Consumer expectations are getting higher
Fast and free shipping is the new standard, but supply chain issues make that hard to meet
Brands pivot to meet consumer demands
Resilient brands are holding more inventory, diversifying product sourcing, cracking down on return rates, and leaning into digitization
Adapting now could lead to stronger logistic networks
Slower and less consistent supply chains are transforming how brands think about and strengthen them in the future
Consumer demands aren't waiting for supply chains to recover
The pandemic bottlenecked supply chains across the globe, and many businesses are still feeling the squeeze. Just when businesses thought trade routes would open up, the Russia-Ukraine war hit. Supply chains are more congested than ever. Of the 900 global brands we surveyed, 66% expect supply chain issues to get even worse in 2023.*
All values are in U.S. dollars
How the supply chain crisis is impacting businesses
Sourced from Shopify/Ipsos Commerce Trends Study. A survey covering n=900 SMBs and Enterprises in 14 countries, Aug–Sep 2022
As costs and supply chain delays increased, so did customer demands. Yet massive marketplaces have set expectations for speedy delivery and easy returns that not even they can keep up with anymore.
Brands face the challenge of providing reliable shipping even beyond the current supply chain crisis. Significant disruptions to production—like pandemics, trade tensions, cyber attacks, and climate-related events—happen every 3.7 years on average. Global brands need logistics practices that can adapt quickly to a continually changing ecommerce landscape and attract the buyers of tomorrow.
Supply chain management hasn't kept pace with commerce trends
Just-in-time (JIT) manufacturing became standard fare since Toyota modeled it as a way to cut down on storage costs and waste in a post–World War II economy. Like the name suggests, the JIT approach aims to get products sourced, manufactured, assembled, and shipped just in time to meet the customer's demands. Companies across the globe adopted JIT principles over the last half-century.
Meanwhile, supply chains became more complicated and spanned more territory, quietly threatening the ideal of continuously flowing production. JIT relies on everything in the supply chain working without any hiccups. The more links in the chain, the more places it can break. The pandemic exposed that vulnerability on a massive scale. Global supply chain disruptions more than tripled from 2019 to 2021, and most companies were almost immediately unable to cope.
Some brands patched their supply chains, hoping to just get through the pandemic. But for many, the pandemic was just the beginning of the breakdown. Disruptions cost businesses around the world an average of $184 million USD in 2021 alone. Shipping ports are still backlogged in 2022, especially in China, where COVID policies remain in place. And since the onset of the war, millions of products are being rerouted by sea to avoid their usual path by train through Russia.
Sourced from Interos Annual Global Supply Chain Report
But it’s no surprise that JIT supply chains aren't holding up under the weight of modern commerce. The JIT production model wasn’t developed with an interconnected and complex commercial world in mind. It was a culturally specific response to particular shortages: natural resources, space, and capital. Most brands today don't face the same challenges of a young Toyota, struggling in a national market without much space or natural resources. But most brands do share Toyota's motivation to keep cash flowing, and that’s where JIT fails modern brands the most.
The compounding crises of the 2020s have shown just how costly JIT supply chains are when they break. Nearly six out of 10 companies report lost sales from products being out of stock, according to a survey of global Shopify Plus merchants.✝︎ Not to mention the damage to reputation and customer relationships that 23% of merchants report is even harder to recoup. Consumers are tired of being patient. Brands need updated solutions to succeed in the next era of commerce.
How to future-proof logistics networks
1. Hold more inventory
Carrying more inventory is the most common way Shopify Plus merchants are battling the supply chain crisis. And eight out of 10 companies McKinsey surveyed in the spring of 2022 had already started upping their inventory in 2021. The world's 3,000 biggest businesses now keep the equivalent of 1% GDP more inventory holdings compared to 2019.
More available stock makes it easier to meet customer needs, but there's a balance: Cushioning inventory doesn't mean overstocking. Brands that increase inventory holdings little by little (depending on cost, space, and demand) lower their risk of trapping funds in inventory they can't sell.
Also, because most buyers have less spending power right now, brands need to watch how many higher priced items they keep on hand. In the second quarter of 2022, the inventory-to-sales ratio spiked for items priced over $100 for some Shopify merchants, probably because shoppers are responding to inflation by choosing cheaper options. So it's crucial to manage inventory closely.
2. Diversify product sources
Low cost, high productivity, and dependable quality are no longer the main factors in creating a winning supply chain. Thousands of companies have learned the hard way that supply chains are graded on resilience.
Nearly one-third of Shopify Plus merchants are building shock absorbers into their supply chains by diversifying their product sourcing: 30% have found new suppliers and 29% now get their products from multiple suppliers or countries.
Another option is sourcing products or raw materials closer to home, like 31% of Shopify merchants began doing in 2022.
3. Shrink return rates
Brands are losing a record average of $29 for every customer they acquire—a 222% increase in the last eight years. Aside from steep customer acquisition costs, returns take a lot of the blame. Customers return 20–30% of online purchases, compared to only 8–10% of in-store purchases.
