ANALYSIS OF SUPPLY CHAIN RISK MANAGEMENT CHALLENGES IN THE RETAIL INDUSTRY

Executive Summary

This report explored the current and future challenges associated with supply chain risk management (SCRM) in the retail industry, focusing on case examples that highlight the potential risks and solutions. Although SCRM has emerged as a reliable approach to minimising risks associated with supply chain operations, the increased complexity of markets and rising customer demands have made it challenging for smaller businesses in the industry. Regardless, leveraging technologically advanced tools and prioritising supplier audits can mitigate these challenges.

Table of Contents

1. Introduction 4

1.1. Background of the Report 4

2. Supply Chain Risk Management in the Retail Industry 5

3. Common challenges associated with SCRM 9

3.1. Risk identification 10

3.2. Risk Assessment 10

3.3. Reliability of suppliers 11

3.4. Supply chain volatility and sustainability risk 11

4. Strategies to mitigate SCRM-related challenges 12

4.1. Risk diversification and automated tools 12

4.2. Investing in automated tools 12

4.2. Supply chain mapping 12

4.3. Supplier auditing 13

5. Conclusion 13

References 14

 

1. Introduction

Supply chain risk management (SCRM) is a crucial topic that has attracted the attention of market researchers and business leaders to ensure the long-term agility of businesses in the face of uncertainties. The past few years witnessed tremendous upheavals of unforeseen disruptions and vulnerabilities in the global supply chains, leading to a worldwide financial crisis. A common theme lies at the heart of these crises: the absence of adequate approaches to viewing and managing risks. To ensure effective recovery from the situation, numerous SCRM strategies were applied by businesses in the retail sector; nevertheless, there are certain challenges to properly implementing SCRM within a business. In this regard, this report explores the current and future challenges associated with supply chain risk management in the retail industry, focusing on case examples that highlight the potential risks and solutions.

1.1. Background of the Report

In recent years, the global supply chain was brought to an abrupt halt by the COVID-19 pandemic outbreak with lockdown restrictions that led to bottlenecks and massive losses of inventory. In light of these challenges, businesses prioritised supply chain management (SCM) operations to minimise losses in similar future scenarios. The retail sector was one of the hardest-hit industries in the pandemic outbreak with offline markets temporarily shutting down due to lockdown restrictions. In 2020, the global retail sector witnessed a 2.9% decline in sales due to the pandemic; however, the economy bounced back and grew by 9.7% in 2021 through e-commerce and supply chain management (Sabanoglu, 2023).

Figure 1: Global retail sales (2020-2025)

(Source: Sabanoglu, 2023)

Globalisation and e-commerce played a vital role in stabilising the recovery of retail sales as markets started reopening, leading to remarkable financial growth within a year. Although the concept of “supply chain risk management” (SCRM) was relatively less popular before the pandemic, the emerging trends of globalisation, trade disruptions and digital advancements changed the outlook of modern business. In the present age, businesses and managers actively assess and combat the risks associated with supply chain management (SCM) and leverage technology to develop innovative strategies.

2. Supply Chain Risk Management in the Retail Industry

“Supply chain risk management” (SCRM) has emerged as a crucial topic in today’s age of globalisation with the establishment of new businesses and the global expansion of existing ones. With businesses entering new markets and developing new logistics mechanisms, the outlook of the global retail industry has become complex and more vulnerable to a range of legal, environmental, financial and security risks. Gurtu and Johny (2021) define SCRM as a systematic approach for continuously “recognizing, evaluating, ranking, mitigating, and monitoring potential disruptions in supply chains”. It has developed as an important area of 21st-century businesses due to the cascading potential of SCRM to improve the performance of supply and logistics networks. It can be viewed as a strategic outlook for organisational supply chains that ensures the seamless mobility and security of operations. As such, SCRM approaches are majorly categorised into comprehensive risk management (RM) strategies and focused RM approaches for specific supply chain disruptions (Gurtu and Johny, 2021). The effectiveness of SCRM is realised by the efficacy of organisations to manage the flow of goods and services across the supply chain from the procurement of raw materials, manufacture of products and delivery to the end customer.

Figure 2: SCRM in the retail sector

(Source: Self-developed)

In the retail industry, SCRM operations manage the risks associated with an organisation’s internal and external operations including demand forecast, inventory management, warehousing, product procurement and system operations. Risk management plays a pivotal role in retail supply chains as it facilitates the improvement of operational performance while ensuring minimum uncertainties (Um and Han, 2021). The following are some of the most popular SCRM strategies adopted by retail businesses to manage the efficiency of supply chains:

• Digital control towers

Leveraging the power of advanced technology, modern retailers are shifting towards developing digitally powered supply chain networks to improve the transparency of SCM operations. Also known as “supply chain towers”, digital control towers provide real-time insights into supply networks through advanced technologies such as artificial intelligence (AI), machine learning (ML) and big data analytics (IBM, 2023). One major benefit of digital control towers lies in the establishment of “end-to-end visibility” across the supply chain which enables organisational managers to manage potential disruptions through actionable insights. Through the help of big data, digital control towers help managers develop predictive analyses of risks by identifying unique patterns and trends from historical data (Ivanov and Dolgui, 2021). Further, AI-powered solutions enable 21/7 tracking of products throughout the supply chain. Leading retail brands such as Walmart are heavily investing in reengineering their supply chain models through an interconnected “omnichannel network” to revolutionise their SCRM strategies with better inventory accuracy, in-stock management and delivery operations (Walmart, 2023).

