The AlixPartners Retail Restart Playbook is a special weekly series of our Retail Viewpoint newsletter that provides in-depth answers and operational considerations for retailers as they reopen stores and restart business post COVID-19 closures.
Maintaining healthy margins is crucial for retailers confronting increased expenses in keeping customers and employees safe, significant markdowns on excess inventory, and lowered discretionary consumer spending. But as you make merchandise decisions for reopened stores and e-commerce channels, your current product cost and existing commercial agreements may not deliver adequate margins anymore.
Consumer behavior is hard to predict at the moment and is likely to remain dynamic, making historical product and category insights unreliable. This unreliable data is impacting how retailers and suppliers engage and work together. At the same time, the strength of retailer-supplier partnerships has been tested because of order cancellations, extended payment terms, factory shutdowns, and development or production delays. The overarching consequence of all this is that the vital relationship between retailers and suppliers is undergoing a reset that is likely to have both short-term and longer-term implications. This chapter of our Retail Restart Playbook focuses on what retailers need to do to adapt to the new rules.
Protracted order cancellations and delays have left suppliers and factories with goods stranded at varying stages of production. Many are working hard just to survive the impact. While retailers and brands will want to secure their supply chain both to ensure continuity and to fulfill their corporate and social responsibilities, they will also be challenged by their own cash and liquidity pressures. Strengthening supplier partnerships and empowering trusted vendors, as we talked about in the product development chapter of our playbook, should be a main focus area for the next few weeks.
The right supplier base is critical to a retailer’s ability to stay competitive. In the current scenario, with the compounding consequences of the crisis, retailers and brands are rightly focusing on survival. This may require them to take a close look at the value driven by all suppliers and make some tough choices. But doing so thoughtfully and with an eye on the future will allow them to emerge with stronger relationships as things return to normal. This will be critical in separating winners from losers. Here are key actions to consider as you try to secure your product offering profitably:
Conduct a thorough evaluation of your supplier base: With inputs from stakeholders such as product development, sourcing, and buying teams, assess where all your vendors stand:
- Incorporate financial and liquidity status checks in the review process and classify vendors into low, medium, and high risk.
- Identify situations where a category may be single-sourced or where there may be disproportionate reliance on a single supplier, as this heightens the risk factor.
- Calculate if and how inventory and space productivity has changed at individual item, category, and supplier level based on adjusted gross margins that take into account new vendor or promotional funding, expenses associated with returns, markdowns, etc.
- Evaluate the risk profile of each product category as there are both inventory gluts and shortages across the assortment.
- Assess alternative brands, including private label options, for national brand items that can either not be fulfilled or are no longer as desirable given changes in customer buying behavior and potential preference for lower-cost products.
- Introduce stages in the decision-making process while adding or changing suppliers or placing orders that allow for flexibility in adjusting quantities or repurposing raw material positions.
Engage with vendors for long-term sustainability of your end-to-end supply chain: While it may be tempting to make all decisions based strictly on immediate profit and cash enhancement, stability and continuity is incredibly important, as is supply chain transparency and social responsibility:
- Negotiate cost relief across the value chain—beyond just finished goods suppliers—to include third-party service providers such as testing and auditing services, transportation and logistics, etc.
- Take concrete steps, such as paying outstanding invoices, which can immediately help employees across all parts of the business, such as factory workers, distribution networks, materials development, etc.
- Extend payment terms with potential exemptions for key suppliers in financially weak positions. As the business environment stabilizes, you can solidify extended payment terms with discounts and incentives for early payments.
- Develop stronger partnerships with a limited set of vendors through mutually beneficial terms whenever possible.
- Secure production capacity and raw material for must-have products. As we talked about in the inventory planning chapter of our Retail Restart Playbook, inputs from product development should be flowing up to financial planning at the moment.
- Pursue renegotiation opportunities based on lowered demand or product performance or if there are situations of reduced competition in the supplier marketplace.
- Determine if you can negotiate cost concessions as vendors try to maximize capacity utilization.
Explore options to hold inventory with suppliers for when more standard demand patterns return.
- Assess supplier distribution capabilities, such as drop-shipping or consignment, which can reduce inventory liability without materially impacting the sales, margins, or customer experience.
- Partner with vendors to create new joint programs that bring agility into your promotions calendar and markdown cadence.
Restart plans may continue to experience fluctuations, which demands an increased need for flexibility and responsiveness in retailer-vendor relationships to maintain category margins and supply sustainability. In the next chapter of our playbook, we will tackle the topic of pricing and markdown management, as these decisions are likely to have enormous profit and loss implications.