Preparing for the unpredictable

Preparing for the Unpredictable: Supply Chain Flexibility


March 2012

The prices of copper, cotton, oil and other commodities are fluctuating wildly. Currencies and stock markets are on a similar roller coaster. Governments, grappling with debt overhangs and entrenched unemployment, bounce from fiscal to monetary solutions and back again.

For companies with a global footprint, the current volatility looms especially large. Already burdened by huge infrastructure, labor and logistics issues as product lifecycles shrink and customer expectations rise, they now must mitigate the impact of shifting customer behaviors along with sudden and dramatic price and policy changes on supply lines. Not surprisingly, many fear they are fighting a losing battle.

In fact, 70 percent of executives who responded to a recent Accenture survey expressed dissatisfaction at their inability to predict future performance in the new normal of permanent market volatility and the uncertainty it creates. In addition, more than 80 percent of our respondents were worried about the resilience of their supply chains. And with good reason.

“Supply chain integration”—the operations management mantra of the recent past— helped globalizing organizations secure key relationships across extended supply lines by tying the operations of critical business partners tightly together. By its very nature, integration means a supply chain can be only as good as its weakest link. The slowest supplier defines a company’s ability to respond to market changes. With their fortunes tied to those of their selected vendors, many companies now have supply chain structures too inflexible for today’s conditions.

Consider, for example, that many US metro-area grocers leverage supply sources that are close enough to allow them to carry three to five days of inventory and depend on the short lead time for replenishment. Because they do not have the flexibility to turn to other suppliers who might be slightly more expensive but quicker to deliver in a crunch, they can run out of goods at the worst possible times—like after a major storm.

Indeed, the pitfalls of integrated supply chains are plentiful—and are exacerbated by the fact that product lifecycles for everything from cars to consumer electronics have dropped 12 percent to 46 percent over the past decade, depending on the product. Not only have lengthy, inflexible supply lines limited responsiveness, they have done so in a period with such shortened product lifecycles that the majority of the profit for many new products comes in the first months or even weeks as opposed to years or quarters.

Supply lines that are too tightly integrated can lead to lost sales, a diminished brand and lower profits. When supply is disrupted and a company can’t quickly move to an alternate source of supply, its fortunes can plummet—as happened with companies in Japan after the recent earthquake and tsunami, and in Thailand after recent flooding. Companies whose supply lines emphasize minimizing costs may not be able to capitalize on new trends, because it can take months to get a modified product to store shelves in North America or Europe from sources that are far away. Different growth strategies demand a different set of functional flexibilities-no two dynamic supply chains are alike.

As players struggle to operate in markets characterized by continuous mini booms and busts, tightly integrated supply chains are actually deepening the negative impact of volatility—locking in excess cost during downturns and seriously cramping upside potential when opportunities arise. Yesterday’s supply chain strengths, in other words, have become today’s weaknesses. And all companies should be asking themselves exactly how vulnerable they are to volatility—and just how resilient their current supply chain structures really are.

Reimagining the supply chain
A number of forward-looking companies are seizing the initiative, however—rising to the challenge of permanent volatility by reimagining their supply chains as adaptable ecosystems of processes, people, capital assets, technology and data. Rather than trying in vain to make every part of their operations as adaptive as possible, they strive for flexibility where it matters and focus their efforts on operational flexibility that drives profits, not just short-term efficiencies.

Research by MIT and Accenture, respectively, has shown that while disruptions in the balance between supply and demand due to geopolitical events and natural disasters get the most press, disruptions due to volatility from everyday occurrences like poor supplier performance, forecast inaccuracy, and slow or inconsistent execution actually cause more lost profits. At the same time, they are inherently more addressable. Further, regardless of the type of risk or cause of disruption, companies that are more dynamic in responding to these anomalies are disproportionately more profitable—in fact, as much as 75 percent more profitable—than their less adaptive competitors (see chart). Click to Enlarge

In unpredictable markets, dynamic supply chains are designed to meet the specific needs of each customer channel. If a particular product is highly sensitive to media trends, for example, suppliers may be willing to commit to highly flexible manufacturing and distribution networks for the front end of the product lifecycle and then move to more cost-effective methods toward the back end. Or if consumers of another product really care only about low price, then the supply chain for that product must ruthlessly drive out every last bit of waste or excess cost.

Many consider maximum flexibility the ultimate objective of every supply chain function. Such functional flexibility frequently comes at a cost, however, which may or may not meet the value equation of a given customer segment. A truly dynamic supply chain, synchronized end to end with such critical functions as sales and marketing (especially adaptive pricing and promotion) to both sense and shape demand, optimizes the level of flexibility at each link in the supply chain based on the value proposition of the specific consumer targeted.

