How Sourcing Executives Prepare to Repair Hard-Hit Supply Chains
The global spread of the coronavirus has effected the footwear supply chains at all levels, with both suppliers and vendors struggling to fulfill their commitments. A new McKinsey survey of sourcing executives, responsible for $120 billion in sourcing value, shows the extent of the impact, but also a way forward.
For many brands, production was impacted first: the virus caused early shutdowns in key manufacturing areas such as China. More than half reported that their suppliers are only “partly able” to deliver orders in the second quarter, with 7% seeing an inability to deliver right now. Two thirds of the executives believe that Q2 will see a cut in sourcing volumes of at least 20%.
But the closure of brick-and-mortar across Europe and North America has also seen vendors reducing the number of their orders reducing the quantities per order and canceling purchases of finished goods. With strain felt across the supply network, the McKinsey survey found that executives were prioritizing finding a fair balance between “cash position, profit impact and supplier stability.”
One way executives can manage this is paying a percentage of outstanding purchases; only 20% of those surveyed said they were paying for 75% or more. Other alternatives include taking responsibility for raw-material liabilities (more than 50%) and paying production workers’ wages (13%).
The stakes are high: the survey found that most of the executives reported that at least 25% of their suppliers were in financial distress, with the prediction that more than half would be within six months. Within their own companies, McKinsey found a majority of respondents were applying temporary staff measures to manage overhead, including salary reductions and furloughs; only 10% spoke of permanent layoffs.
“Fashion companies should support their suppliers along the entire supply chain,” said Karl-Hendrik Magnus, expert for sourcing and sustainability and senior partner at McKinsey. “The crisis provides the opportunity to now work on making fundamental changes in apparel sourcing and create more flexible supply chains.”
Looking ahead, the report said demand-driven supply chains will be accelerated as a result of COVID-19. More than 70% of executives predict that they will develop closer relationships with their suppliers post-pandemic, with 60% anticipating that sustainable materials will become mainstream.
One method expected to gain more popularity is nearshoring: producing close to the intended product market, such as in Turkey for Europe or Mexico for North America. This both diversifies supply chain networks and enables faster, more efficient production cycles. Digitization of supply chain management is also expected — 40% reported an intention to introduce predictive analytics for capacity and production planning.