Here’s Why Suppliers Will Face Their Biggest Headwinds in the Second Half of 2020
Date: Friday, April 10, 2020
Source: Sourcing Journal
If the first half of 2020 dropped some big surprises on retailers, it’ll be suppliers who will face significant headwinds in the second six months of the year.
That’s because no one knows what consumer demand will be like coming out of the coronavirus pandemic. And while suppliers faced supply-chain disruption in the first quarter of 2020, retailers have canceled second-quarter orders and are expected to place reduced orders for fall and holiday once they know when they can reopen their stores. Most retailers in the U.S. and Canada, as well as parts of Europe, have temporarily closed due to shelter-in-place orders and restrictions on how many people can occupy a public space at any given time.
A report from Bank of America Securities on global athletic brands on Tuesday said the firms expected to see second-half 2020 order cuts. Much of that is due to uncertainty and the lead time needed to process and confirm orders.
“Brands typically confirm orders three to four months before delivery or one to two months prior to production. The manufacturer will begin to prepare materials roughly one month prior to production. After manufacturers prepare materials, brands are required to pay a penalty to cancel orders. Productions last one to two months. Ocean freight typically takes four to six weeks,” The BofA report said, outlining the production timeline for goods.
An estimate at even the low end of the estimated time frame would require at the very least four months lead time ahead of when the merchandise needs to arrive at the warehouses. Given that shutdowns are in place for who knows how long, retailers and brands will be making some estimates on what they may need in the stores for when they reopen without knowing when the stores will reopen or what consumer demand will be at that point in time.
The report concluded that no brand is immune, but some will recover more quickly than their peers.
“We anticipate a faster rebound for brands that have: 1) higher penetration in China where the industry recovery is already underway, 2) the ability to proactively manage inventory levels through product returns, pack-and-hold of non-seasonal items to sell at a later date, and an extensive outlet store network to clear excess inventory, 3) strong digital presence that is less reliant on digital traffic, and 4) healthy balance sheets and ample liquidity,” BofA said.
Here’s the BofA takeaway from brands commenting on COVID-19:
Nike Inc. is expecting to cancel orders, and is focusing on supply and demand management. It continues to work with its manufacturing partners, many of which span decades with the athletic brand.
Adidas AG says it doesn’t have any materials issues with its supply chain in China, particularly as factories are largely operational again, and that it has been working with wholesale partners to make sure inventory levels remain healthy. It said that if it has to take back product due to February cancellations, it will clear merchandise through its own channels.
Puma SE said it doesn’t have a supply chain risk because Tier 1 supplier factories are open and operating at near capacity, while Tier 2 factories are mostly up and running. And there’s been no impact on factories outside of China.
Under Armour Inc. expects supply-chain challenges in materials, factory and logistics. Materials include possible issues around fabric, trim and package sourcing, as well as possible delays and capacity challenges in the second half.
Lululemon Athletica Inc. has indicated it can leverage recent investments in its supply chain and distribution network to navigate the current situation, which includes an expected 10 percent to 15 percent reduction of second-quarter orders and moving production of some spring goods to autumn.
VF Corp. has redirected manufacturing and materials sourcing to mitigate potential future disruption, minimizing interruptions to supply chain operations.
And last, but not least, The Columbia Sportswear Co. has seen some disruption from COVID-19, less so from factory production and more so from the amount of raw materials its contract manufacturers source from China.