It’s not business as usual: achieving retail success in an inflationary environment – Low Calorie Diets Tips

Many retailers today face two major problems: rising supplier costs and general supply shortages, which are driving inflation rates up to levels not seen in at least 40 years. As a result, retailers face a daunting dilemma: choosing whether to absorb cost increases or pass those costs on to consumers—neither is ideal.

Due to capacity constraints, the product shortage is also competed by labor shortages, supply chain issues, international disputes, a still ongoing global pandemic, war in Ukraine and other factors. Retailers are at the mercy of suppliers to fill shelves as they take significant risk to bottom line and potential lost sales. How can retailers overcome these challenges?

It starts at the enterprise level by committing to address these supplier cost increases and making some significant changes to how retailers approach supplier negotiations and how they make their assortment decisions. Retailers should also invest in their digital skills to better prepare for these supply disruptions in the future.

Business as usual will not work

The first step is to recognize that a business-as-usual approach is not going to help address these challenges quickly as suppliers are increasing costs at a rate the industry has never seen before, and doing so more frequently do. What is really needed is for retailers to set up a “war room”. This is an approach to orchestrating an expedited and organized response that works across the entire supplier base and all categories.

Simply put, a war room represents a focused effort by the entire organization to bring all stakeholders – including merchandising, finance, store operations and marketing – together and increase visibility of the most critical issues to the leadership team so the company can develop a coordinated response .

Next, retailers need to standardize the onboarding process. This means suppliers are asked to submit cost increase proposals on a standardized intake form, which forces them to provide more details about the cost increases. This onboarding process primarily helps retailers in two ways: 1. It forces suppliers to justify the cost increases caused by factors such as raw material prices, labor costs, freight, etc.; and 2. It provides more detail on cost increases that can be compared between suppliers to identify opportunities.

Product Cost Breakdown is the best leverage for negotiations

Retailers should also take a CPG industry approach, where they understand the cost structure and cost drivers for each product on the shelf. For example, a baby bottle retailer should know the cost of plastic, silicone, and other materials that go into making the product. In addition, they should understand input costs such as labor, manufacturing, manufacturer overhead, packaging, duties on imported products, and dealer margin when not sourced directly from the manufacturer.

While these inputs may not be readily available for all products, private label products would provide an estimate of most cost drivers. All of these input costs could be brought together to create detailed cost models for the products. When retail executives combine these cost models with commodity trends, they can quickly see if the cost increase is justified. Rather than simply accepting raises, retailers can use these insights in their discussions with suppliers and together identify mutually beneficial opportunities.

Adjust the product range and supply base

There are several short-term tactics retailers can apply to their inventory and supply base to make quick profits. One of the key tactics is to rebalance the product portfolio by changing private label and national brand SKUs to minimize the impact at the category level. Whenever a large retailer learned of a product shortage from its private label supplier, it immediately increased its orders from a national brand to maintain balance and minimize category-level impact. Other retailers are reducing the number of SKU variations to simplify assortment.

In addition, retailers should reconsider their advertising strategy. For example, a large retailer specializing in baby products has historically kept a product on sale to keep up with the competition so it doesn’t lose sales from price-conscious consumers. However, the retailer never took notice of the competition increasing their price while the retailer continued the promotion. While sales rose, profits fell, lowering profitability for the entire category.

Retailers need to sharpen their competitive pricing intelligence, including assessing how key competitors are reacting and how this could affect retailers’ room for price adjustments. A retailer assembled a team that regularly web-scrapes competing products to gain insight into their assortment mix and pricing. This information was used in the line review process to tailor the range. All of these signals should be used in the demand planning phase to improve forecast accuracy.

Also, it’s always a good time to do market calculations or start an RFP. A retailer conducted market calculations during the peak of the pandemic. Through the process, the retailer identified some new domestic suppliers that also offered cost savings. These new suppliers helped offset product shortages, diversify the supply base, and reduce risk in the supply chain.

It’s also important how retailers approach these new suppliers during the current supply shortages. Retailers should use these new supplier discussions as an opportunity for new suppliers to test and build long-term partnerships.

Invest in your skills

Businesses in all industries cannot control major disruptions such as a pandemic, natural disaster, or war. However, retailers can prepare for these supply disruptions and mitigate their risk if they have the right tools.

The foundation of this toolkit begins with the development of a digital blueprint of the end-to-end supply chain that helps anticipate and respond to key events quickly. This digital blueprint provides insight into all aspects of the supply chain, including where the product is created, how it is routed, how much of it is sourced from where, etc. In addition, machine learning and AI models can be added to the blueprint to monitor environmental, economic and geopolitical factors. These models help to anticipate the failure points and access the risk exposure.

Armed with this information, based on the events or vulnerabilities, retailers can conduct various scenario analysis with different allocation strategies across different regions, products, etc. This analysis helps retailers anticipate and prepare for these disruptions before the damage occurs.

Tilak Sagireddy is a Retail Advisor at Alix Partners with profound expertise in supply chain and assortment strategy. He has led high-profile retail turnarounds utilizing AI and machine learning tools both in the US and internationally. He also helped retailers with inflation mitigation strategies.

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