Few sectors were hit as hard by the COVID-19 outbreak as retail. Analysis by Tradeshift shows that the volume of transactions across retail supply chains dropped by nearly 50% when lockdown restrictions came into effect in April 2020.

Supply chain operators were caught flat footed by the pandemic. Limited visibility into complex and extended supply chain networks meant many were unaware of disruptions to their supplier networks until it was too late. And as buyers put the brakes on activity, suppliers felt the impact hardest. Cancelled orders, deferred payments and sluggish demand left countless small businesses with little option but to run down limited working capital reserves as they sought to ride out the storm.

By Nick Hunt, Retail Industry Specialist at Tradeshift

Volatility is the new normal

More than a year on since the first lockdowns, the early signs point to a robust recovery through the summer months. Our own data shows that in recent months, retail trade activity has largely recovered to something approaching the pattern observable prior to the pandemic (Fig 1). But getting to this point has been a bumpy ride characterized by the regular peaks and troughs in activity which coincided with the lifting and reimposition of lockdown restrictions since the pandemic first struck.

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Sectors like retail, where margins are thin, rely on predictable conditions to make profit. Retail supply chains are used to dealing with seasonal spikes in activity, but the uncharacteristically volatile trading environment of the past year has played havoc with traditional demand-forecasting processes. The effects of this are well-publicized, from food shortages through to a run on kettle bells and trampolines as consumers tried to keep themselves occupied during lockdown.

Running on empty

As recovery gathers momentum, research conducted as part of Tradeshift’s Index of Global Trade Health suggests that as many as one in five suppliers are struggling to cope with the uplift in demand. There are a number of contributing factors, but a recurring theme centres on the lack of working capital flowing through supply chains to support suppliers as they ramp up production. Nearly a third of suppliers we surveyed had seen their cash flow position deteriorate over the past six months. Nearly half said that they’ve seen an increase in the number of late customer payments since the beginning of the year.

Addressing the current liquidity crunch is vital if retailers are to return to an even footing. But challenges for the sector do not stop there. COVID has accelerated the shift towards ecommerce that was already happening prior to the pandemic. Even as high streets begin to re-open, the latest data suggests that footfall in May 2021 was 27.5% below where it stood in May 2019. It’s too early to call the end of the traditional high street, but it seems increasingly inevitable that some of the shift away from brick-and-mortar may be permanent. Retailers that cannot adapt to these changes quickly enough will fall.

Plotting a way through the chaos

Retailers are already investing heavily in technologies that transform the customer experience, but the digitalization of many back-office functions is frequently overlooked. Many of these functions are vital to ensure operations and cash flow are optimized.

We tend to think of supply chains as these incredibly sophisticated machines, but underneath it all, they’re currently held together by the exchange of paper-based documents. Invoicing is a good example. Despite all the recent advances in technology, around 50% of all invoices are still sent on paper. Heavy reliance on these manual processes clogs up systems and represents a single point of failure which can undermine all the good work retailers are doing on the front-end.

There is a growing acceptance that digitalization is the only way for buyers to build the transparent and collaborative relationships with suppliers they will need to weather future shocks. Establishing this connective tissue across supply chains allows decision makers to spot single points of failure and make informed choices quickly about how to manage them. And the enhanced ability to collaborate with sellers and other parties in their supply chain ecosystem means decisions, including finding new suppliers, can be implemented more quickly, which is critical in times of stress.

Plugging the liquidity gap

The robust data that comes from digitalising these relationships can also play a critical role in addressing liquidity issues facing suppliers. Arrangements like supply chain finance are designed to free up liquidity so that smaller businesses can make much-needed investments into their own businesses. However, supply chain finance has largely failed to support suppliers because many of them appear too risky for financial institutions to extend a line of credit.

Financial institutions are more willing to fund smaller suppliers if they have a higher level of visibility into their transaction histories, and that’s where digitization initiatives benefit the supplier. A new wave of technology-driven financing mechanisms are springing up to help small businesses unlock access to capital in ways which would be impossible using traditional paper-heavy systems.

A defence against uncertainty

To paraphrase a quote from Jon Kabat-Zinn: “We might not be able to stop the waves, but we can learn to surf.” As retailers focus on building resilience to future shocks, they must realize that it’s in their own best interest to have a more equitable relationship with their suppliers. Technology is poised to help them bridge this gap by unlocking faster, more predictable cash flow, access to more vendors, and increased optionality in the event of disruption. The bottom line is that what’s good for suppliers, is ultimately good for buyers.