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Supply Chain Impact From Coronavirus Likely Hits Replenishments First

Fast-moving items such as those in the replenishment categories are likely the first to see impact from the coronavirus in the supply chain.

Socks and T-shirts, as well as other core replenishment items, are what Shanton Wilcox believes will get hit first when thinking about what are the categories of goods that could see the most impact.

“Retailers keep low inventory [of these items] because they don’t change with the season, so the category of goods are in continuous replenishment. These are the staple items that are part of any assortment,” Wilcox said. As spring approaches, the manufacturing and operations expert said that sports apparel or major league licensed team products–the kind you might find at a Dick’s Sporting Goods or a Nike store–might see a missed shipment as those are products most likely to be sourced abroad, he said.

Wilcox also believes that big-box retailers, such as the discounters–Walmart or Target– have their own challenges and “in some ways could be more at risk because their volume is so high.” These retailers order in huge quantities and their suppliers might not be able to produce in the necessary quantities in the usual time frame.

But depending on the category, that could be a plus or minus for mass discounters. They might be able to get product for certain categories on a front-loaded basis because their volume is so great, even if that might push the orders from much smaller competitors aside. And in other categories, the smaller specialty chains could see a benefit because it might be easier for them to find alternative producers who can actually meet their smaller volume requirements.

Wilcox believes that not all spring and summer goods are in warehouses ready to be put on the sales floor. Summer outdoor furniture, such as patio sets, might still be on the production schedule, or a retailer might get some merchandise early, but not the full order. As for further down the road, even getting warmer apparel, such as for winter outerwear, might be a problem for retailers. Just as China is restarting production, other countries such as Italy are still dealing with trying to keep the coronavirus contained. And there’s also the growing possibility that the virus, now also known as COVID-19, could start impacting parts of the supply chain in other operations throughout the world.

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While it’s still too early to tell what direction the virus will take in most countries, Wilcox raised the possibility that companies are going to have to start thinking about becoming more flexible due to market conditions. As inventory shrinks, that could mean the beginnings of an operations draw down. Retailers could elect to reduce the headcount for each shift to match need, Wilcox said, explaining that as retailers think about certain parts of the supply chain as it tries to maintain profitability, matching headcount to align store labor with projected sales is one option.

Another might be taking a look at where those goods are coming from and whether it makes sense–even if it means greater costs and a hit to profits–to split some orders and prioritize some shipments, such as having a portion arrive by air just to be able to have it in the stores. And finally Wilcox said retailers could also take a closer look at the assortment of goods and make some decisions over which items might be offered for sale at  higher prices to offset the increased operational costs.

Wilcox isn’t the only one who believes that there are a number of challenges facing brands and retailers in the weeks and months ahead.

“The daily movements of people and the sheer number of personal connections within the transmission complexes [China, East Asia in South Korea and Japan, the Middle East and Western Europe] makes it unlikely that COVID-19 can be contained,” McKinsey & Co. wrote in a report, noting that the most-affected countries to date “represent nearly 40 percent of the global economy,” as new cases are rising elsewhere in the world.

As other geographies experience continued case growth, movement restriction will be imposed to try to stop or slow the progression of the disease, McKinsey said. “This will almost certainly drive a sharp reduction in demand, which in turn lowers economic growth through [the second quarter and early third quarter],” according to the report. In consumer goods, customers may put off discretionary spending because of outbreak concerns, even if they eventually will make purchases later once the fear subsides.

Addressing supply chain issues, “companies should start planning how to manage supply for products that may, as supply comes back on line, see unusual spikes in demand due to hoarding,” McKinsey said. Businesses that can better navigate the disruptions are those that can anticipate customer behaviors, it added. Consumers will likely shift more of their shopping online, including food and produce delivery, and those “changing preferences are not likely to go back to pre-outbreak norms.”

The economics team at Morgan Stanley has outlined three possible scenarios, with the first possibility seeing containment by March. The second possibility sees escalation of infections in new geographies, with disruption extending into the second quarter “before peaking by May end,” Chetan Ahya, chief economist and global head of economics, said. The last scenario foresees possible COVID-19 disruption persisting into the third quarter.