Editor’s note: Ananth Iyer is senior associate dean and Susan Bulkeley Butler Chair in Operations Management at the Krannert School of Management at Purdue University. Freelance writer Holly Poulos recently interviewed Iyer about how coronavirus disease 2019 (COVID-19) is affecting the supply chain for retailers and consumers alike, as well as how recent panic buying has forced both large and small businesses to reevaluate how they manage day-to-day operations, reassure customers about inventory availability, and prepare for long-term ramifications.
Holly Poulos: How can retailers match consumer demand right now when they don’t have the usual data or other means for anticipating it?
Ananth Iyer: Customer demand is driven by rational customer balancing of A) their potential increased demand, B) worries about price increases, C) worries of when next they can go to the store and D) worries about shortages when they do go to the store. Retailers should work to reduce the anxieties associated with B, C and D.
First, stop classifying the customer as irrational. Instead, think of their decision-making as rational. That’s why I put in four separate buckets, because each of these is a different reason. If demand went up, you have to satisfy the demand. You need to buy more. That’s because either
- people are using more hand sanitizer and hand soap or even toilet paper, because they have moved back home
- there are worries about price increases
- worries about whether stores will be open
- worries about shortages.
Retailers can work to ease these customer concerns. Commit to saying, “Look, our pricing will remain fair. We’re not going to increase prices.” And actions speak louder than words.
The easiest way to solve the, “I’m worried that the store would have run out,” is for stores to be proactive. If stores are proactive, then customers see inventory in the stores and they’ll stop stocking up. Grocery stores should be out there reassuring customers that they’re in the business of satisfying customer demand and they’re going to try very hard to do it. That’s really what will ease some of these issues right now.
Poulos: What advice do you have for retailers that are having trouble meeting consumer demand for household goods following regular procedures?
Iyer: Retailers may need to be flexible regarding the brands they carry, the sources of purchase and use of online channels to fulfill demand. Each of the options require quick decision-making to ensure agility. Private label brands may be more easily available, but it is important to note that the grocery supply chain does have a lot of finished goods inventory, with past studies suggesting between 80 and 120 days of finished goods inventory of nonperishables across the supply chain.
But there are many other things to consider, and I think this is the part where it gets a little tricky. Many of the things that are focused on replenishing supply may well require things like extra shipping and full truckloads. Now’s not the time for [retailers] to pass along any price increases, because that will be viewed negatively. However, express shipping, taking full truckloads and scheduling third-party pickup with direct transportation may all involve higher logistics costs to increase availability. But that may need to be justified as part of maintaining or increasing customer goodwill.
There is a margin decrease that retailers may have to contend with. But the actual availability of inventory, I don’t think should be an issue, because manufacturers are still operating full tilt and distributors have lots of inventory. The key is the logistics of getting it to the store.
Poulos: A huge number of people are placing orders online. What should retailers keep in mind as they invest more heavily in e-commerce?
Iyer: First, if the focus is on customer satisfaction, e-commerce is great, because you get the product out there. The key is to do it efficiently. In some sense, you’re taking work that customers do themselves. When the customer goes to a grocery store, they do the work themselves. Whenever any retailer starts doing work that the customer used to do, then there are costs. The question is how to recover those costs.
Many, many retailers, thanks to Amazon Prime, have offered free delivery and free shipping and free pickup. All that free is actually expensive for the retailer. The one thing to think about is, “How on earth are we going to cover those costs? What are they going to do to get customers to pay in some form?” Usually, when you pay, you pay because of slightly higher margins. The prices go up to cover this cost; but you cannot increase [the price] during a pandemic. The balancing act for retailers is how efficiently they’re going to be to do this.
Some retailers, like Walmart and Target, have announced increased use of robotics and automation. Those may be ways to become more efficient, but those things can’t be done in a very short run. Yes, e-commerce is a great solution to satisfy the customer. But retailers need to actually recover those costs.
Poulos: For retailers that are nowhere near as large as Walmart and Target, what issues are they facing? How are small businesses offering services to customers stuck at home?
Iyer: For small businesses, the only way that they can be competitive is to understand customer data. The hope is that they have a relationship with their customers; they know who they are. If people come in and ask if there will be stock, small businesses can have a conversation. They may actually have more information regarding customer intent than larges businesses.
The key is to stay solvent, keep the flow going, keep people coming in. That would mean, in the short run, they may have to absorb lower margins, hoping that they can survive enough for the long run. They really don’t have the option for a lot of automation, but this may be the time for them to consider software tools — especially software-as-a-service — to help them keep track of their inventory, so they’re not missing anything.
Poulos: As a professor, what are you telling graduating seniors planning to enter the supply chain field?
Iyer: The key is how long it’ll take to get back to normal and what that new normal would be. Luckily, for now, we haven’t seen much of an impact on this year’s graduates. It’s really the next year’s graduates. … Those are the students who will face a very, very challenging market. We’ll see how that sorts out. What may end up happening is, if the market happens to be a little tough, we may see more students going to graduate school or getting additional qualifications, so that they’re ready for the job market.
There are many conditions that could change pretty quickly. The good news is I think the industry is being proactive. I’m hoping that the ports remain open, that the truckers remain operating and the store employees remain working — and nobody panics about catching anything because they went shopping for groceries. At the end of it all, I think both the supply chain managers and consumers will realize that a little bit of flexibility goes a very long way.