Navigating Retail’s New Era of Risk

If a single image has come to define the failure of global supply chains amid the Covid-19 crisis it’s that of the Ever Given — one of the world’s largest container ships — stuck in a diagonal death grip inside the Suez Canal, heavy with more than twenty thousand units of cargo destined for Western retailers. For almost a week, the ship jammed up worldwide shipping, halting nearly $10 billion in trade a day, before eventually being freed.

But the plight of the Ever Given was just the tip of the proverbial iceberg. Indeed, the entire global shipping industry had seemingly run aground – if only metaphorically – as dock workers at many of the world’s largest ports suffered from the effects of the virus. Soon, merchants everywhere began to see panic buying, empty shelves and bottomless backlogs to fill them: a shock to the system of western merchants and consumers who had largely operated with an assumption of unconstrained access to whatever they’ve wanted, whenever they’ve wanted it.

How could our supposedly modern supply chains be so fragile?

On closer inspection it’s clear that today’s global supply chains are the product of centuries of growth but little meaningful evolution when it comes to risk management. Indeed, Covid-19 was not the first major derailment of the global supply chain. Less than 200 years earlier, a similar breakdown brought an entire global industry to its knees.

At the turn of the 19th century, the economy of the freshly constituted United States of America ran principally on cotton, which, by 1825, had found significant demand in England and Europe. While cotton could be sourced elsewhere, the US had several advantages. Boundless, fertile land, an objectively superior strain of cotton, and most significantly, slave labourers.If anything, it was the use of slave labour that made it simply impossible to compete with the United States with on the global cotton market.

By the mid-1800′s two thirds of all cotton imported by Great Britain and Europe was being sourced from America. India, Brazil and Egypt struggled to make up the remaining third. According to some historical reports, close to 80 percent of England’s cotton imports came from America. Fully half of the factories in Britain at the time were for cotton production. Goods made from cotton comprised nearly 40 percent of all British exports. And about 1 in 5 British workers relied on the cotton trade to put food on the table.

Then on April 12, 1861, something happened that would throw America and global cotton supply into a state of chaos. Confederate troops fired on South Carolina’s Fort Sumter, plunging America into civil war. By July of that same year, a mere three months after the start of the conflict, supply of American cotton to England was reduced to nearly nothing, where it would stay for the better part of three years. The effects on England’s economy were devastating, with factory closures and rampant unemployment, coupled with meteoric inflation in the price of cotton and cotton goods.

By the time the American Civil War ended and US cotton exports resumed, England and other countries had learned their lesson, spreading their cotton imports across alternate sources of supply. Thus preventing the US from ever again recapturing such an outsized share of the global cotton market.

At this point you might reasonably imagine that having experienced what many saw as the first true global raw materials shortage, the retail industry would have completely rethought the premise of supply chains and the inherent risk of putting all one’s eggs in a single, distant basket for the sake of low price. You’d surely assume that governments would never again allow their economies and labour forces to become so inextricably dependent on a single industry, commodity or source of supply.

But you’d be wrong.

Flash forward 76 years to America’s Port Newark. It was here in 1937 that trucking entrepreneur Malcom McClean had an idea. As he sat for hours while his cargo of cotton (yes, cotton) was unloaded and reloaded onto a waiting ship, McClean imagined how much more efficient it would be if only his entire truck could be lifted onto the ship. A huge saving of time and labour, he thought.

In 1956, after almost two decades of planning, McClean’s musings became reality when he loaded 58 metal containers in Port Newark onto the S.S. Ideal X, a recommissioned tanker ship that McClean had specially outfitted to carry uniform cargo containers on a maiden voyage to Houston, Texas. It was a short journey with long lasting consequences.

McClean had managed to reduce the cost of loading and unloading cargo from $5.83 per ton to just 16 cents. And with that, intermodal transportation was born,an innovation that would usher in a new era of supply chains.

Modern cargo ships like the Ever Ace, a leviathan of a vessel with a capacity of almost 24,000 containers, have made it possible to venture farther and with more payload than America’s cotton barons ever could have dreamed.

This single innovation,the container ship, swung open the doors of the global economy to countries like China. Like the US of 200 years earlier, China was a nation rich with land, resources and a low cost labour market plagued with widely reported instances of modern slavery. The combination of ultra-cheap transport coupled with the fractional labour costs drove a wave of hyper-globalised supply chains that delivered plentiful goods to western consumers but in the process also created risks that would make the cotton collapse of 1861 look like a picnic.

Today, the vast majority of what is consumed in the world is made in the East. Roughly eighty percent of Walmart’s non-food inventory is made in China. Seventy-five to eighty percent of Amazon’s new marketplace sellers, in its top four markets, are also based in China. Just as England found itself dangerously addicted to American cotton, western economies have become alarmingly addicted to Asian manufacturing. If the US of the 1800′s became the world’s cotton factory to disastrous ends, Asia in the 1990s and 2000s became its everything factory, creating risks we are only now beginning to understand.