The degree of supply chain dynamism varies, to be sure: Different growth strategies demand a different mix of functional flexibilities. And our research confirms that no two dynamic supply chains are alike, even within the same industry or geography, and that they frequently vary within business units of the same company. All, however, strive toward optimal agility—and thus speed to outcome—within each functional domain. By continuously re-optimizing as market conditions change, they enable leading players to better plan for (and mitigate) a host of risks.

It is also important to note that this approach differs from traditional supply chain management in two broad areas: fit with business strategy and ability to execute. Simply put, those with excellent strategic fit but poor execution are effectively operational dreamers, while outstanding execution without a tight strategic fit results in a supply chain system that, although efficient, underperforms. High performers must excel at both strategy and execution (see chart).

Click to Enlarge

Accenture research reveals five imperatives critical to the success of any dynamic supply chain.

 

A more adaptive operating model and variable cost structure that is fit-for-purpose to business unit strategy

Building an appropriate supply chain operating model is a key first step in becoming dynamic. And an adaptive model, optimized by a variable cost structure, is becoming increasingly critical—especially considering the steadily diminishing benefits of pursuing lowest-cost sourcing focused narrowly on labor rates. Taking a total landed value view, where all costs are considered—inventory, lost opportunities and other risk factors—frequently yields very different answers than the strategies of many more traditional models.

In many cases, labor frequently represents less than 10 percent of direct costs (and an even smaller percentage of total landed costs) for many items. Transportation costs, by contrast, continue to consume a rising proportion of total costs, as do commodity-related costs. And companies with lengthy supply lines struggle to achieve timely responses and swift execution, needlessly building excess inventory that must eventually be either discounted or written off.

These pressures are driving more and more organizations to abandon the wholesale offshoring strategies so popular a few years ago in favor of strategies that include hemispheric sourcing, closer to home. Witness, for example, how some European TV manufacturers shifted production from China to Europe to be closer to the customer and to keep manufacturing costs and market response times down. Companies that make televisions for the US market have similarly reemphasized the Mexican maquiladoras that just a decade ago were almost completely abandoned in favor of China and other East Asian production locations.

Such companies are also using standardized processes and systems to make themselves better able to rapidly scale or shutter operations based on short-notice demand.

A European food company, for instance, recently integrated a previously heterogeneous supply chain organization, spread across 54 production facilities (most of them abroad), into a single and vastly more efficient, end-to-end system. The entire purpose of standardization changes dramatically under the dynamic model: Whereas standardized processes under integration were all about driving out variance and costs, standardization in the new era is all about being able to adapt rapidly with extreme precision while minimizing cost of response.

 

Risk anticipation and rapid mitigation

Speed of response is a critical capability of dynamic supply chains, and the key to mitigating risk and swiftly implementing the changes that will make the supply chain still more resilient. But response time hinges on the company’s ability to proactively identify high-risk events, and to decide whether to design the operation to flex to known risks—those that are unpredictable but relatively more likely to occur—or to have contingency plans for the unknowable—risks that are unlikely to occur but are potentially catastrophic.

Most companies are woefully inadequate in this regard. Only 11 percent of our global survey respondents reported that they actively manage supply chain risk. Indeed, only 18 percent have formal supply chain risk management systems in place. And fewer than 20 percent of respondents have made the executive team responsible for this crucial function.

Our experience suggests that being able to distinguish among and between risks is a key differentiator. And there are predictive and real-time risk management technologies available that companies can use, in combination with scenario planning and execution technologies, to drive far greater levels of supply chain dynamism.

Some companies choose to use the services of third parties, such as intelligent risk services providers. Using a cadre of professionals, sophisticated predictive systems and a global network of data gathering resources, services of this kind can provide information almost in real time, predicting risks such as port shutdowns, calculating the probability of labor unrest in given geographies, and assessing the impact of natural disasters or political strife on in-region operations. Making these alerts part of a company’s global operations can help businesses respond much more quickly than their competitors—by rerouting shipments around projected problem areas, for example, or by committing to incremental production capacity to fill in for potential shortfalls. Speed of response is the key to mitigating risk and swiftly implementing the changes that will make the supply chain still more resilient.

 

Enhanced visibility and profitable allocation of capacity

Dynamic supply chains are networks, not only of inter-enterprise collaboration but also of external relationships. And the information they supply can enhance decision making and enable successful responses.

Consider, for example, how Procter & Gamble leverages crowdsourcing to boost its innovation capabilities and supply chain responsiveness. This is not purely for the value of new ideas, although the exercise is valuable for this reason as well. It also allows the company to capitalize on immediate market trends that a more traditional, inflexible R&D environment might not be able to adapt to. In addition, other functions within the company can see the potential new product portfolio—which gives them a greater ability to plan for sourcing, manufacturing, distribution and servicing well in advance of the launch of the new items.