• Strategic inventory allocation

Inventory allocation can be defined as a strategic approach to product distribution across the supply chain according to market demands and inventory level fluctuations. As an SCRM approach, strategic inventory allocation primarily aims to cut down the costs of inventory. Just-in-time (JIT) inventory is currently one of the most widely used inventory allocation approaches used in the retail industry. JIT focuses on limiting inventory allocation to avoid overcrowding of warehouses and unnecessary stockpiling of commodities (Zaman and Ghuryani, 2022). This strategy focuses on minimising losses, cutting down costs and optimising supply chain operations through demand forecast. Businesses adopting a JIT system focus on keeping limited inventory in stock and reordering only those commodities that need to be restocked to fulfil market demands. Contrary to traditional inventory management approaches where bulk quantities of products were ordered regardless of their sales margin, JIT systems focus on ordering specific commodities that have higher sales. Through this strategy, retailers make sure that products are delivered “just in time” before running out of stock. Some common benefits of this approach include minimised product waste caused by stockpiling, increased productivity margins and greater flexibility in the supply chain (Milewski, 2022). In the retail industry, JIT poses an additional benefit of improving product quality: this especially applies to grocery retailers as customers are continuously provided with fresh products due to limited inventory. In light of the COVID-19 pandemic, the mega-retailer Walmart adopted the JIT system to prevent future disruptions in their supply chains and improved their operational efficiency (Baertlein, 2023). This strategy contributed to the company’s remarkable growth in the post-pandemic era, with its global revenue rising from 514.41 billion US dollars in FY 2019 to 559.15 billion in FY 2021 (Ozbun, 2023).

Figure 2: Global revenue of Walmart (2012-2023)

(Source: Ozbun, 2023)

• Supplier diversification (Tesco)

This is another common SCRM strategy that makes businesses more prepared for supply chain uncertainties in case of external risks such as pandemics, natural calamities or trade restrictions. The supplier diversification strategy entails expanding the reach of third-party suppliers by diversifying the supplier network and spreading the impact of risks. One notable example of the supplier diversification strategy is set by the British mega-retailer, Tesco. The company has established an online community of product manufacturers and suppliers through strong partnerships of shared expertise and knowledge, contributing to its supply chain efficiency. The supplier network of Tesco is spread across more than 10,000 suppliers from different parts of the globe who heavily contributed to its sustainability margin (Tesco Plc, 2023). The benefits of having a diversified supplier network are prominent in Tesco’s revenue margin: Tesco’s sales revenue amounted to 51.64 million GBP during the 2019 pandemic, rising from 44.9 million the previous year (Bedford, 2023). Unlike other retailers who faced significant losses during the pandemic, Tesco’s sales margin reached record heights, given its diversified network of suppliers who managed to supply products on time and maintain resource mobilisation across the supply chain.

Figure 3: Annual revenue of Tesco Plc (2012-2023)

(Source: Bedford, 2023)

3. Common challenges associated with SCRM

Although the benefits of SCRM are undeniable, businesses are likely to face the following challenges:

3.1. Risk identification

As suggested by Mamun (2023), risk identification is the first step to ensuring effective SCRM practices and involves regular screening of potential supply chain risks. However, it is a complex and challenging process as risk identification requires firms to collect bulk amounts of data and regularly update daily operations in the supply chain. As such, risk identification can be an arduous process that requires critical data and partnership flows. The effectiveness of risk identification further contributes to monitoring the overall productivity of the organisation’s supply chain. In this regard, Badwan et al. (2023) points out that identifying risks can become significantly challenging for small and medium-sized enterprises (SMEs) due to the bulk volumes of data and information that require critical expertise and advanced technology to support the data. Proper risk identification necessitates businesses to differentiate the most relevant data from the less useful ones to specify the types of potential risks. Moreover, risk managers must be adequately proficient in identifying internal risks such as logistics, procurement, production and inventory, as well as external threats such as natural disasters, political risks and economic downturns. The research of Baz and Ruel (2021) identified a positive relation between risk identification and supply chain risk mitigation, while also highlighting that larger firms are more likely to initiate accurate “risk identification”. As a result, adopting SCRM strategies can be challenging for smaller organisations due to limited expertise and access to data and technology.

