The recent outbreak of the Coronavirus has impacted many, including businesses with supply chain operations in the region. Aside from lost sales due to regional shop closures, the temporary shutdown of factories is causing unforeseen delays in production. The lack of inventory manufactured subsequently hinders product sales and is prompting brands to find abrupt solutions. Read on to see what impact the virus is having on major brands and what you can do to protect your business.
Millions of missed sales
According to The American Chamber of Commerce in Shanghai, nearly 90% of U.S. companies with operations in China expect a negative revenue impact from the virus - a quarter of whom are expecting declines of 16% or more. Production delays can affect everything from finished goods to raw materials and packaging, halting varying components of open orders. Moreover, once factories are cleared to resume, congestion at ports from mass production will cause further delays. Without a clear end in sight, the following effects can only continue.
The impact from production is expected to hit multiple industries, including electronics and automobiles, which is expected to fall by more than 8%. Sales of electronics from manufacturers are expected to decline over a million units by April 2020. While Apple currently believes inventory is safe due to their actions around tariff issues and the Chinese New Year, if delays continue they can expect stock outs by mid-April according to analysts.
Fashion retailers are also expecting major implications. Kering, the parent company of Gucci, is adjusting its operations abroad in an attempt to mitigate the impact. After closing 50% of their stores in China, Gucci is now reallocating inventory to other regions of the world. Another big retailer in China, Adidas, makes nearly a third of its sales in Asia. They quoted an 85% drop in YoY sales in January alone.
To put this volume in perspective, brands like Under Armour share their expectation of nearly a $60 million hit to revenue in the first quarter alone. During a recent earnings call, CEO Patrik Frisk quoted uncertainties around the duration of the impact and levels of excess inventories and subsequent promotional activities later in the year. An unfortunate occurrence following their recent progress on inventory control and supply chain modifications.
What can you do?
No one could have predicted this outbreak nor the impact it would have on business. There are, however, several ways to manage your business to mitigate risks. The most important solution when it comes to your supply chain is to diversify production across various regions of the world. Aside from viruses, events like natural disasters, tariffs, strikes, and a handful of other things can halt production and delay your expected inventory. Diversify early on so that you’re not abruptly looking for a solution at a time when competition rises - increasing costs and availability.
Having the right quantity and allocation of inventory on hand ahead of time can also help offset risks. Make sure you’re stocking adequate weeks of supply (WOS) so that you have a buffer of inventory to last a set amount of time. Most retailers aim for 8-12 weeks. Moreover, invest appropriately in your product assortment as you might experience cannibalization from out of stock goods. Having the right inventory in all products will allow you to pivot marketing efforts and shift demand to offset any losses from shortages.
Lastly, be prepared for the end of the delays. Whether there will be port congestions due to timing and demand or you simply need to get goods as soon as possible, consider air shipments to shorten your lead times. Of course, this comes at a higher price tag, so make sure your inventory position is healthy enough to afford you adequate cash on hand. Rest assured knowing Fuse helps you have the right amount of inventory across all SKUs. With Fuse, spend the time optimizing your production, not your inventory planning - we take care of that for you.