Wildly fluctuating commodity prices. Broad currency swings. Shrinking product life cycles. In Europe and North America, people are calling this The New Normal—a permanent state of sudden changes and rapidly shifting paradigms. In most parts of Asia, however, it’s much harder to say what the Old Normal was, so the idea of a New Normal seems less compelling. In a business context, in fact, many of Asia’s more-recently emerging economies never had much of a Normal to begin with, which means that the 21st century drama associated with commodities, currencies and customers has no comparative context.
Nevertheless, how companies react to today’s hyperactive environment is really important. A recent Accenture survey of 3,000 executives in 21 countries underscores this point: 70%expressed dissatisfaction with their ability to predict future performance, and more than 80% said they are worried about the resilience of their supply chains—the ability to adapt operationally to rapid changes in products, markets and currencies.
The above-mentioned executives recognise that supply chain management will play a huge part in almost any company’s ability to execute profitably in the 21st century. But it cannot be supply chain management as we have traditionally known (or even idealised) it. Take the concept of supply chain integration—the focus of countless companies’ efforts to efficiently acquire supplies, organise materials and serve customers. By its very nature, integration places huge dependencies on what often are a company’s weakest links. Your least-adaptive supplier, for example, can severely limit your ability to respond to market changes. Consider the fact that (after years of integration efforts to maximise efficiency and drive out cost) many US metropolitan areas now operate on three to five days of in-market grocery inventory, or that product life cycles for everything from autos to consumer electronics have dropped by as much as 50% over the past decade. So in this hyper- tightened environment, what happens when demand streams are shortened or supplies are halted by a political or climatic cataclysm, and a company bound by strict interdependencies can’t switch quickly to an alternate source of supply?
The answer, unfortunately, is usually lost sales, diminished brand strength and/ or lower profits. Indeed, as players struggle to operate in markets characterised by continuous mini booms and busts, tightly integrated supply chains can actually deepen the negative impact of volatility—locking in excess cost during downturns and limiting upside potential when opportunities arise. Yesterday’s supply chain strengths, in other words, could become today’s weaknesses, which is why all companies should be working to determine how vulnerable they are to volatility and how resilient their current supply chain structures really are or should be.
Reinventing the supply chain
Many responses to today’s state of permanent volatility are possible, but one initiative traverses most of them. That solution is to reinvent the supply chain as an adaptable, malleable ecosystem of processes, people, capital assets, technology and data. One justification for this shift is particularly salient: the increasing importance and difficulty of balancing supply and demand. Research by MIT and Accenture has shown that, while disruptions caused by geopolitical events and natural disasters get the most press, disruptions due to volatility in supply/demand balancing from everyday occurrences (e.g. poor supplier performance, inaccurate forecasts and low levels of executional rigour) are actually responsible for more lost profits. Accenture and MIT also determined that, regardless of the type of risk or cause of disruption, companies that respond more dynamically—i.e. with maximum speed, preparedness and decisiveness—are significantly more profitable than their less-adaptable competitors.
Simply put, the adaptable ecosystems we’re suggesting facilitate maneuverability in unpredictable markets. They are anchored and powered by dynamic supply chains that link inherent product characteristics to the specific needs of differentiated customer channels. Flexibility is part of this new equation but not the only part. This is because high levels of supply chain-wide flexibility may come at too high a cost. A truly dynamic supply chain continuously seeks the right level of flexibility for every specific link in the supply chain, based on the (often shifting) value proposition associated with each customer-, product- and geographical segment. The result is a cost-saving, value-enhancing opportunity to balance trade-offs quickly and effectively.
Different growth, profit and margin strategies also demand different mixes of functional flexibilities, which is another reason that a company’s degree of supply chain dynamism needs to vary. In fact, no two dynamic supply chains will ever be preciselyalike, even among industries, geographies or business units within the same company. There is a common trait, however: speed to outcome within each functional domain. By continuously re-optimising as market conditions change, dynamic supply chain practitioners are better able to anticipate (and mitigate) a host of risks.
What makes a dynamic supply chain?
As shown in Figure 2, the ways that dynamic supply chains differ from earlier approaches to supply chain excellence are myriad and significant. But if there is one key distinction, it is the dynamic supply chains’ role as a readily adaptable, value-producing asset, profit enhancer and creator of competitive differentiation.
Many changes are needed to reach this value-oriented pinnacle; but here are five essential components of any dynamic supply chain.
1. An adaptive operating model
Companies are discovering that the benefits of narrowly focused labour- arbitrage strategies are diminishing. In many locales, in fact, the cost of labour is rising dramatically but the percentage of direct costs contributed by labour is still less than 10%. On the other side of the coin, transportation and commodities are consuming a rapidly rising proportion of total costs.
