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PRTM Study: Five Key Supply Chain Challenges – Challenge 1

In my previous post, PRTM study highlights five key supply chain challenges, I highlighted a recent study by the supply chain management consulting firm. In this post, I want to delve a little deeper into those key challenges. Again, the highlighted challenges were:

    1. Supply chain volatility and uncertainty have permanently increased
    2. Securing growth requires truly global customer and supplier networks
    3. Market dynamics demand regional, cost-optimized supply chain configurations
    4. Risk management involves the end-to-end supply chain
    5. Existing supply chain organization are not truly integrated and empowered

Supply chain volatility and uncertainty have permanently increased

So what is the situation with supply chain volatility and uncertainty?

Survey results clearly show that concerns about continued demand volatility hamper companies’ ability to effectively manage supply chains in an upturn. In fact, three-fourths of respondents consider demand and supply volatility and poor forecast accuracy to be the biggest roadblocks they currently face. Volatility concerns were not assuaged during the recession, nor have most companies successfully implemented strategies for managing volatility in the years ahead. Recent shortages, such as those in electronic components and selected raw materials, indicate that many companies do not have the flexibility to meet an increasingly volatile demand. The rapid ramp up or ramp down of capacities seems to be a big challenge for many study participants.

The biggest roadblocks faced by respondents are demand and supply volatility and poor forecast accuracy. But surely, one is the cause of the other and this can only be exacerbated in a global supply chain with long manufacturing and transportation lead times. Does not poor forecasting of demand beget supply volatility whereas demand volatility is a function of the economic cycle? Now, when both situations occur simultaneously, then it is quite believable that firms are in for a rough time.

The actions that respondents plan to take doesn’t make much sense to me – they don’t hurt but more importantly, they don’t help. The action items can be broken down as follows:

The best-performing companies have already taken steps to improve supply chain response time and visibility across all supply chain partners.

I believe this is the key to cutting down volatility – reducing the supply chain response time and if no reduction is possible, then at least making certain of it. Both the magnitude and variation of supply chain response time create uncertainty (and consequently volatility).

Others plan to implement new strategies within the next two years. Companies are focusing primarily on deepening collaboration with key customers to reduce unanticipated changes in demand.

I believe that this is a no-go. Key customers themselves face volatility and therefore partnering with customers to reduce one’s own volatility is unlikely to bear fruit unless the key customer’s customers are not creating volatility. The first point above i.e. reducing supply chain response time is the more important factor.

Half of participants plan to implement joint “real-time” planning with their key customers by 2012, and nearly half plan to develop processes for improved demand sensing—that is, understanding the market rate of demand in real time, rather than having to wait for after-the-fact reporting.

Again, real-time planning is quite useless when you cannot obtain real-time response. You can create a plan as soon as a trend/micro trend is recognized but if you cannot create a response to it, then you’re just printing numbers.

Rainmakers… Part 2

In Rainmakers… Part 2, I want to go through the list and Q&A of the Rainmakers identified by DC Velocity in their article Who are this year’s Rainmakers?. The previous post in this series is here: Rainmakers… Part 1.

So let’s get started,

Judy McReynolds [Arkansas Best Corp]

Q: You have taken the reins of Arkansas Best during a very challenging time for the economy, transportation, and the LTL segment in particular. LTL faces overcapacity, soft demand, and ongoing price wars. What is your strategy for steering Arkansas Best and ABF through this?
A
: Both the industry and our company have been severely impacted by the length and depth of this recession. Our most experienced officers will tell you they have never seen a business climate as challenging as this one. Fortunately, we have managed the company conservatively and that has provided us with flexibility. We have remained focused on understanding what is important to our customers and finding a way to be an essential element of their distribution networks. Those are the things that have sustained us during this challenging period and will allow us to be successful in the future.

