Lessons Learned from 2021 Peak Season for 2022 Planning

"Demand was greater than available inventory" was a common theme in many retailers' earnings announcements in early Q1 of 2022. Bed, Bath & Beyond, Best Buy, and Abercrombie & Fitch were among several retailers noting not having enough inventory during the 2021 holiday season:

• "While we effectively offset higher freight costs that have been at the core of global supply chain pressures, increasing inventory disruptions impacting our ability to meet demand during the holiday season," Bed, Bath & Beyond CEO Mark Tritton said.
  
• "After a strong start to the quarter in inventory receipts and product sell-through, we experienced unexpected inventory receipt slides in key categories due to extended port and transportation delays. As a result, we did not have enough inventory to keep pace with customer demand, resulting in lost sales during the peak holiday selling period," Abercrombie CEO Fran Horowitz said.
  
• "Q4 sales of $16.4 billion were impacted by more constrained inventory than expected, including some high-demand holiday items…," Best Buy CEO Corie Barry said.

Indeed, port disruptions and inland supply chain upheavals resulted in delivery delays for many retailers. Some retailers mitigate these risks by diversifying the number of U.S. ports they use and ordering more inventory much earlier than usual.

For instance, The Gap plans to move the majority of its products through U.S. Eastern and Southern ports, "where delays are materially better than on the West Coast," CEO Sonia Syngal said during the company's latest earnings call. In addition, the company is increasing its sourcing in Mexico and Central America and undergoing what it describes as an "end-to-end supply chain transformation."

Diversification Across the Board Can Help in Many Ways

Retailers are diversifying ports, suppliers, and carriers to ensure speedier deliveries and capacity. But at what cost? When implemented correctly, diversification is a smart strategy; however, it could lead to higher costs and delays elsewhere in supply chains.

For example, including ports that are further away from warehouses or stores could lead to higher inland transportation costs and potential delays if the ports do not have the right equipment — or enough of it — to handle a retailer's imports.

Adding more suppliers is always a smart move, but vetting these suppliers in terms of work, labor, and sustainable practices is important. Extending visibility capabilities beyond tier one and tier two suppliers is also important. If not managed correctly, the costs in terms of finances, quality of goods, and delivery timings could be expensive.

Carrier diversification also is important for capacity purposes. Capacity constraints throughout supply chains have plagued retailers and resulted in delivery delays in the middle and final miles. However, don't forget the rates! Establishing a good working relationship with your carriers goes a long way in helping to mitigate costs, capacity, and so much more.

The Increasing Need for Advanced Demand Forecasting

As part of its supply chain transformation, The Gap is investing in inventory management capabilities that involve using predictive analytics and data "to better forecast and make us more agile and precise about where we place product… to meet customer demand," according to a transcript of its earnings call posted by the Motley Fool on March 4, 2022.

According to a 2021 survey from market research firm Coresight Research, of the 170 respondents surveyed:

• More than 80% estimated lost sales of at least 3% due to allocation issues such as infrequent stock replenishment.
• 57% said that at least 3% to 6% of total sales were lost.
• 18% believe allocation issues negatively impacted as much as 6% to 9% percent of sales.

Furthermore, only 17% of surveyed respondents indicated they use more advanced forecasting techniques such as real-time machine learning-powered models. The highest percentage, 37%, use Excel-based forecasting, while 20% use manual "gut-based" forecasting models.

Coresight estimates that advanced demand forecasting could measure at 90% or greater inventory management accuracy.

Outlook: More Agility, Data Analytics Will Help Speed Improvements

Retailers do not foresee improvements anytime soon. Low inventory levels and strong consumer demand will likely drive strong imports and increased demand for trucking and other transportation services in the coming months.

Dr. Sheng Lu, a professor at the University of Delaware, told The Wall Street Journal that he estimates that retailers will see average delays of one to two months on shipments this spring.

Whereas John Idol, CEO of Michael Kors parent Capri Holdings Ltd., said disruptions would continue for at least the next six months. "We don't see it actually improving," he told analysts in early February.

The uncertain environment will lead more retailers to invest in agile supply chains, including data analytics, and build and maintain strong relationships with supply chain partners.Follow the Intelligent Audit blog for more insights from the world of logistics and supply chains.