In this Supply Chain Matters retail industry supply chain focused commentary, we share our belief as to why precision planning and inventory management will be crucial for retail focused supply chain management and their respective sales and operations planning teams over the coming four months.

Over the last two weeks, Wall Street and business media focused on the latest financial performance reporting from major retailers such as Amazon, BestBuy, Walmart, Target, Home Depot and others. In the first half of this year, many large retailers continued to benefit by the post-pandemic economy in the U.S. especially in overall profitability levels. However, even Amazon experienced some warning signs regarding the second-half.

After U.S. retail sales experienced a dip in July, investors and industry watchers were keenly focused on common themes and market observations for the July ended quarter. Those themes turned out to be:

Shoppers returning to the physical store shopping experience with increased store visits primarily for back-to-school and other apparel needs and merchandise needs. Comparable same store revenue growth rates were generally good. As an example, Walmart reported 5.2 percent comp sales growth while Target reported 8.9 percent.

Online sales were muted; 6 percent growth for Walmart in the July ending quarter and 10 percent growth for Target. Both were year-over year comparisons, with 2020 reflecting the height of U.S. population restrictions due to COVID-19 infections. Home improvement chain Home Depot reported comp sales growth of 4.5 percent, after four consecutive quarters of double-digit growth for this channel. Executives attributed the performance to home improvement projects shifting from smaller do-it-yourself projects to larger contractor involved home improvement projects with higher ticket values.

Most all of the major retailers expressed optimism for sales growth for the remainder of this year, despite continued COVID-19 infection rates in specific U.S. regions as the delta variant spreads among populations that remain unvaccinated. Of more stated concerns are the ongoing global supply network and associated inter-modal transportation disruptions that all of media has been writing about.

A further theme that is now being reinforced is that given the current state of disruption, retailers have been actively attempting to accelerate inventory purchases from global based suppliers to avoid being in the position of having not enough inventory to meet holiday focused demand. According to recent data U.S. Census Bureau data, the inventories-to-sales ratio for June among U.S. businesses was 1.25, the lowest level dating back to 1992. Specifically for retailers, the same ratio stood at 1.08 in June, hardly covering sales fulfillment needs.

An example of extraordinary measures to both forward buy merchandise and to move them to domestic distribution centers was home electronics retailer Best Buy. Executives indicated this week that merchandise inventories at the end of July were 55 percent higher than year ago levels and 23 percent higher than pre-pandemic levels, reflecting a value of $6.4 billion. We venture to state that not all retailers or wholesalers can attribute to such a forward buying condition given the ongoing turbulence and literal daily disruptions occurring across global and domestic supply and transportation networks. The explosion of container shipping rates is a reflection of the ongoing needs of retailers to forward buy essential inventory.


Upcoming Holiday Fulfillment Period

August represents the traditional start of managing the peak holiday focused customer fulfillment period across retail and wholesale focused supply networks. Overall annual profitability for many retailers is predicated on healthy order volumes including successful merchandise promotions that are timed for when consumers are most inclined to make their holiday buying decisions.  Traditional is a conditional word at this point.

The National Retail Federation’s (NRF) August 2021 Economic Review noted that while the U.S. economy was expanding at the fastest pace in decades, it comes with “aches and pains.” Retail sales during the first six months of the year were up 16.4 percent year-over-year, and NRF’s revised forecast calls for overall annual retail sales growth in the range of 10.5 to 13.5 percent over 2020 levels. That is a healthy level of growth but in comes with significant qualifiers mostly centered on supply chain networks. Namely, there is a flood of merchandise headed toward the U.S.

The NRF Port Tracker published earlier this month forecasts that imports among the U.S. largest retail ports should establish a new record of 2.37 million TEU’s (twenty-foot container equivalent units), a 12.6 percent year-over-year growth. The forecast for September call for 2.21 million TEU’s, October having 2.2 million TEU’s and November having 2.1 million TEU’s.

As Supply Chain Matters has highlighted in recent updates, global supply chains and transportation networks remain disrupted, and the condition is not showing any signs of improvement. Major U.S. ports are again in a state of ships at anchorage awaiting berth availability with warehouse, rail and truck movements disrupted and clogged by surge volumes. Each and every week presents a new disruption, the latest being a COVID outbreak at Shanghai’s Pudong international airport impacting air freight operations. A smooth movement of material over the next four months is not at all assured.


Supply Chain Matters Reader Takeaways

What our retail industry commentary implies is the reality that precision planning and inventory management is an obvious essential for the remainder of this year and into the foreseeable future.

There are uncertainties as to which buying channels consumers will rely on in the upcoming holiday fulfilment period. For retailers who invested in planning and inventory management processes that integrate customer fulfillment inventory needs across multiple online, direct ship or physical store channels, such investments will prove instrumental in meeting consumer demand regardless of channel.

Similarly, retailers who invested in end-to-end supply chain visibility, forms of supply chain control towers and what-if planning simulations will be better equipped to manage and adequately respond to the day-to-day disruptions that are sure to be present in the coming weeks. The most important need is to have the best information, the context of that information relative to impacted customer fulfillment levels and the various scenarios available to optimize inventory, capacity or fulfillment decisions.

Organizations that have not as yet had the opportunity to invest in augmented business processes will likely acquire some painful additional learning.

Similar to a hurricane, typhoon or other major incident warning, organizations that have established planning, inventory management and operations execution plans in place know what to expect, what tools to leverage in mitigating risks and what actions to take in minimizing impacts to business performance.

An ongoing inventory tsunami is impacting global and domestic supply and transport networks and more cascading disruption is inevitable at this point. It will be interesting to observe the overall results in January of next year. We anticipate a heck of a lot of added learning and new thinking.


Bob Ferrari

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