Adaptive technologies can also help ensure the most appropriate and efficient allocation of resources. This includes applications such as global freight and customs optimization from GT Nexus, Amber Road and others, as well as retail merchandise allocation from Predicitx and other cloud-based providers of adaptive software-as-a-service. It also involves integrating supply chain systems with pricing and promotion systems. By linking supply chain technologies to sales and marketing systems, companies can sense and respond to real-time market needs.

Of course, even the most adaptive supply chains can’t be infinitely responsive. There are not only cost limitations but actual physical limitations as well. By linking supply chain technologies to sales and marketing systems, companies can sense and respond to real-time market needs; they can also send triggers back to the pricing and promotion side to shape demand where the operations do not have the capacity to fulfill the need. Companies such as Dell and Amazon.com have become masters at this particular capability.

 

Executional excellence consistent with the stated operational strategy

Excellent execution is critical to the daily operation of a dynamic supply chain. Agile, accelerated processes help make execution predictable, thus ensuring certainty of outcome. And leading practitioners of dynamic supply chains have invested in core business processes that are fully aligned with their business strategy and operating model.

Take one of the world’s largest container manufacturers, with more than 20,000 people working in dozens of plants around the globe. As part of its supply chain transformation, the company extended its supply chain beyond the traditional four walls of manufacturing and distribution across all functions and value streams—including new-product development and supplier management.

As part of its product development process, unique templates must be designed and produced to generate prototypes for customer approval and, subsequently, for manufacturing. Company executives recognized the immense advantage of reducing template-development time and did so, delivering a more than 60 percent reduction in cycle time. Coupled with ongoing improvements in manufacturing and logistics, the company dramatically reduced end-to-end “design to deliver” time. This led to improved customer satisfaction, increased market share in the high-margin end of the business and—more important—a more agile organization, ready to respond to future changes in demand.

Even if there are setbacks along the way—a prototype is completely different than expected, or a customer changes his or her mind unexpectedly—the company’s industry-leading response time allows it to recover and still deliver faster than its competitors. This excellence in execution trumps the need to forecast with perfection.

 

A culture of constant change and supply chain as a profession

It’s essential that the organization as a whole understands all components of a dynamic supply chain strategy. And the culture of the organization should enable people to think and act dynamically. Not all the necessary skill sets will be sourced in-house.

A North American retailer recently faced significant challenges expanding beyond its traditional product mix. The company experienced lost sales, excess inventories and poor in-stock performance because of the greater complexities associated with managing the global supply chain of the broader product mix. Specifically, the planning team lacked the competence and experience necessary to manage the forecasting and replenishment process and the additional complexities brought on by the new categories.

In response, the retailer developed an innovative solution that segmented the complex product categories from the more traditional grocery categories and outsourced the forecasting and replenishment functions to a firm with the skills, experience and processes needed. The results were significant and almost immediate. The company improved productivity and profitability and became more agile in handling rapidly changing conditions in the marketplace.

Where to start?
Clearly, achieving the optimal level of dynamism across a company’s entire operating model is not going to happen overnight. But where do you start? How do you know where to go, and how far is enough?

While the process of transforming into a fully dynamic supply chain model needs to be tailored to the strategic needs of each individual company (and even each business unit), there are three initial steps that any company can take to jump start the process.

1. Think “portfolio of supply chains.”
To create a dynamic supply chain, companies must first understand their customers’ needs and then define the appropriate kind of structural flexibility for meeting those needs. Before defining the number of unique supply chains in its operating portfolio, the organization must have an understanding of current and anticipated business strategies, and the core value propositions—whether it be innovation, customer intimacy or low cost—offered to each customer segment by product family and geography.

2. Define the dynamic operating model 
Once the organization understands which inherent characteristics each supply chain needs, that supply chain must be modeled and then rigorous sensitivity analysis performed against a host of business and economic conditions. Rigorous modeling also enables the organization to understand the day-to-day risk sensitivities that really matter to the bottom line, with contingencies for events that, although unlikely, are possible.

3. Establish a value-sequenced transformational roadmap.
Since every company must deal with managing change without putting existing business at risk, sequencing is every bit as important as timing. Furthermore, today’s economic environment does not allow for “big bang” efforts, where results first begin to accrue years into the future. A proper dynamic supply chain roadmap is grouped into a series of capability releases that build upon one another, starting with foundational activities and early wins that generate quick cash flow, and produce measurable operational and financial results at each step in the journey. Thus, the majority of these transformations rapidly become self-funding.