Whether the returned item ends up being resold in a brick-and-mortar store, repackaged in a distribution center, or sitting in a landfill, it matters as much to the modern consumer as it does to a business' bottom line. Fewer returns mean happier buyers, less pollution from transportation and packaging, and less strain on a key aspect of supply chains: inventory management.
To minimize returns, customers need to be confident what they see online is what shows up at their door. Detailed product descriptions, customer reviews, and 360-degree views of each product help set customer expectations and reduce return rates. Bringing products to life for customers through augmented reality is becoming a viable option as more consumers around the world adopt the technology.
Sourced from Soocial
More online shoppers will use augmented reality while buying products by 2025
The global virtual and augmented reality market in retail is growing
In million U.S. dollars
Sourced from Statista
The immersive and interactive nature of livestream shopping also makes customers more confident in what they're buying and how to use it, significantly lowering return rates.
Big brands like Target and Walmart let their customers keep small returns. But for many businesses, a refund-only approach is not cost effective. Instead, some brands like Zara are popularizing return fees.
Zara's U.K. branch followed its European neighbors in 2022 by adding a fee to mailed returns. It's only a £1.95 ($2.39 USD) deduction on refunds, but some analysts predict this trend will grow.
There are mixed opinions about charging for returns, with some concerns that return fees will negatively impact brand loyalty. But customers are likely to stay on board as long as a free option to return items in store exists. Either way, it's crucial to clearly spell out any return policy and then always honor it.
4. Digitize supply chains
The more volatile global supply chains are, the faster brands must respond. One-third of the brands we surveyed planned to digitize manual processes within their supply chains. That looks like using scanning apps or inventory management software, or relying on machine learning and artificial intelligence (AI)–based solutions to do everything from load pooling to dynamic rerouting.**
Few companies have visibility into the deeper tiers of their supply networks, even though greater insight would help businesses anticipate disruptions and demand. According to McKinsey, early adopters of AI–enabled supply chain management can improve logistics costs by 15%, inventory levels by 35%, and service levels by 65%, compared with slower moving competitors.
How The Natural Patch overstocks to add flexibility into their supply chain
Australian company The Natural Patch carries all-natural adhesives that stick to children’s clothing and act as an insect repellent, emotional wellness patch, or a sleep aid. They launched in 2020 at the start of supply chain woes and have seen 100% growth since.
Although The Natural Patch relies exclusively on air freighting—the fastest and most expensive shipping method—to move their products from manufacturer to distribution center, air freighting hasn’t spared them from supply chain challenges.
The Natural Patch has learned to leave a healthy buffer. For them, that’s 20%, or three months of inventory, to get through unexpected delays or surges in demand due to marketing promotions or around Black Friday.
“Our rule is we cannot run out of stock,” says Jankie. “It’s not just about turning off marketing for [a] product. It’s winding things down; it messes with our finances.”
Having three months of inventory on hand is their cushion from the time the product is put into manufacturing to being on the shelf, ready for picking, packing, and sending. There are, of course, risks to holding too much inventory—like cash flow being tied up in stock. For The Natural Patch, holding six or even 12 months of product means inventory goes “stale”: Buyers have to wait until the current batch of inventory sells out before seeing the latest updates to product or packaging.
In two years of being in business, they’ve grown from one SKU to six and have doubled their volume-based sales each year. That growth has allowed them to expand globally with Shopify Markets, which helps them localize their online store by calculating duties and taxes for their shoppers around the world. They won’t launch in a market unless they can do last-mile delivery domestically with a reliable 3PL, which 62% of survey respondents say is difficult to find. Their wholesale business fills in the gaps for the rest of the countries.*
Michael Jankie Founder, The Natural Patch
You could get away with it a couple of years ago by saying, ‘Hey, there's postage problems because of COVID.’ That's no longer an acceptable excuse when consumers know that with an Amazon Prime membership, they can get something in the day.
How Shopify can help
Digitize your supply chain with Shopify APIs and automations
Whether you self-ship or outsource your fulfillment, managing more inventory can be made easy with the inventory states API. Get a real-time view of your stock at all times when you integrate your inventory management system with Shopify.
And with Shopify Flow, you can streamline and reduce the manual work that comes with managing the end-to-end fulfillment process. Some fulfillment automations include preparing draft shipping labels, tagging orders by shipping method, or sending follow-up messages for orders that didn’t ship on time.
Turn shipping into a revenue generator
With Shopify Shipping, you can turn savings into earnings with a no-fee platform. Shopify Shipping offers:
- The best rates on shipping labels from top-tier carriers
- Pre-negotiated rates directly integrated in the Shopify admin
- Embedded insurance on every eligible label
Outsource your supply chain with a 3PL
For businesses looking to digitize and outsource their logistics, Shopify Fulfillment Network (SFN) is a software-based solution that offers fast, reliable delivery to help you scale your business. Using data across the national fulfillment network, SFN automatically positions your products closest to your buyers. SFN also comes with Shop Promise by default, which means you can communicate expected delivery times to customers across your online store.
Supply chain trends FAQ
Learn how Shopify Plus can lighten your load with automated inventory and fulfillment.
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Powered by data from millions of Shopify brands, our proprietary report provides the tools and insights businesses need to drive growth in the next year.Commerce Trends 2023p. 13, Overview
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