What should Supply Chain do to prepare for Economic Recovery?

Economic and financial gurus have predicted that the recession will bottom out very shortly and recovery will start by end of 2009. Not sure if it has a sound scientific base but commodity prices and stock markets are on upward trend.

Unlike the way we were caught unaware with recession staring at face, we should start making plans for recovery of economy. When recession hit all of us, we were stuck with huge inventories, capacities and resources. During last 6 months we have learnt to live with recessionary trends, used our wisdom to liquidate inventory and unwanted capacities & resources. We have learnt to take a conservative approach to demand and changed our mindset that allows losing sales opportunities here and there rather than blocking cash in resources. We have shed all possible buffers and extra flab. Many suppliers of materials have closed their shops and skilled manpower has been lost.

Should the recovery starts by end of 2009, as projected by many experts, are we prepared to embrace it without any major hiccup? The one who is prepared for recovery, is certainly going to gain market share and competitive edge in future. Imagine a situation that there is increased demand from the customers but we can’t meet the demand because we either don’t have enough capacity or material suppliers for the additional demand. We will be caught on the other side of the “bullwhip effect”. What are the options available with Supply Chain? Should we start building extra resources hoping that recovery will happen?

Let us explore the possible ways that we can adopt without much of risk. We categorize these under External Actions and Internal Actions.

External Actions

1. Check macro indicators: Certain indicators like construction activities, prices of metals and other commodities, manufacturing index, import and exports indices can provide a view on overall economy.

2. Maintain a close contact with customers: It is your customers who can give you first signals of recovery in demand. It is very likely that they would have also scaled down their level of operations during recession. Look for these signs:

-If you are in consumer goods business check if there are frequent stock outs at shelf or Distributors’ warehouses.

- Erratic order pattern from the customers, with intermittent & frequent spikes in demand. It may happen because of the reduced capacity of the entire downstream pipeline not able to cater to increased demand.

- Customers placing more frequent orders albeit each order is small.
Increasing number of delivery or service complaints from the customers or consumers.

- Last but not the least, the mood and behavior patter of your key customers. If they look more relaxed it means that they are able to recover their money better but not yet ready to invest back in the business.

3. Monitor unusual increase or decrease of imports and exports of the products in similar category. Due to increase in local demand and inability of domestic suppliers to meet the demand, the imports may increase. Similarly increase in demand in the country may result in lesser availability for exports. It can work both ways.

4. Start talking to suppliers who had either scaled down operations or closed shops. They should re-oil the equipment that was shut, line up requisite manpower (not necessary employ them right away), talk to their bankers for increasing credit limits. If that doesn’t work out, start scouting for new suppliers who can be developed at a short notice.

5. The same holds true for the logistics and other service providers. They will need to revive their capacities to handle higher volume of products.

Internal Actions
1. Evaluate spare manufacturing capacity & upward flexibility. Build “what-if” scenarios and options e.g. whether to revive own capacity or outsource till the time there is sufficient confidence or sustainability in demand.

2. Review stocking policies for the raw materials, finished goods for various levels of demand and estimate cash required. Make plans with finance teams to prepare for the most likely scenario.

3. Watch out for likely inflationary trends in commodities and revise your budgets accordingly.

4. Most importantly, make plans to retain talent because revival will also lead to more job opportunities.

Let us hope that this prognosis of recovery by end of this year really comes true.

Innovative Logistics

Innovation doesn't always mean the technology. It is at times means driven by end or value for money.

Seven Habits of Effective Supply Chain Managers

1. Skeptical : Supply Chain Managers always look for the risks involved in every strategy, plan or move. Being skeptical doesn’t mean that they are averse to risk taking but simply prepare themselves for any eventuality and have a backup or mitigation plan in place. The ability & habit of generating “what-if” scenarios help them to minimize exposure to operational and financial risks.
   
   “What-if my most critical supplier close down shop?”
   
   “What-if there is a strike at the port?”
   
   “What-if the commodity prices shoot up beyond expectation?”
   
   It may sound crazy to expect a person to always imagine negative events all the time. But it is always better to foresee them than to be surprised by them.

   
   
2. Eye for Details: Supply Chain Managers don’t go by perceptions or the superficial analysis. They are the one who change perceptions by presenting in depth and unbiased analysis. They are aware that the devil lies in details and they don’t let the devil catch them by surprise. However there is a difference between having an eye for details and getting lost in details.
   
   A superficial Supply Chain Manager will try to solve the problem of increasing backlog of customer orders by increasing safety stocks. Whereas the effective supply chain manager will get into root cause of the problem e.g. forecast reliability or production reliability and attack the right cause.
   

3. Observant: Supply Chain Managers are astute and inquisitive observers. They are not dependant only on reports and excel analysis to take decisions. They keep an eye on softer aspects, qualitative and informal information to blend it with the quantitative data.
   
