Over recent years
businesses have responded to growth in demand and price pressure by exploiting
global manufacturing and supplier advantages. However the drawback of this
globalization agenda is longer lead times, heavy reliance on logistics and
weaker single sourced supplier relationships, but in a growth cycle these were
accepted. In the current global downturn, businesses are being hit by falling
demand and unpredictable global supply costs which will expose these and other
built in supply chain vulnerabilities. The key questions are, do business
leaders understand these vulnerabilities and does their supply chain team have
the capability to identify them and present the plans to mitigate them? In most
cases the answer is no.
In tough times
businesses need to focus absolutely on profit, cash flow and eliminating
unpredictable events from a declining demand profile. Supply chains have a
critical role in delivering this agenda but face vulnerabilities across
demand-side, internal operations and supply-side that can have a serious
business impact. This article discusses the vulnerabilities and provides ten
actions a business can take to counter them.
·
Demand-side
vulnerabilities
In a downturn
weakening demand leads to a set of vulnerabilities around the customer
interface:
o Unpredictable demand –
High demand creates predictability of volumes and some certainty about product
mix. As demand softens, the period of demand visibility shortens to when orders
are received, which gives the business limited opportunity to react to changes
in demand. Unpredictable demand requires a robust Sales and Operations Planning
(S&OP) process to provide medium term visibility of issues so timely
actions can be taken to forecast volatility.
o Customer profitability
and cost to serve – In a growth phase demand is often acquired through volume
deals and attracting a wide range of customers, not always profitable, through
a range of marketing offers. However, in a downturn these deals can leave businesses
vulnerable to low margin business that is difficult to fulfil. Weaknesses in
the customer portfolio will drain profitability and distract the supply chain
from servicing the core customers.
o Customer leverage –
When capacity is constrained by high demand customers have to collaborate to
secure supply. As it switch into tough economic times, customers have the
leverage to push risk into their supplier base. This results in:
1.
Inventory
exposure as customers pass cash flow risk onto their suppliers by changing
orders within fixed plan periods
2.
Penalties
invoked due to failure to meet service targets
3.
Request
for shorter lead times driving up component and finished goods inventory
4.
Non-adherence
to payment terms and risk of non-payment.
·
Internal
operations vulnerabilities
The internal
operations vulnerabilities are a result of the business reacting to the things
that they can influence, but without the visibility to understand the impact:
o Tactical activity – To
reduce costs, extend payment periods and cut inventory businesses implement
tactical actions across functions, which impacts the end to end supply chain.
o Performance visibility
– Limited visibility of actual and future performance due to nominal
integration of supply chain organisations, systems and processes.
o Supply to all – Lack
of leadership process to ration supply to the most profitable, loyal and low
risk customers. Profit and cash is therefore given away to weaknesses in
customer portfolios.
·
Supply-side
vulnerabilities
The supply side
vulnerabilities are difficult to identify but if they happen they have an
immediate cost and cash flow impact:
o Global sourcing of suppliers
1.
Volatile
commodity, fuel and energy costs undermining global supply assumptions
2.
As
emerging markets experience sharp rises in domestic demand the subsequent high
inflation has significantly eroded the cost advantages of manufacturing for
export
3.
Long
lead times increasing inventory exposure and reducing fulfilment flexibility
o Supply disruption due
to supplier cash flow pressures
1.
Late
payment of supplier invoices resulting in disputes
2.
Suppliers
experiencing cash flow issues due to customer actions
o Single source
suppliers imposing price rises and new terms
1.
It
is probable that these vulnerabilities exist in your supply chain. Could you
identify them and take specific actions to mitigate them?
There
are ten actions you can take to reduce your supply chain vulnerability.
1.
Tactical vulnerability assessment – Run a tactical
end-to-end supply chain vulnerability assessment to identify the visible
vulnerabilities and risks. This must result in a board level sponsored risk
mitigation action plan being developed and executed.
2.
On time supplier payment – Ensure your supplier
payment processes are robust and deliver on payment term obligations.
3.
Upgrade S&OP capability – Re-invigorate your
S&OP process to provide medium term visibility and build the capability to
simulate Profit and Loss, inventory and cash flow from the demand plan. Make
reviewing your risk mitigation action plan a fundamental part of your S&OP
cycle.
4.
Rationalise customer portfolio – Review your
customer portfolio to understand who are the most profitable, loyal and stable.
Focus your business on them and eliminate the weaker customers which are
unprofitable and are probably driving volatility into your supply chain.
5.
Dual source supply – Move to dual sourced regional
and global supply strategies to de-risk the supply base and provide shorter
lead times when required.
6.
Focus on the designed-in costs – Target your
designed-in costs around product design and complexity, manufacturing processes
and sales channels. These are the largest cost elements and waste can be
removed without undermining your supply chain capability.
7.
Rationalise into a future state operating model –
Most businesses will have to rationalise operational capacity during this
downturn. Reactionary rationalisation will create further risks for the
businesses so any changes must build towards a consolidated and integrated
operating model which positions for the future. Your supply chain visibility
will then be improved during the downturn and you will be well placed to take
advantage of future demand up turn.
8. Use after sales to
boost revenue – Boost revenue by focusing the business on improving spares
availability and investing in after sales support where third parties have
operated.
9. Limit customer
flexibility – Implement strict sales business rules to limit the sales team’s
flexibility to offer non-standard customer offers that drive additional
inventory or product complexity into the supply chain.
10 Routinely assess
supply chain vulnerability – When you have implemented these nine steps you
will have much greater visibility of your supply chain vulnerability. Build on
this by implementing a six month rolling strategic supply chain vulnerability
review to provide direction and inform business leader’s future decision making
to ensure these vulnerabilities are not re-created.