Procurement: The True Hero of the Retail Holidays
It’s the most wonderful time of year! We are gathering with family and friends, celebrating over feasts and yummy treats, and best of all — we’re shopping. Black Friday is expected to be the busiest shopping day of the year in the U.S.
In 2022, Black Friday and Cyber Monday both broke spending records with shoppers spending $9.12 billion and $11.3 billion, respectively. With inflation rates having increased from 2022, analysts expect there to be only a 3 – 4% increase in spend – the slowest growth in five years.
Something we often take for granted as consumers is the Black Friday supply chain practices that occur for each piece of inventory on a retailer’s shelves. This blog will take a closer look at how Black Friday came to be, what it takes to make it happen, and how retailers can prepare for potential issues during the holiday season with retail procurement.
The Origins of Black Friday
Holiday shopping around Thanksgiving didn’t become mainstream until the Macy’s Thanksgiving Parade in 1924, thus a holiday shopping season that once started in December was pushed to the Friday following Thanksgiving festivities.
The phrase “Black Friday” was coined in 1960s Philadelphia. Local police dreaded the day filled with congested streets from shoppers looking for last minute deals, long hours watching over attendees from an annual football game, and usually bad weather.
Black Friday also refers to retailers moving from the “red” (a loss) to “black” (a profit) from a day of record sales. And sales certainly occur! Consumers use the day to stock up on drastically discounted toys, electronics, home furnishings and apparel.
Black Friday: Then vs. Now
The Black Friday of the early 2000’s predominantly functioned on hype and FOMO (fear of missing out), tactics to draw big crowds. Items would go up for sale the morning of Thanksgiving that would create lines that would wrap around stores and turn shoppers into raging hordes.
The landscape changed with the rise of Covid-19, where shoppers turned to predominantly curbside pickup or online shopping deals. In fact, many consumers continue to appreciate the convenience of shopping via phone, with 51% choosing to use this format in 2022 (up from 46% the previous year).
However, experts from Reuters are predicting that shoppers will be even more financially cautious this year due to high interest rates and a resumption of student loan repayments. This is causing retailers such as Walmart to offer holiday discounts even earlier than usual, which might shake up Black Friday as we know it for the future.
From Sheep to Your Feet: A Christmas Sock Story
Picture this, it’s Christmas morning and your Aunt Ethel is excitedly watching you unwrap one of your gifts that she claims she got for 75% off on Black Friday. It turns out it’s a pair of reindeer printed, Christmas socks. As your Aunt Ethel gives you a big hug, you begin to wonder…what was the journey those socks took to get to me?
Believe it or not, every item that you purchase likely went through a supply chain, which is a network of people and resources that turn raw materials such as wool into a finished product, like your Christmas socks.
While Aunt Ethel’s Christmas gift might seem simple, the supply chain management process behind it is anything but. Here are the major steps that need to be managed:
Ensure Product Availability
One of the biggest challenges for retailers is forecasting customer demand. Ideally they will collect and analyze previous data to locate growth or stagnation trends for particular products. Of course they also need to account for events such as rising inflation rates which will cause consumers to spend less since goods will cost more.
The Christmas sock retailer had a great profit on reindeer socks last Black Friday, so they ordered 20% more for this year. However, they didn’t account for this year’s rising inflation rates and other environmental factors, which may ultimately add some coal to those socks!
Sourcing and Procurement
This is where manufacturers will work with vendors to find the materials needed to make the product, in this case: wool, elastic, and spandex. This part of the supply chain cycle is also vital for acquiring the appropriate amount of materials, negotiating prices, and maintaining positive relationships with vendors.
Wooly Mammoth, the manufacturer that produces the Christmas socks, has a diverse supplier network with strong vendor relationships, but sadly due to the weather this past winter, the quality of wool from the sheep isn’t up to standards. The remaining wool from season’s past has a price markup of 30% because of this. Wooly Mammoth is committed to obtaining quality wool, so they settle with a supplier that they haven’t used before but insists they only use last year’s wool.
