It''s 2003. Do You Know Where Your Supplier Is?
Five years ago, businesses and individuals were riding a wave of unprecedented,
technology-driven prosperity. The wave appeared endless, and there was room for
practically everyone.
What a difference a few years make. Today, most of us are glad to simply preserve our capital and hope that our skills, products, or services are recognized and valued in the marketplace. For people and corporations, it's basically the same reality: Economic forces are fundamentally different. Demand is uncertain or declining. Geopolitical conflicts and uncertainties are rampant. In addition, the excesses of the late 1990s are still working their way through our corporate systems in the form of financial and operational restructurings. And all the while, key industries, such as telecom and air travel, are bedeviled by too much capacity and too few customers.
For some parts of the global economy, falling prices are another daunting reality. A recent article in The New York Times stated that the cost of most manufactured goods — including cars, clothing, electronics, furniture, jewelry, kitchen equipment, and toys — has dropped in the last year.1 "More goods are chasing less money, instead of more money chasing fewer goods," comments Arthur J. Rolnick, research director of the Federal Reserve Bank of Minneapolis.
Does this mean that we are facing a period of secular deflation in parts of the economy? There are several reasons to believe this might be the case. For example, falling prices and slack demand for technology and communications have contributed to declining cost structures. And adoption of the World Trade Organization by China and other Asian countries — combined with the effects of workforce arbitrage on a global scale — appear to be pushing down the cost of supply in many areas. Some companies are moving fast to take advantage of falling prices. At General Electric's 2002 investor presentation, Jeffrey Immelt presented plans to source $5 billion worth of material from China by 2005. Using sourcing deflation as a strategic lever, GE intends to protect itself from soft prices and uncertain global demand.
The Effect on Operations
During the booming 1990s, demand for consumer and industrial products surged. Plants ran at near capacity, and new facilities, equipment, and third-party services were added frequently. To ensure availability, semi-finished components often were stockpiled at suppliers and plants and traded among facilities to keep uptime high. Downstream channels also were stuffed with double- or triple-inflated finished-product orders from buyers seeking to increase their chances of receiving original order quantities.
The results of these behaviors were comprehensive business approaches designed largely around demand. To deal with the era's endemic supply limitations, many companies adopted new management techniques, such as elaborate product-allocation methods; specialized processes and technologies for managing forecasts; and innovative customer relationship management (or perhaps, customer relationship pacification) capabilities. New supply chain technology installations — also oriented toward demand management — sought to understand customer orders across multiple channels and geographies; project output in supply planning modules; and use availability-to-promise (ATP) algorithms to know when and where to deliver product. Extensive new business functions were designed to find creative (and usually labor intensive) ways to satisfy demand and satisfy customers.
Even supply chain performance metrics were intensively customer/demand-focused. Order fill rates and on-time/complete deliveries were the twin mantras of harried executives trying to survive in a world with not enough product to go around. Still, visibility into true customer demand — a concept that was alternately praised and vilified in the technology sector — remained elusive. So as the 1990s wore down, companies began writing down billions of dollars in overproduced and unsold material and product inventories. Even then, few had learned how to predict demand with perfect accuracy.
The modern business landscape is no longer fashioned by demand. Economic woes softened everything, while increased global competition created less-expensive manufacturing capacity and put downward pressures on prices. In many cases, products and companies have lost value; recent supply chain technology and process investments often depreciated as well. Around the world, the new priority is managing in a demand-constrained environment. And the key challenge is adapting to slower growth and fierce competition by managing and minimiz- ing supplies — both in materials and in finished products.
Characteristics of the All-Weather Supply Chain
Accenture recently completed a year-long research study into what makes leading supply chain companies successful. The study also sought to explain why some companies are able to adapt quickly to changing economic conditions, and thus suffer less during lean economic periods.
A key finding was that supply chain leaders do a superior job of designing and implementing integrated operating models. They seek competitive advantage by tightly balancing supply and demand across supply chain operations, including suppliers, customers, outsourcers, and other supply chain partners. Of course, their models vary by industry: Dell uses a direct-to-customer supply chain that minimizes work-in-process inventory by building to demand, and Saturn focuses on lifecycle ownership value via low prices and distinctive after-sale service. Across all industries, however, the model is generally customized, often revolutionary, and always focused on low costs and quality service, regardless of economic, competitor, or marketplace conditions.
To support their integrated operating models, supply chain leaders also were shown to have flexible, adaptable business processes for customer relations, supplier management, new product design, and other supply chain operations. Effective but uncomplicated, these processes are managed with common performance measures and feedback loops, which means that leaders are positioned to collect and disburse information more smoothly and consistently across external partners and internal functions. A wide variety of information is shared in this manner, including product design data, manufacturing schedules, delivery status, channel inventories, cost and pricing data, and customer requirements.