3.2. Risk Assessment

The next step of successful SCRM is risk assessment which involves examining the identified risks regarding the likelihood of occurrence and the extent of impact. As postulated by Baz and Ruel (2021), risk assessment helps organisational managers assess the severity of the identified risks and arrange them by order of priority, occurrence and severity. Moreover, proper risk assessment indicates better preparedness for future events and uncertainties. Leading retail brands in the global market such as Walmart ($572.75 billion annual revenue in 2021), Amazon ($239.15 billion) and Costco ($195.93 billion) set examples of how proper risk assessment improves supply chain mobility and cushions the impact of uncertain circumstances (Sabanoglu, 2023b). While it is hardly an issue for large businesses due to their extensive supplier networks, SMEs with limited networks often find it challenging to arrange adequate resources and expertise for continuous risk assessment.

3.3. Reliability of suppliers

Rather than relying on specific suppliers, modern retailers focus on establishing an extended supplier network and spreading their reliance to a pool of partners. Large retailers such as Tesco and Walmart use supplier diversification to procure goods and services from around the globe by establishing mutually beneficial relations. This strategy not only reduces costs by bringing out the best deals but also forges strategic partnerships with shared benefits. Through this approach, businesses expand their networks to create economic prospects for disadvantaged communities which further adds to their corporate image. However, the reliability of suppliers is a crucial factor that influences the quality of an organisation’s supplier network. Hence, any misstep could lead small retailers to lose a significant chunk of suppliers in the midst of critical circumstances. As pointed out by Zahraee et al. (2022), unexpected changes in the external environment such as supplier bankruptcy and pandemics can significantly interrupt the mobilisation of goods across the supply chain and influence customer satisfaction levels. Hence, it is crucial that the allied suppliers are backed by additional ones so that if one supplier fails, the other can fill the gaps. However, this becomes especially challenging for small businesses as they have to rely on a finite network of suppliers to procure items due to limited resources and market knowledge. Limited market knowledge additionally limits the ability of businesses to distinguish financially stable and reliable suppliers from unstable ones.

3.4. Supply chain volatility and sustainability risk

The increased complexity, uncertainty and volatility of the modern market pose significant challenges to risk management in the supply chain. Supply chain volatility (SCV) can be defined as an “unplanned variation of upstream and downstream material flows resulting in a mismatch of supply and demand at the focal firm” (Benjamin Nitsche et al., 2020, p. 321). In other words, volatility refers to the phase in supply chains where the demands of commodities supersede their supply and availability. In today’s digital age, supply chain volatility has emerged as a crucial risk factor to effective SCM practices given the rapidly changing demands of customers. In the retail industry, market volatility is significantly realised in the fashion retail sector. The modern customer is heavily influenced by the Internet, social media advertisements and influencers’ posts. Besides, automated algorithms bombard customers with similar advertisements across different online platforms which influence customers’ intentions to try the latest designs of fashion apparel to keep up with the changing social trends. This has given rise to a trend of “fast fashion” where fashion retailers focus on balancing the supply chain volatility by investing in cost-effective and mass-produced commodities. The balancing act continues in a cyclic process where bulk inventories of clothes are discarded to replace them with new ones to address the new demands. As such, market volatility not only challenges retailers to maintain equivalence in the supply chain but also raises significant concerns about environmental sustainability. According to recent market insights, the fashion retail industry generated a total of “897 million metric tons of carbon dioxide equivalents” in the environment in 2021, projected to amount to “1.3 billion metric tons” by 2030 (Smith, 2023).

4. Strategies to mitigate SCRM-related challenges

4.1. Risk diversification and automated tools

SMEs in the retail sector can deal with the challenges of risk identification by diversifying the supply chain and distributing the impact of risks across multiple suppliers. By collaborating with customers, partners and stakeholders to share risk assessment strategies, suppliers can comprehensively capture relevant data and take necessary risk management actions.

4.2. Investing in automated tools

Investing in automation can significantly help retailers automatically collect and analyse relevant data and update risk management strategies according to changing market dynamics through “natural language processing” (NLP).

4.2. Supply chain mapping

Although JIT systems are efficient approaches to mitigating supply chain risks, developing comprehensive supply chain maps will be a more economically feasible option for smaller retailers. Through the help of blockchain technology, retailers can visualise the overall supply chain and track products in real-time.

4.3. Supplier auditing

The reliability of suppliers has been identified as a key challenge associated with SCRM in the retail sector. To address this issue, companies need to prioritise regular audits of supply chain operations to gain informed insights into the ethical and financial welfare of suppliers.

5. Conclusion

“Supply chain risk management” is a continuously evolving field that challenges even the strongest market players in the face of uncertainties. This report delved into the most common challenges facing the retail industry in the contemporary era and identified through case examples the strategies used by leading brands to improve their SCM operations. Although SCRM has emerged as a reliable approach to minimising SC risks, the increased complexity of modern markets has made it challenging for smaller businesses in the retail sector. Regardless, leveraging technologically advanced tools and prioritising supplier audits can mitigate these challenges.

References

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