Once all of the materials are procured, this is where the raw materials are transformed into the finished product by the manufacturer. This step typically includes manufacturing, quality control, and packaging.
Somehow, some of the subpar wool made its way into the skeins, producing socks with itchy materials that failed to meet quality standards. Fearing for their brand reputation, Wooly Mammoth finds itself having to reproduce the socks, costing both time and money. Disgruntled employees forced to work long hours to correct this mistake let some of the subpar wool socks slip through.
When the final product is completed by the manufacturer, it then either heads to storage in a warehouse or to be sold at a retail location. Knowing where your product is and how much of it you have, is a critical part of this step.
It’s two weeks until Black Friday, and the Christmas sock retailer has yet to receive their order. They begin to panic as these socks were a best seller last season! They contact Wooly Mammoth who explains the production delay, and ensures the socks will arrive on time. To sweeten the deal, they offer to provide an additional 20% extra sock pairs at no cost.
The final piece of the supply chain puzzle is getting the finished product to the customer. This is when an order is processed, payment is fulfilled, and packaging occurs (if ordered from online retailers).
It’s Black Friday and the Christmas sock retailer is up to their ears in socks! Thankfully the order arrived a couple days before Black Friday, but the quality of the socks is poor. Customers are complaining of itchiness causing the socks to stagnate on the shelves. To top it off, the rising inflation rates over the past year has caused consumers to only save up for big ticket purchases, and sadly socks are not one of them.
In desperation to reduce inventory, the Christmas sock retailer slashes prices by 75%. This catches the eye of your Aunt Ethel, but sadly her meager purchase won’t be enough to get the retailer out of the red on wool socks this year. They will have to go back to the drawing board on how to reduce their inventory and better prepare for future holidays to come!
As you pull on your reindeer socks, you are overwhelmed with the thought of all it took to get them on your feet. All these steps and complications could cause anything to happen! You think to yourself that we often take the products we buy for granted. The thought quickly creeps out of your mind as you hear caroling from the other room. You scratch your suddenly itchy ankles and go to join Aunt Ethel and the family.
4 Challenges Facing Retailer’s Supply Chain this Black Friday
Retailers this holiday season are finding their expenses for handling, storing, and transporting products skyrocketing due to carrying too much inventory. A Reuters analysis found that two-thirds of 30 retailers showed indications of either slow sales or excess stock.
While this in part can be due to inventory management challenges, we should also consider the effects on the supply chain management portion of things:
Plain and simple, data is key. Any inaccuracies can significantly increase the amount of time for products to flow through the supply chain. Human error causes a majority of these issues via data entry, but different names and SKUs for the same item, lack of naming conventions for supplier and item records cause confusion, and software glitches and communication breakdowns can also slow things down.
Rising Costs of Goods
It’s no surprise that we are seeing a rise in the cost of goods due to inflation or environmental factors. In fact, 31% of retailers report rising costs of 5-10% this year. It has now become a delicate balance of maintaining stock while managing costs effectively.
Poor Supplier Relationships
The critical pressures of Black Friday should force retailers to be more open and communicative with suppliers, but often the opposite happens. Some retailers are not transparent with their demand forecasts or unwilling to negotiate favorable terms with suppliers. This can ultimately lead to disruptions and out-of-stock situations.
Inadequate Use of Technology
For the fast-paced nature of Black Friday, retailers really can’t rely on manual processes and a lack of strategy anymore. Investing in software such as Arkestro’s Predictive Procurement Orchestration can help retailers to make the data-driven decisions they need to stay ahead of the Black Friday demands on their supply chain.
All Retailers Want for the Holidays is Arkestro
This holiday season, don’t let the fear of excessive inventory or rising inflation costs get you down! Face your supply chain challenges with the confidence gained from Arkestro.
We will act on your behalf and save you time by helping you run 3x as many events, achieve on average 15% savings, and find the right supplier at the right price, right now, without increasing your resources.
To learn more about what the power of machine learning, data science, and game theory can do for the retail industry, we encourage you to contact us or visit our video library to watch our product demos.