What Tesla Could Teach Retailers About Supply Chains

The supply chain logjam has been a once-in-a-century management crisis which no company could have anticipated, let alone been prepared for. And yet some were, to one degree or another. 

In the mega-retailer category, Walmart is in year nine of a multi-decade program to source more of its products closer to home. The company initially pledged to buy $50 billion in US-made products. Last year, citing among other factors that 85% of the company’s customers “have said it is important for retailers to carry products made or assembled in America,” Walmart announced plans to inject an additional $350 billion into the U.S. manufacturing sector over the next decade.

At the other end of the spectrum is Taylor Guitar, a leading maker of acoustic guitars. The company has said it was able to maintain production through the pandemic because it had built up deep inventories of the specialty woods it uses, which can only be found in overseas forests and must be harvested sustainably.

Perhaps the company with the most to teach the retail industry by example is Tesla, the electric car company.

As recently reported in The New York Times, while G.M. and Ford were shutting down factories due to a shortage of computer chips, Tesla was posting a string of record sales quarters. Last year the company doubled the number of vehicles it sold in 2020.

Before the pandemic struck, analysts were skeptical of founder Elon Musk’s goal to have the company “do more things on its own,” the Times reported. When the pandemic hit and Tesla also couldn’t get the chips it needed, “it took the ones that were available and rewrote the software that operated them to suit its needs. Larger auto companies couldn’t do that because they relied on outside suppliers for much of their software and computing expertise.”

The pandemic caught most retailers off guard because the prevailing practice in the industry, spurred in part by Amazon’s ruthless race-to-the-bottom pricing, was to focus on keeping costs as low as possible and inventories lean. 

Brian Higgins, head of KPMG’s U.S. supply chain and operations practice, recently told The Financial Post, “A lot of the operating models in the supply chains we see as broken today, were cemented 20 years ago on what at the time were universal truths.” Those truths, he said, “produced long and fragile supply chains.”

Covid was not the first time the vulnerability of supply chains was exposed. The last time was during the economic malaise that began with the 2008 Financial Crisis — the Great Meltdown of asset values — and lingered for years. The problem then was not clogged ports but the effect of financial instability among suppliers.

Sourcing suppliers domestically and near-shoring are trends well underway in year three of the COVID era.

But there’s more to it than shipping distance. The key word now should be collaboration. In a crisis, companies that develop partnerships with suppliers, and encourage transparency, will find they have leverage and goodwill that they wouldn’t have with sources halfway around the world that were selected based on cost.  

As evidence that it makes a difference, private label sourcing in the retail sector has become a discrete issue for managers. In a recent column on the Wall Street Journal website, Michael Taylor, president of Daymon, a private labeling consultant, said his firm had looked at a cross-section of U.S. retailers and determined that, “Those with long-term supplier relationships outpaced their competition … even in times of struggling distribution.”

Everyone plans to tackle this issue, but the problems persist, as predicted in the data we recently collected from retail executives on supply chain disruption. According to consulting giant McKinsey there’s more talk than action. The firm surveyed senior supply-chain executives from across industries and geographies in 2020 and found that 93 percent said they intended, “to make their supply chains far more flexible, agile, and resilient.” A year later, Mckinsey reported that, “only 15 percent had begun to make structural changes.”