Each of these shifts speaks to the need for a new “total landed value” strategy that considers a wider range of costs that may not have been examined previously, including inventory, response times, lost opportunities and other risk factors. An adaptive operating model—the executional embodiment of that strategy—can help ensure that companies’ supply chains align more fully with growth and innovation strategies, and embrace standardised processes and systems that help make it possible to rapidly scale or shutter operations based on short-notice demand signals. Consider the case of a European food company that integrated a previously heterogeneous supply chain organisation spread across 54 production facilities into a single, vastly-more-efficient, end-to-end system. Another example might be Vestal Electronics, a European TV manufacturer that shifted production from China to Turkey in order to be closer to its customers and keep manufacturing costs and market response times down.
2. New skills in risk anticipation and mitigation
“Speed of response” is a critical characteristic of dynamic supply chains, and one way to get it is with advanced risk- prediction and -identification capabilities. It also is vital that companies make informed choices about 1) designing their operations to flex to known (unpredictable, but likely) risks and 2) creating planning contingencies for the relatively unknowable (the unlikely, but potentially catastrophic). Most companies are woefully inadequate in this regard. Only 11% of the aforementioned survey respondents actively manage supply chain risk. 18% have formal supply chain risk management systems in place and fewer than 20% have made their executive teams responsible for this crucial function.
Several risk-management technologies are now available to help companies proactively identify and manage threats. Combined with improved scenario planning and better execution technologies, these risk-focused innovations are key to vast increases in supply chain dynamism. A good example is the services of iJet, which combines skilled professionals, sophisticated predictive systems and a global network of data-gathering resources from multiple intelligence agencies. iJet uses these assets to provide clients with information about potential problems, such as port shut-downs, labour unrest, natural disasters and political strife. Integrating iJet’s high-frequency alerts into a company’s global operations can help it respond much more quickly, for instance by rerouting shipments around projected problem areas or committing to incremental production capacity to make up for potential shortfalls.
3. Enhanced visibility and information acquisition
Dynamic supply chains are networks— internal and external—and the information contributed by each link in the chain can enhance decision-making and enable successful responses. A large consumer products company, for example, uses crowd sourcing (sourcing tasks to larger groups rather than individuals) to boost innovation and supply chain responsiveness. In addition to bringing new ideas to light, crowd sourcing can increase planning effectiveness, ensure the most appropriate allocation of resources, and raise supply chain responsiveness by accelerating companies’ awareness of fast-breaking market trends.
Other companies are leveraging visibility and enhanced information by integrating supply chain systems with pricing, promotion, sales and marketing systems; leveraging global freight and customs-optimisation applications by companies such as GT Nexus and Management Dynamics; and applying retail-merchandise-allocation technologies with the help of cloud-based service providers such as Predicitx.
4. Executional excellence consistent with the operational strategy
Companies focused on the development of dynamic supply chains don’t overlook the importance of investing in core business processes. One such company—a leading container manufacturer—identified enterprise speed and agility as a strategic imperative. Focused improvements in manufacturing and logistics abetted the company’s product development process significantly, particularly the ability to accelerate mould-development time. Tangible results include improved customer satisfaction, increased high-margin market share and (of particularly great importance) the ability to respond quickly to future changes in demand: Even if the company experiences an upstream misfire (e.g. a customer changes its specifications unexpectedly), rapid response times allow the company to still deliver end product faster than its competitors.
5. Supply chain sophistication and professionalism
It’s essential that the organisation as a whole understand all components of a dynamic supply chain strategy, and this means developing superior supply chain skills and ensuring that the entire organisation is receptive to new ways of doing things. One good example is a retailer seeking to overcome lost sales, excess inventories and poor in-stock performance associated with extreme complexity and an overly broad product mix. The company responded by segmenting complex product categories from the more-traditional grocery categories and then outsourcing forecasting and replenishment functions to a services firm with deeper experience, resources and process-management skills. Significant bottom line improvements followed, along with far greater supply chain “dynamism” for dealing with rapidly changing market conditions.
Making it happen: Moving from dug-in to dynamic
The bottom line is that supply chains focused solely on executional excellence, optimal flexibility or end-to-end integration are not the way for a company to thrive in a business environment characterised by permanent volatility. What companies do need is the ability to embrace the unpredictable—to concurrently anticipate and mitigate risk; maximise visibility; reallocate capacity; and, perhaps most important of all, alter capabilities node by node to meet ever-changing value propositions. In the New Normal, supply chain masters will shift smoothly and seamlessly—reorienting, repositioning and fine tuning each part of their operations as conditions change.