Pedestrians wearing a face masks walk through an empty shopping plaza, in view of a closed Apple … [+]
© 2020 Bloomberg Finance LP
As the coronavirus epidemic continues, so too does its effects across business—particularly in retail. Since the first case was confirmed in Wuhan China, retailers from luxury names like Burberry and Canada Goose, to mass-market brands like Nike and Under Armour have temporarily closed stores and slashed sales forecasts. Under Armour warned that it expects first-quarter sales declines of $50 million to $60 million, mostly due to the ongoing coronavirus outbreak in China. According to Dana Telsey, Telsey Advisory Group, in a CNBC interview, the uncertainty of not knowing when production will resume in China is what’s making retailers reassess their numbers.
Beyond first-quarter financial results, however, a longer-term effect may be seen in the U.S. market across more companies as the coronavirus comes on top of other factors hitting the supply chain output for 2020. The ongoing battles with tariffs and taxes have affected sourcing and production costs for the past year, but the outbreak of coronavirus may have a more immediate impact on production schedules for merchandise deliveries slated for spring, summer and even fall.
Closed factories, workers staying home and travel restrictions have resulted in production delays in China, which represents 29.7% of apparel shipments to the U.S., according to WWD. Imports in 2019 from China, while down 16.2% from 2018, still represent 18.1% of total U.S. imported products for 2019.”
The impact on the production schedule
According to a Coresight Research Report, the outbreak remains in its early stages but is causing implications for global supply chains. Delayed production could lead to less inventory in stores. The delivery calendar for finished goods can be impacted by activities that take place at the beginning of the product life cycle including designing, supplying raw materials, manufacturing and distributing. Many companies have worked toward a pull supply chain, especially for fashion goods, where the production calendar has been reduced from 54 weeks to 15 weeks. The shortened schedule minimizes long-term commitments and allows companies to develop a contingency plan when a global crisis occurs.
However, a number of companies still operate a push supply chain, which typically works on a 35 t0 54 week production schedule. Commodities that routinely run on a push supply chain calendar include non-fashion goods. Some smaller companies without the infrastructure or capital to implement a pull supply chain may continue to operate a traditional supply chain.
Both types of supply chains will be impacted by the fallout from a late start in production schedules, but in different ways. For merchandise due to arrive in March and April, orders may end up late or even canceled, leaving customers without products. Fall and holiday goods may also be impacted, although there is a longer lead time to make strategic decisions to offset the stalled production lines.
Jiangsu Siborui Import and Export Co. warehouse in Anaheim, California, U.S.. None of its suppliers … [+]
© 2020 Bloomberg Finance LP
The supply chain has been improved over the past decade with the implementation of the Product Life Cycle Management (PLM) process, which allows for many companies to collaborate on each step of a product’s life creating a more complex but efficient supply chain. PLM also includes less waste and optimizes the use of resources. The transparency of the pipeline allows all collaborators to build contingency plans when a global crisis has surfaced.
“Implementing PLM enables companies to develop solutions for inventory shortages as a result of global issues like coronavirus.”
Lori Massaro, a professor at the Fashion Institute of Technology, states, “Implementing any version of PLM can enable organizations to connect more efficiently with their supply chains to work smarter to develop solutions for inventory shortages as a result of global issues like coronavirus.” While some companies are working to minimize product shortages, Massaro said, “An obvious contingency plan would be for companies to produce products in other countries or even domestically. It should be considered, however, that many of the raw materials needed in the global supply chain such as textiles, trim, packaging and labeling supplies may come from China, so that may impact outsourcing.”
While sources across the industry agree that the long-term financial impact on businesses in the retail sector is unknown at this time, it is confirmed that the coronavirus will have a significant impact on the global economy. Increased production costs may include shipping products by air to make up the lag time in the production process and, according to Massaro, may encompass re-sourcing raw materials in a new country while still being held liable for already sourced raw materials in China, such as custom textiles, original copyrighted prints or signature trim items. The financial implications for retailers include sales declines, gross margin erosion and reduction of net profit. Customers may be impacted by product shortages or increased prices.