Summary: My, how times have changed. During the period immediately before this recession/depression, trucking was booming, drivers were scarce even while oil prices were high. Now, this industry is muddling through the trough laden with overcapacity. Even if and when the broader economy recovers, trucking will continue to remain in the doldrums until the excess capacity is discarded. If as Judy mentioned, that Arkansas Best has been managed conservatively, then it should be well positioned to ride out the lean years which in my opinion could last quite a while longer than people expect and especially for the trucking industry.

Steve Mulaik [Progress Group]

Q: What one key piece of advice would you offer a supply chain manager looking to set up a logistics network in India?
A:
Always have a Plan B in your pocket. Things happen fast or they never happen at all in India. The problem is you never know which until the last second. Risk management is child’s play in the United States compared to what it’s like on the [Indian] subcontinent. Make it your organization’s mission to be prepared.

Summary: Now, I’m from India and have a fair idea of the business practices in my country and it is refreshing to hear a reflection on the enormous differences in the way things are done in different countries. And I agree strongly that Risk management here is child’s play in the US compared to other parts of the world. Just last week, I was at a party hosted by my uncle who spent a great deal of time with a non-profit in Sierra Leone (in the years leading up to the coup and war i.e. 1990s). There was one memorable line that I think captures the polar opposites of how different cultures operate – “Six days for the thief man, one day for the master.” The phrase means that workers might spend six days thieving from the master while the master has only one day to discover and put an end to it – lopsided, wouldn’t you say?

What I’ve always found surprising about the global supply chain is that it works. Somehow. Some sort of a shifting but workable common ground is found upon which this global supply chain marches forward. Corporations that are engaged in this global dance have somehow managed to persevere where decades and millennia of human endeavor has sallied and failed. I think there is an important reason for this – the transnational corporation has an operational sub-culture that in all matters non-operational is dissociated from the collision of cultures that is constantly taking place. What I’m saying is that as long as it was the members of the culture that attempted to create long supply chains, it kept tailing because culture carried a currency that rarely extended far beyond the borders of that culture. The transnational corporation is one of the ways in which this former feature of human experience has been transcended. And that is a significant breakthrough.

Wesley Randall [Auburn University]

Q: What advice would you offer a young person considering a career in logistics or supply chain?
A:
Work hard, learn the basics, find a mentor, be willing to take a lateral job to learn a new skill, and don’t be afraid to go international. For my family, the time spent internationally was some of the best of our lives. And care about the people around you. I recently heard an executive from The Container Store say, "Culture eats strategy for breakfast". How true that is. There is an emerging realization that attracting and keeping talent is critical to sustained competitive advantage.

Summary: “Culture eats strategy for breakfast.” That’s some major pawnage.

Rich Thompson [Jones Lang LaSalle]

Q: The conventional wisdom has been that the industrial property segment skirted much of the damage inflicted on the real estate market in the past two years. Is the other shoe about to drop, or has it already dropped?
A:
In general, real estate values are down 30 percent across the board, and industrial properties have suffered as with the rest of the commercial real estate market.

Over the past five quarters, the majority of U.S. industrial markets have experienced rising vacancy rates, creating the potential for landlord cash flow issues. Based on how the debt is structured on properties experiencing these problems, we expect to see more foreclosures, loan defaults and public disclosure of these problems in the industrial market in 2010 and 2011.

Summary: If you’ve been following this blog, I think you’d easily agree that I’ve been harping about the implosion and non-recovery in the housing market, broader economy etc. In fact, for the better part of the past 12 months, this has been the constant on this blog. This is simply because, this implosion is ongoing – it’s not in the public eye because negativity (even if true) has a limited shelf life while positivity does not. As Rich says, these problems in the industrial and commercial can be expected to continue in 2010 and 2011. Well, I’d expect the real estate oversupply to last longer than that until some major driver of growth appears.

One anecdotal observation that I make is that people are snapping up real estate thinking that there are good deals available. It’s true that there has been a 20-25% decrease in property values but my study of asset values post bubbles is that it has to reach the point that it is considered a dead end and I just don’t think that it has reached that point stateside. Couple that with the fact that residential real estate is still largely unaffordable evidenced by the need for loans still offered at 3.5% down (FHA) and even 5% by private lenders – this market is still on life support. Consequently, when the most important investment that middle class families makes is treading water, what are the implications for the broader economy and the supply chains at large?