Although separated by almost 200 years of history, the cotton famine of the 1860′s and the supply chain crises of today share the same root cause: a myopic and often perilous focus on lowest landed unit cost. Procuring vast quantities of cheap goods has driven and continues to drive most of today’s top brands because most see price as the cornerstone of competitiveness. However, as supply chain expert John Thorbeck often says, we operate in an era where business leaders must once and for all appreciate that the singular pursuit of low cost comes with an extraordinary number of risks that make businesses far less competitive, the first being the risk to financial capital.

Most companies today, according to Thorbeck, are accounting only for the front-end advantage that low cost might afford them. What they’re failing to properly consider are the deleterious back-end costs that accompany it. For example, the massive orders and long lead times implicit in most globalised supply chains make responding to fluctuations in demand nearly impossible. In a world where consumer preference can shift on a viral TikTok video, fashion-based products may be out of fashion even before they reach the rack. The result is slow turns, deep markdowns, write-offs, and heaps of dead stock in warehouses, much of which eventually becomes landfill. Increasingly unpredictable weather events may disrupt seasonal weather changes, once again throwing demand into chaos. And given record levels of consolidation in manufacturing across many categories of goods, a hiccup at a single factory on the other side of the planet can spur weeks of supply shortages.

It is also logical to assume that risks to global supply chains will become more frequent and profound as we become increasingly interconnected as a global community. Whether driven by economic turmoil, civil unrest, climatic events, or yes, the next pandemic, disruption today moves at light speed compared to only a few decades ago, so frequent and fast-moving, that we must completely rethink and rebuild our supply chains. But how?

Most supply chains are merely a loosely connected set of individual companies, each with its own goals, data and resources, as well as an accepted share of the financial risk inherent in any supply chain. Often, within such groups, one party or parties will try to gain some material advantage over the others, perhaps by seeking lower prices, more favourable terms, or any number of other concessions. To some this might seem simply like shrewd business. But when this happens, it’s essentially one party attempting to shift its risk to another party or parties. If, for example, a retailer can secure a 10 percent lower price, it clearly lowers its risk to capital. The problem in doing so, however, is that it sets off a daisy-chain of risk shifting. Because, in theory at least, parties forced to take on more risk will likewise similarly seek to off-load that risk to others in the chain. Soon, trust suffers, performance wanes, corners are cut and links in the chain grow weaker, subjecting everyone to greater risk, which often only becomes fully clear when a crisis hits

So, instead of simply shifting risk, brands should aggressively work to transform their supply chains into digital ecosystems where members share risk and work collectively to reduce it for all. An ecosystem, operated on a shared platform of data analytics and operational resources, along with a jointly used set of tools for managing demand planning, business continuity, key raw material or product stockpiles, transportation contingencies and even inter-industry materials demands to avoid shortages due to spikes in demand across categories. The goals of the group may also include plans to regionalise a percentage of supply to provide a fallback position should a crisis arise.

The point is that each member of the ecosystem protects not only their own interests but those of the group and in so doing, reduces risk and improves business outcomes for all, making every link in the supply chain, from upstream design and production through to retail, stronger.

Most retail buyers today know their primary suppliers. They know who they are, where they are located, and may even have some understanding of their practices and reputation. However, when it comes to knowing secondary suppliers (their suppliers’s suppliers), things get murky fast with most companies reporting little to no visibility into this layer of their supply chains. This is the very definition of risk. And too frequently today it’s one that is showing up to undermine the reputations of retailers and brands.

In 2020, for example, the Australian Strategic Policy Institute, “identified 27 factories in nine Chinese provinces that are using Uyghur labour transferred from Xinjiang since 2017.” In all, 87 well known international brands were identified in the report as (wittingly or unwittingly) using these factories for production. Indeed, numerous studies have shown that beyond tier one vendors, most supply chains are essentially black boxes offering very little visibility, traceability or transparency.

Whether or not they have been sideswiped by allegations of environmental crimes or human rights abuses, brands are quickly realising that a new and radical level of supply chain transparency is essential — not only to avoid reputational damage to their brands but also to attract consumers, 75 percent of whom in a recent University of Pennsylvania study indicated that a brand’s sustainability credentials are an “important factor” when choosing products. It follows then that those brands that can supply consumers with verifiable data to back up their social and environmental claims will outperform. Technologies like RFID tagging and blockchain are already helping proactive brands begin better trace their products through the supply chain from point of origin to point of sale.

Consumer sentiment on corporate social and environmental accountability is converting directly into investor demands. According to a Reuters report, “investors managing over $130 trillion in assets have written to more than 10,000 companies calling on them to supply environmental data to non-profit disclosure platform CDP.” The CDP (Carbon Disclosure Project) manages an open scorecard, listing participating companies, countries and regions and their disclosures on performance across issues like climate change, water security and deforestation. With increased pressure by the investment community for such disclosures, it’s only a matter of time before outlying companies become conspicuous by their failure to report and are cut off from global capital markets.

In turn, such investor demands are forcing governments to accept the writing on the wall. If they hope to attract investment in their national economies, they and their corporate citizens will have to achieve above average performance on environmental, social and governance issues. It’s reasonable therefore to assume an increasingly aggressive stance by government regulators, because failing to do so will send capital, growth and prosperity elsewhere.

