With fuel disruptions across Asia sending ripple effects through global supply chains, Canadians may be having a sense of déjà vu. But would today’s disruptions lead to the kind of shortages we saw in the early days of COVID-19?
Vinayak Madappa, Retail Advisory Partner at Capgemini, who has spent the last several years working with retailers on post-COVID supply chains, says that’s not likely – and that the pandemic may have actually left Canadian consumers better insulated than they realize.
“The biggest shift is in how retailers think about safety stock. Before COVID, the industry ran lean as a result of focus on free cash flow and lower inventory holding on the assumption that efficiency and resilience were the same thing, and 2020 proved they are not. Most retailers have not gone back to that position, and we are now seeing “just in case” inventory vs “just in time” inventory as a standard buffer,” he said.
“Transportation impacts as an example from Red Sea adds 10+ days to delivery windows leading to impact on shelf availability. Sourcing and supplier diversification is no longer an option and is mandatory. This was dominated by cost and margin pressures. The other factor is that COVID was a different kind of shock: it hit demand, operations, and logistics all at once, whereas what we are seeing now is primarily fuel-driven and narrower in scope, which means the system is being stressed but not overwhelmed. The response to this was shifting to multi country / region (LATAM/Eastern Europe) sourcing and dual sourcing at SKU level is a new BAU (Business as Usual) for retailers making supply chain resilient by reducing lead times, derisked transportation (Red Sea impact).
“Lastly, contractual structures have changed with suppliers agreeing to alternative routes, multiple ports of entry and allows for better control tower visibility in the supply chain ecosystem.”
Where are the pressure points right now?
Madappa said the categories that warrant the closest attention are textiles and apparel, technology and electronics, and anything with deep sourcing dependency on Asia.
“These are where the second-order effects of fuel disruption land hardest, through higher diesel costs flowing into fertilizer, farm machinery, and manufacturing inputs, which simultaneously drives up costs,” he explained.
“On a secondary level, while Canada is a major producer in agriculture, we are dependent heavily for foreign processing leading to impact on packaged goods, frozen food and other on the shelf staples which are impacted by both price increases as well as delays in logistics.
“Hospitality and travel-adjacent retail are also worth watching, because ticket prices to Asia are already up significantly and disrupted routes are changing how Canadians plan and spend. For retailers with heavy private label programs sourced in those regions, the six-to-eight month window is when commodity and yield pressures are likely to show up in replenishment costs.”
Are current inventory levels enough of a buffer?
For retailers that made the shift from weeks to months of safety inventory, they’ve bought significant time before disruptions become visible to shoppers, noted Madappa.
“For most retailers, the current inventory buffers for essential and core SKU’s is in the range of 8-12 weeks of protection which limits availability exposure. The risk is that not every retailer made that transition across all categories, so there will be pockets of exposure even within otherwise well-managed businesses. If this disruption is not resolved within six to eight months, that is when on-shelf availability starts to become a genuine concern in Asia-dependent categories,” he said.
“What consumers are already feeling, though, is price, because fuel is a global commodity and that pressure does not wait for inventory buffers to run down. The buffer protects availability, not cost.”
Diversification and nearshoring being tested
Madappa said diversification and nearshoring are being tested, and for the most part the ones that were executed well are holding up.
“Canada’s trade relationships are more diversified than they sometimes get credit for, with backup suppliers for technology components spread across Latin America, and strong food and everyday goods ties to Australia, New Zealand, and CUSMA partners like Mexico and the US.
“Textiles follow a similar pattern, where dependency tends to be concentrated in raw materials rather than finished goods, and many Canadian brands have retained domestic finishing and production capacity.”
Where will consumers feel the impact?
Madappa said consumers are already feeling the impact in price, and that is the most immediate and sustained effect.
“Pricing pressure hits shelves well before inventory buffers are exhausted, and consumers have already started responding by reducing basket sizes and shifting toward discount banners,” he said.
“Assortment is the next place to watch. As commodity and yield pressures work through the supply chain, retailers may rationalize stock keeping units in certain categories, which means less variety rather than empty shelves. Delivery timelines on certain goods, particularly those moving through disrupted shipping lanes, will also stretch. The least visible impact is probably in the margin decisions happening right now, where brands are absorbing costs they will eventually have to pass through, which means some of the pricing pressure consumers are feeling today is still in its early stages.”
More from Retail Insider:
