Retailers are bracing for a tough holiday season, with 83% of supply chain professionals anticipating that supply chain disruptions will negatively impact their revenue this year – up from 70% in 2022. On average, retailers expect to lose around 10% of their revenue, which could translate to billions of dollars in losses during this critical selling period.
The main challenges retailers are facing include:
1. Product Shortages: Over half (53%) of retailers are already experiencing out-of-stocks on key holiday items, with the most impacted goods expected to be household goods, apparel, and electronics. This is due to ongoing supply chain issues and labor shortages.
2. Reduced Consumer Spending: 81% of retailers are worried that pressure on family budgets from the higher cost of living will significantly reduce consumer spending this holiday season. Almost three-quarters of consumers are concerned that the cost of living will negatively impact their ability to spend.
3. Missed Sales Forecasts: 91% of retailers fear they’ll miss hitting their holiday sales forecasts. This is particularly concerning as the holiday season is typically the most lucrative time of year for retailers.
These challenges are a stark contrast to the optimism many retailers felt just a year ago. In 2022, 70% of retailers anticipated supply chain disruptions would impact their revenue, compared to the 83% who now expect it this year. The situation has clearly deteriorated.
One company that experienced major supply chain issues and a resulting revenue hit is Cisco. In 2001, Cisco announced a $2.5 billion inventory write-off – one of the largest in US business history. This was due to the company’s new forecasting software failing to accurately predict demand, combined with incentives that encouraged its contract manufacturers to build up buffer stocks. When a recession hit, Cisco was left with a massive surplus of raw materials.
To recover from such supply chain failures, experts recommend that companies:
1. Recognize Incentive Issues: Examine how misaligned incentives between your company and supply chain partners may be contributing to problems like excess inventory or stock-outs. Educate managers on how these issues arise.
2. Pinpoint Root Causes: Look for three key sources of incentive misalignment: concealed actions, concealed information, and faulty incentive structures. Addressing these can help fix the underlying problems.
3. Adjust or Redesign Incentives: Modify contracts to better align incentives, unearth hidden information that impacts supply chain effectiveness, and foster trust between partners. This can help create a more collaborative and efficient supply chain.
Companies must also build greater supply chain resilience to withstand future disruptions. This means moving from “one-off episodic designs” to a “state of continuous design” where the supply chain can rapidly adapt. Simulating scenarios, making tradeoffs, and accelerating decision-making are key to this.
The stakes are high, as the impact of supply chain failures can be severe. Cisco’s $2.5 billion write-off significantly damaged its reputation and shareholder value. And the broader economic impact of supply chain disruptions can be immense, with one study finding that Indian companies lose an average of 2.88% of shareholder wealth over an 11-day period.
Retailers and other companies must learn from these painful lessons and take proactive steps to shore up their supply chains. Failing to do so could mean the difference between a merry holiday season and a lump of coal.