For most companies today, supply chain planning remains largely a finger-to-the-wind exercise. Most use some combination of volume, velocity and visibility to project supply and demand. Many still rely on fairly rudimentary data sets – stock on-hand, sales velocity, order lead-time, and in-transit order quantity. Sprinkle in some accounting for seasonality and you’ve got inventory management 101 – a system that was feasible when the planet was less interconnected and change was slower.

But in an increasingly fast-paced, globalised landscape, these considerations only scratch the surface of what brands need to factor into their planning. Weather patterns, industry sales projections, consumer trends and macro-economic indicators are now also vital. Stepping out even further, what about geopolitical issues, transportation costs and environmental performance optimization? All these new and dynamic data points are increasingly vital. The problem is no human being can possibly consider all these things at once.

Therefore, the incorporation of artificial intelligence and machine learning into an organisation’s planning systems is becoming a critical investment that is helping pioneering companies outperform competitors in both revenue growth and margin expansion. While most brands today are still playing checkers, forward-thinking brands are already beginning to play 3-D chess, modelling supply and demand data across dozens of new real-time data inputs.

And finally, beyond all the business cases supporting a rethink of supply chain goals and behaviours, there’s the human case. As primatologist Jane Goodall once said, “The most intellectual creature to ever walk Earth is destroying its only home” a jarring truth in which retail has a conspicuous hand.

A recent report from the environmental advocacy group Ship It Zero indicates that “Container imports from America’s 15 largest retail giants in 2019 caused the same climate pollution as three coal-fired power plants or the energy needed to power 1.5 million American homes. These retail giants have produced 7.3 times more carcinogenic sulphur oxide emissions than all road vehicles in the United States combined, or 2 billion trucks and cars.” And that’s just the 15 largest U.S. retailers. The apparel industry is responsible for 10 percent of global emissions. And the next time you’re admiring the beauty of an ocean, know that beneath its surface lies 16 million tons of plastic. In fact, 90 percent of the plastic that has ever been created — whether from packaging, parts or products themselves — still exists, in some form today.

Our obsession with low price also exacts a human cost. Whether it’s the garment workers in Pakistan who are paid $112 per month, the forced labour camps of China or the victims of factory fires and collapses in places like Bangladesh, our fellow human beings are paying an inhuman toll for our low-cost consumer products. But such abuses are hardly limited to foreign workers. As our lust for cheap products becomes increasingly insatiable, we in the west have become willfully blind to abuses closer to home. Whether it’s working conditions in the Amazon warehouses of America or documented instances of forced labour in England’s garment factories, we have become increasingly consumerist at the expense of human suffering, even when that suffering takes place close to home.

Regrettably, too many companies today take all this to mean that their goal should be to do less harm. This, says Cradle to Cradle author William McDonough, is the wrong way to think about it. Consider, he once said to me, your reaction if your local water treatment facility announced an effort to gradually, over time, reduce deadly levels of lead in your drinking water. You’d be outraged and demand that all lead be removed immediately.

The goal of brands should not be to simply lessen the damage caused by their supply chains. Rather the aim ought to be to do zero harm and indeed even transform their business activity into a force for good. For many companies this might sound like a pipedream, yet inspiration for such transformation can be found around us today.

For example, denim production tends to be a messy business, and one that uses conspicuous amounts of energy and water, resulting in an effluent sludge containing dyes and a range of other toxins, much of which escapes through the process into local sources of drinking water. It’s been an inconvenient truth in the denim industry for decades and one that Sanjeev Bahl was determined to tackle head on.

Bahl is the founder of Saitex, a unique denim manufacturing company in Vietnam. He and his team devised an entirely new system of manufacturing; one that recycles 98 percent of all water used in the process (2 percent evaporates). Where heat and steam are recycled. Where 100 percent of the jeans are air-dried and biomass is used to generate heat. A facility where solar energy is used to generate electricity. Where ozone technology and lasers are used to replace old harmful methods for distressing fabrics. And to top it all off, Saitex reclaims the waste sludge from the process, turning it into bricks, which are then used to build affordable housing for Saitex workers, all of whom, as it turns out, receive wages well above industry and regional standards.

This is what being a force for good looks like. But beyond the obvious societal and environmental payoffs, Bahl has done something else. He’s all but completely de-risked Saitex as a supply chain partner, thereby harnessing a remarkable competitive advantage over his competitors, while also becoming a force for good.

It’s time to fix a system that has, for at least 200 years, run amok. Time to not only repair but also reverse the damage done by a global retail industry addicted to low cost. That also means redefining our concept of “cost” for the tumultuous age in which we find ourselves, where the true cost of every product now includes an array of risks: to capital, to brand reputation, to the planet and to humanity at large. If reducing unit cost was the competitive advantage of the past, eliminating risk is the competitive advantage of the future.

Doug Stephens is the founder of Retail Prophet and the author of three books on the future of retail, including the recently released ‘Resurrecting Retail: The Future of Business in a Post-Pandemic World.’