Of course, the new iPhone is selling like hot cakes – so go figure?

Rainmakers… Part 1

Who are this year’s Rainmakers? is a recent article about thought leaders identified by DC Velocity for 2010.

This year’s selections represent many different segments of the supply chain discipline: practitioners, academics, consultants, and vendors. But they’re also united by some common threads, including an emphasis on education, training, and people. Through word and deed, our 2010 honorees more than live up to the Rainmakers’ legacy of making a lasting contribution to the profession.

There is also a short Q&A with these professional’s, a sampling of comments that I found interesting are below:

Catherine Cooper [Ozburn-Hessey Logistics]:

Q: What do you consider to be the greatest obstacles to supply chain optimization?
A: One of the great challenges facing our industry is managing a supply chain with the new credit market constraints. With a restriction on working capital, we are seeing lower inventory levels than ever before, resulting in reduced supply chain cycle times and the need for networkwide item visibility. OHL’s customers are making radical changes in SKU [stock-keeping unit] assortments and sourcing methods. The old model of abundance has been replaced with one of scarcity, impacting every part of our industry.

Summary: Volatility is here. Is network visibility the answer? A very small “Yes” but what matters more is the network configuration. Some networks are more susceptible to volatility while others are not – I’ll leave that as an open question for my readers.

Mike Duffy [Cardinal Health]:

Q: What have you found to be the key differences between managing a consumer goods supply chain and a health-care supply chain?
A: For me, a supply chain is a supply chain. The vernacular is very similar, the principles are similar. The biggest difference is where an industry is when it comes to recognizing the role the supply chain can play in driving business performance. In consumer goods and other industries, we’ve identified the supply chain as a key enabler to driving business results. Health care is at a different place on the continuum. Most health-care providers came into existence to take care of patients first and were thrown into the business side of health care second. As a result, the industry as a whole is working to adopt best practices from the consumer products and other industries in order to leverage the supply chain to drive efficiencies and performance.

Summary: A supply chain is a supply chain. Except there is one significant difference arising this past year. The big government is about to slap its paw print over the healthcare supply chain. Anyone thinking about that?

Charlie Guardiola [Burlington Coat Factory]

Q: If you could offer one piece of advice to someone looking to jump-start their career in distribution or supply chain management, what would it be?
A: My advice would be to be a great businessperson first and then apply that business knowledge to the supply chain discipline. I believe that the best supply chain people are those who are great business people. Back when it was called "logistics" and not "supply chain," we were seen as warehouse guys who moved boxes from point A to point B. But things have really changed over the years, and now supply chain is seen as an integral contributor far beyond the four walls of the DC.

Summary: That is some really sound advice. Some of the others identified here talk about greater visibility, confronting volatility etc – that’s something that businesspersons don’t seem to understand all that well. I mean, they get the list of it but they don’t get the gist of it.

Peter D. Gibbons [Starbucks Corp.]

Q: What do you consider to be the greatest obstacles to supply chain optimization?
A:
Two things come to mind: talent and coordination across the supply chain. The logistics field needs more well-educated logistics professionals with early hands-on experience who can understand quickly what needs to change and can implement change without negatively impacting customer service and cost.

On top of that, the ability to manage "total cost to serve" from product development all the way through to delivery onto a customer’s shelf is essential. The major change in the Starbucks food offerings over the last two years is a great example of balancing improvements to product quality with a supply chain solution that improved total costs and margin but allowed cost trade-offs, including better ingredients and quality.

Summary: I don’t think that he can say it but I can – Over the last two years, Starbucks learnt the lesson that practically every growth company learns sooner than later: Growth doesn’t last forever. But Starbucks has survived, somewhat, despite the threats from competitors because they’ve taken the value route. And the above is a précis of what initial steps of value discovery looks like.

Read the rest of this entry »

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

@ SCM Clustrmap

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