Lastly, supply chain leaders have executives who believe in, and actively support, their integrated operating models. Operating model precepts and fundamentals are infused throughout the organization, which maximizes employee acceptance and fosters flawless execution. At all levels of the organization, the key differentiator is information, not assets. This means that inventories stay low, decision making is well-supported, and demand (however flaccid) is met quickly and economically.
Start With Supply
Most germane to this discussion, however, is the extent to which supply chain leaders balance supply and demand. Toward the end of the 1990s, many companies had serious supply chain problems because they forgot (or, perhaps, never learned) that managing supply is as important as managing demand. According to our research, supply chain leaders usually escaped that trap because their operating models insisted on good upstream visibility and control. In fact, the complete survey population cited comprehensive supply chain planning (upstream and downstream) as the capability most able to spur operational improvements (see Figure 1). But compared to the survey average, supply chain leaders are far more likely to put the concept into action by making balanced supply and demand their most important performance metric.
Figure 1: Executive survey respondents were asked to identify the three supply chain capability areas that they believe provide the largest improvement opportunities.
The key challenge for many companies, therefore, is reconfiguring their operating models to put greater emphasis on managing supply. Some companies have sought to attain supply flexibility through outsourcing — unloading thousands of plants and employees to third-party contract manufacturers and signing long-term supply contracts in return. This strategy worked well in the 1990s because contractors generally could boost production capacity in their underutilized, recently acquired facilities. But in a demand-constrained world, many such facilities again have been mothballed, thus reducing flexibility and lengthening startup times.
Clearly, outsourcing by itself is not the key to survival in the current business environment. Most companies also must work to upgrade their spend-management programs to supplier management programs, while repositioning their attendant processes, technologies, and (most of all) operating models. This implies that they:
- Clean up their systems to obtain the right metrics. Most purchase order systems have much less data integrity than customer order systems, so a one-time "clean-up" is in order.
- Extend the metrics. Once a clear baseline on current supply status has been established, a new set of metrics is needed to ensure visibility into "real" supply — items that are in the facility, in-transit, waiting at supplier hubs, or simply committed to buy. This visibility is the first step in managing supply as effectively as managing demand.
- Add visibility to procurement and execution throughout the pipeline by applying solutions from organizations such as WorldChain or Yantra.
- Emphasize the implementation of technologies that help align pipeline operations with true end demand.
- Identify new ways of working with suppliers to ensure availability without expanding inventories (for example, CPFR or VIM).
- Accelerate product-line changeovers to reduce manufacturing cycle times and improve make-to-order capabilities.
- Develop supplier portals that expedite the sharing of demand estimates, design collaboration tools, and integrated order-reconciliation capabilities.
- Increase the number of non-differentiated parts across product offerings. This helps to reduce costs, improve availability, and enhance aftermarket service.
- Integrate the process. Solutions from Clear Cross, Yantra, and WorldChain allow companies to tightly integrate their entire "purchase-to-invoice" process, thus making the loop as tight with suppliers as it typically is with customers.
Shifting the Perspective
A car's engine provides the power to drive the vehicle and manage the accessories. A superior operating model does much the same for a company — supplying the operating concepts, performance metrics, and organizational means needed to power profitability. Toward the end of the 1990s, supply chain leaders such as Dell Computer, Nokia, and Zara recalibrated their operating models to ensure smooth operation in an environment of lower demand. By controlling supply bases, these companies avoided the demand-visibility problems that plagued many of their competitors (see Figure 2). The ability to quickly reduce production, minimize channel inventories of materials and products, and determine true consumer demand were core elements of their retuned operating models.
Figure 2: Accenture research confirmed that global business leaders apply a wide variety of supplymanagement strategies to help them flourish in lean as well as flush times.
Developing or redeveloping operating models to thrive in a supplier-focused environment often requires a major supply chain transformation (see Figure 3). The first basic step in this admittedly complex process is to link each of the activities identified in the previous section (clean up systems, extend metrics, add visibility, and so on) to a model that emphasizes a balanced, integrated approach to supply and demand. Working with supply chain partners, new supply- oriented strategies then must be institutionalized within business processes, concurrent with shared performance metrics, people, and organizations. Finally, companies will need to adopt a continuous management and improvement attitude — one that is supported and nurtured by all senior executives and that eschews inertia organization-wide.
Figure 3: Accenture supply chain transformation research identified a variety of metrics and success factors.
Throughout this year's ASCET volume — its fifth edition — numerous insiders present their ideas on how to steer supply chain operations through rough economic waters. Each of their observations will take a slightly different, but no less poignant, perspective. But it shouldn't be surprising if most of them make it abundantly clear that balancing supply and demand in a flexible, expeditious way is supply chain management's most important contribution to ongoing corporate profitability.
