@ Supply Chain Management

In this ongoing series about the five key supply chain challenges as reported by PRTM a few weeks ago, I am going to look at Challenges 2 and 3. If you missed the earlier posts in the series, here they are: PRTM Study: Five Key Supply Chain Challenges – Challenge 1 and PRTM study highlights five key supply chain challenges.

Challenge 2: Securing growth requires truly global customer and supplier networks

Most survey participants expect that future business growth will come primarily from new international customers and products that are customized to meet their needs. As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012.

This I don’t understand – where are the respondents coming from? If business growth is going to come primarily from new international customers, what does that mean other than the fact that overseas growth is going to be met largely by overseas means of production. In that case, the complexity in the supply chain decreases not increases. The control of the supply chain from overseers stateside is going to be more difficult but why must it be controlled from far away?

Nearly 30% of respondents expect the number of manufacturing facilities to decline until 2012, which reflects the expectation that their companies will increase outsourcing to external partners. Similarly, a nearly 30% decline in the number of strategic suppliers indicates that many companies expect to further consolidate their supplier bases. In general, companies in North America and Europe will consolidate their manufacturing and distribution footprint, while companies in Asia will further expand their entire supply chain network.

I don’t really understand this challenge at all. In fact, it is an observation that the trend of offshoring and outsourcing is going to continue, perhaps, even increase. The first stage of outsourcing and offshoring was primarily driven by the need to improve profit margins vis a vis the consumer in the developed world (who was for quite a period on a debt fueled binge). Today, that consumer in the developed world is all but tapped out – well, the answer to that is the consumer overseas whose consumption habits have yet to be tapped to the fullest potential.

Challenge 3: Market dynamics demand regional, cost-optimized supply chain configurations

Survey respondents seem confident that they will be able to deliver substantial gross margin improvements over the next two years. As was the case during the downturn, gains will not come from price increases, but from further reductions of end-to-end supply chain costs.

Unfortunately, few firms will confess that this is not a strategy of their choosing but one of the times imposed on them i.e. there is very little by way of pricing power to be had and therefore it is time to resort to the strong arm tactics of squeezing out your suppliers.

What I found interesting here is the comment from a VP of supply chain of a leading industrial electronics company. He recounts:

“Unit costs are easy to measure. When we move to a ‘less expensive’ supplier, we can see the improvement right away. But a lot of costs are hidden—costs associated with things like quality, site visits, and the loss of flexibility. We often spend more expediting parts from a ‘less expensive’ supplier than we save on the material cost.”

Well, methinks that he has it quite backwards – Unit costs are impossible to measure (especially after the fact let alone before the fact) whereas hidden and unexpected costs can be easily determined (after the fact). This GM-Sloan mentality of calculating, nay, obsessing about unit costs is downright silly simply because it is a fiction cooked up by accountants at the behest of managers who want to be seen doing addition and subtraction.

And on top of that, he has bought into the idea of a free lunch.

The odd thing about these two challenges is that they are seemingly at odds with each other. The modern supply chain is not as regional as it is global. Perhaps, the implication is that it is directed at emerging markets rather than developed ones, the growth in the supply chain has regional constraints on its mind rather than global ones. That does leave the global supply chains originating state side in a nice pickle. No?

In conclusion, there is one observation here and one challenge.

The observation (emanating from Challenge 2) is that offshoring and outsourcing are set to continue for different reasons and possibly at an increased pace. In fact, I would think that this is the decade when a number of corporations are going to become transnational.

The challenge for the supply chain is that it is going to become decentralized in a big way – regional markets, regional supply chains.

I’ve frequently said on this blog that these global supply chains don’t have to exist and it looks like that this prediction is beginning to come to pass. Do you know where you supply chain passport is?

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.

SupplyChainStandard.com has an article about a PRTM study that highlights five key supply chain challenges: PRTM study highlights five key supply chain challenges.

PRTM’s study titled Lessons Learned from the Global Recession (you can download a free copy of the report by registering) outlines a very real expectation that a survey of 350 manufacturing and service companies have right now:

… believe there will be a significant upturn in demand from their customer base as well as a significant increase in company profitability over the next few years.

From the study, the population considered,

The survey population is composed of organizations from a diverse set of industries, including aerospace,  industrial and automotive equipment, consumer goods, retail, electronics and semiconductors,  telecommunications, and health care.The survey’s global nature is reflected in the response population. Nearly 40% of respondents are senior executives in supply chain management within their company, with 15% at the CXO-level. Three major geographic regions—the Americas, Europe, and Asia—are each well represented within the survey respondents. And, while nearly two-thirds of survey participants are companies with annual revenues
greater than $1 billion, more than 10% have revenues less than $100 million.

The real question is whether this expectation from the survey is from the usual appreciation of business cycles that have long been through expansions and contractions – why must this time be any different? Or is it from a collective impression that things are getting better – something rooted in empiricism or the like? Whatever, it is, it is a valuable data point. Of course, what remains to be done is to take these responses and map them against a sampling of 10-K reports of public listed companies and see whether these words are matched by their actions.

Nevertheless, the study highlights five key challenges. They are:

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

I’ll address the meat of these challenges in the next post.