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The efficient-at-all-costs integrated supply chain model is a thing of the past in an era of permanent volatility. By carefully tailoring their supply chains for optimal end-to-end flexibility, companies can embrace the unpredictable—anticipating and mitigating risk, enhancing visibility and capacity allocation, and facilitating much more adaptive execution.

 

For further reading
The Risk Masters,” Outlook 2011, No. 3

 

Sidebar 1 | Prognosticating: So who can you turn to?
Historically, companies have turned to third parties for reliable forecasts on everything from commodity prices to inflation levels. They typically use these forecasts to plan strategy and operations over the next three to five years.

But in an environment of permanent volatility, how effective are those prognostications? Consider the results of a leading financial firm’s recent performance in predicting trends for a single commodity: oil.

In 2008, the company published five different forecasts over a five-month period (from May through October) for the average price of a barrel of oil in 2009. These forecasts were, in order, $200, $148, $150–$200, $110 and $50.

The actual average price of West Texas Intermediary crude oil per barrel in 2009: $61.65. Had a company planned its distribution and transportation around the May average, it would have had a very different plan than if it had used the October forecast. And the price of oil is only one variable to consider in a supply chain.

Unfortunately, companies cannot just abandon the notion of planning or consulting third-party forecasts. But they must do so understanding which factors matter most to their operations and then prepare for different scenarios with partners that can help them execute better instead of relying on companies that prognosticate without consequences.


Sidebar 2 | Adaptive execution: Dealing with the “Oprah Effect”
For years, American television personality Oprah Winfrey was able to drive major consumer demand simply by featuring a product or service on her TV show or in any of the other channels in her media empire. Nowhere is this truer than in the publishing industry, where being featured as part of Oprah’s Book Club resulted in a near-instantaneous spike in demand—turning a book with a small first printing into an immediate bestseller of more than 1 million copies. To protect the integrity of her Book Club and the freshness of her topics, Oprah clearly didn’t share who or what she was planning to promote.

So a publisher must be super happy to get all that incremental demand, right?

Well, sure, if you have the stock. But few have an extra eight-fold of stock just lying around a warehouse. And since the most cost-effective printing companies are frequently far offshore (using onshore printers on short notice is likely to mean significant expediting charges), the choices seem poor: Either print close to the market at major cost or miss the brief demand spike, during which profits could be dramatic.

While the advent of the Kindle and other digital readers has clearly been a major help, physical books still represent a significant source of profit, especially for new releases.

A leading US-headquartered publisher addressed the issue by making several changes to its processes to improve the company’s ability to adapt to demand spikes. First, it created a set of analyses to determine which titles were most likely to be selected in venues similar to Oprah’s Book Club. Second, for these titles, the publisher arranged to have electronic files ready for production at a select group of onshore and offshore printers.

Finally, for those titles that do indeed see demand spikes beyond the publisher’s initial forecast, production is allocated to nearby (albeit somewhat more costly) printers to capture the demand for the short lifecycle the book is likely to have. Only enough production is allocated to the higher-cost printers to cover the time it takes to produce and bring to-market the inventory from lower-cost offshore producers. The result? A major increase in profits, and significantly less customer dissatisfaction from the book not being available.

 

About the authors
Gregory C. Cudahy is the North American managing partner of Accenture’s Operations group. With more than 30 years of experience across management consulting and technology, he leads a team of specialists in supply chain management, rapid profit improvement, cross-enterprise process-led transformation and operations management services. Mr. Cudahy is based in Atlanta.

Mark O. George heads the global Operations and Process Transformation group in Accenture Operations. His experience in operations and business transformation spans three decades. Mr. George, who is based in Dallas, is the author of The Lean Six Sigma Guide to Doing More with Less (John Wiley & Sons Publishing, 2010) and holds US patents in Lean analytics and Enterprise Speed.

Gary R. Godfrey leads Accenture’s Global Integrated Planning and Fulfillment group. In his almost 20 years with the company, he has served a diverse set of global clients with supply chain strategy, network design, managed supply chain services, supply chain transformation, transportation management, logistics planning and direct store distribution systems. Mr. Godfrey is based in Atlanta.

Mary J. Rollman, a senior manager in Accenture Operations, has more than 15 years of experience in supply chain management across several industries, including retail, consumer packaged goods and pharmaceuticals. Ms. Rollman is based in Los Angeles.


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Preparing for the unpredictable - Accenture Outlook 
By adapting their supply chains to flex with the markets, smart organizations are learning to profit from permanent volatility—insulating themselves against downside risk, and moving with speed and agility to take advantage of the upside.
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