Serving Gulf communities as Covid-19 shifts supply chains
Governments in the Gulf region have responded quickly and intelligently to the COVID-19 pandemic, which by and large has seen most retailers remain stocked despite the enormous uncertainty in the market.
There are certainly some categories of goods like hygiene and sanitization products for which demand has spiked—especially in the early days of the pandemic. That being said, are people necessarily eating more than they used to, or buying clothes more regularly?
One of the early observations we have found is that COVID-19 is not necessarily impacting the total volume of goods going through the region’s overall supply chain. This remains true even as the region has started to build up anticipated stocks for the Ramadan period, especially in the grocery supply chain. Instead, COVID-19 is influencing the organization and delivery of those goods. Time is truly the new currency in today’s unpredictable world.
In particular, the resulting supply chain shifts can be seen in three specific areas: safety stock, changes in channels, and real market demand. By better understanding these factors, industries in the Gulf can better orchestrate their customer experiences and fulfill market needs, even as those continue to evolve.
Considering Safety Stock
This is where the supply chain has traditionally accounted for uncertainty. Consider a supply chain for hand wipes that runs from a manufacturer to a distributor to a grocery store to the consumer. The manufacturer has always forecasted how much product they need to produce to satisfy orders from the distributor. Then the distributor forecasts what they need to satisfy the retailer, and the retailer forecasts what the consumer will want and when. Each of these nodes in the chain keeps a little bit of safety stock to account for the uncertainty of demand and for the uncertainty of supply.
While we usually don’t account for consumers thinking about the uncertainty of demand and supply, they do in some way — even more so right now. They don’t want to run out of a product, so they decide to stock it themselves. This isn’t due to an increase in real demand, or usage of the product; it is due to safety stock moving down the supply chain. Some consumers don’t consider that a six month’s supply is more than what they need, mostly because it doesn’t cost that much to stock it in their home. However, if you multiply this by millions of consumers, the effect is significant on the supply chain.
The challenge for retailers now is to figure out when will consumers decide they have enough safety stock to satisfy their uncertainty, and when is this going to result in a drop in sales. Consumers won’t continue to make purchases at the same rate they’re buying now. That’s the real forecasting challenge right now: When does the supply chain back up?
Changes in Channels
The demand for some products will likely increase over the long term, and in that scenario, it is related to a switch in the delivery channel. For example, we are seeing a change in where people are eating. The total amount of food consumed might not have changed significantly, but the channels it flows through have. Distributors that satisfy restaurants will see a decrease in demand for as long as restaurants remain closed, but farms and manufacturers might only see a shift in sales from restaurant packaging to consumer packaging and even “recipe” delivery services.
Industries must plan for this. Some of the decreases for restaurants, as an example, will be lessened by an increase in take-out and delivery business. There could be a long-term increase in the number of customers that use this kind of service as they are forced to explore more buying options. As another example, university students who have returned home due to the COVID-19 situation will no longer be shopping for food near their campus, but closer to home. Businesses will therefore need to look hard to assess the decline in demand in some areas while projecting the increase in other channels and locations.
Acknowledging Real Demand
There are some product categories where usage is increasing across the board, such as hand sanitizer, demonstrating a rise in “real demand”. Demand for these products will increase for a longer period, possibly much longer if personal habits change.
Industries must consider this and start thinking about the type of behavioral changes that are the underlying cause of the new sales pattern impacting their supply chain. Products like hand sanitizer are still in the minority in terms of demonstrating a real demand increase. However, by thinking about a community’s behavioral changes, industries in the Gulf will be a little closer to anticipating what will happen next—and what they need to do to keep their business on track.