   Supply Chain Managers regularly visit the markets and customers they serve. They observe the market reality and ask questions to their customers about demand trends or competition etc. Whereas a superficial manager will always be satisfied with the sales forecast received from Sales or Marketing. Supply Chain Managers are aware of the IR sensitivity in their factories. They use it in making a decision on changing production schedules up or down.

4. Technology Friendly : Supply Chain Managers are comfortable with technical developments in the area of Supply Chain. They don’t have to be technology wiz kids themselves but they continuously update themselves and evaluate the technology in their area.
   
   I have seen many Supply Chain Managers scoffing at a technical or IT tools as a fad. They always believe that technology means more cost to company. As a result they continue to use obsolete and unproductive methods.
   
   On the other hand the companies with great supply chains are the ones who adopted new technology at an early stage. Dell is one such but not the only example. Unilever, P&G, Toyota adopted technology in supply chain and gained market shares.

5. Challenge the Obvious: Supply Chain Managers always look for continuous improvements by challenging what might seem to be given. They don’t take anything for granted.
   
   I remember a Purchasing Manager of a big multinational company facing a problem of frequent rejections of material from a supplier. All steps starting from calling the supplier to factory to sending the technical teams to his manufacturing facility didn’t seem to work. The whole focus was on and around the supplier.
   
   One day, he questioned his own factory if they were measuring the quality parameters correctly. He had to face the fury of everyone right from the Factory Manager to the Quality Manager. The company’s quality procedures were taken for granted and assumed to be the perfect. However, he wasn’t perturbed and decided to observe the testing in the laboratory himself. He noticed that operator was drawing number of samples at one go and there was a time lag between drawing the samples and testing. The material that was supposed to be kept at low temperature, crossed the threshold and gave different results in the testing. They changed the procedure to drawing & testing samples one by one and everything was fine.
   
   Supply Chain managers don’t believe that there are any holy cows.

6. Team Player: This is one habit without which no Supply Chain Manager can hope to survive. I have seen many Supply Chain managers becoming victim of their own politics. All supply chain processes require involvement of cross functional teams and making them agree for the “business cause” is the most challenging task.
   
   Supply Chain anchors the balance between demand and supply, cost and service. Taking sides or pleasing one section can be dangerous for supply chain performance. Also not involving a section of relevant people in a process may lead to a biased view of situation and wrong decision making. Whether it is demand planning, supply planning or customer service strategy, you cannot do without cross functional team involvement.

7. Flexible: Supply Chain Managers cannot afford to hold to a point of view. As the business and external conditions change, they need to adapt themselves to the change. They change their strategy and review their processes to align with the business. They are flexible enough to allow elbow room for any unforeseen deviations that may happen in the chain.
   
   Some of the statements like the ones below are not accepted any more:
   
   “ The demand forecast is frozen and I will not allow any change until next month”
   
   “ This order may be urgent but I will not ship it unless there is a full container load”
   
   One reason most of the commercial or business managers hate supply chain people is for their lack of flexibility. In the garb adherence to processes. the supply chain people may overlook the business needs. The flexibility has to be built into the processes and performance management. The attitude has to change from “why it can’t be done” to “this is how it can be done”. We must appreciate the fact that Supply Chain is a mean to a business goal and not an end by itself.

Supply Chain Is A Risky Affair

“Fire at Lite-On plant affects more than 50% of LCD monitor production capacity” (source: emsnow, Feb 06 , 2008)

“In 2002, the International Longshore and Warehouse Union was locked out, shutting down ports along the West Coast of the United States for 10 days. The lockout was estimated to cost the US economy up to 2 billion dollars per day. The lockout closed several factories including a joint venture between GM and Toyota.” (source: cnnmoney, Oct 3, 2002)

“Nike Rebounds: How (and Why) Nike Recovered from Its Supply Chain Disaster” (source: CIO, Jun 15, 2004)

I was doing a little research on Supply Chain disasters and came across many examples that were eye opener. SupplyChainDigest has published a list of top Supply Chain disasters that resulted in businesses going bankrupt or CEOs having resigned or sunk investments.

And a recent example of milk adulterated with melamine that killed or seriously sickened babies in China.

I wonder how many of the supply chain leaders take into account such risks in their decisions and have mitigation plans. When it comes to sourcing cheaper and thereby getting a perceived savings in cost, we turn a blind eye to such risks. However there are few exceptions like HP’s Procurement Risk Management Program that works out possible scenarios and shares both risks and rewards with their suppliers.

Let us analyze the factors that have resulted in greater need for focusing on supply chain risk management:

Global Sourcing : Lot of sourcing has shifted to low cost producing countries. Other than challenges of increased lead times, lack of visibility & communication problems, the risks of supply failure, quality & environment related issues have increased manifold. There have been cases of high toxic contents in the plastics used for children toys and recycled leaking batteries. Such incidences have the potential to spoil the reputation of company for ever.

Demand volatility : With current recessionary trends, estimating demand reasonably well has become virtually impossible. The risk of producing excess stocks that may have to be either discounted or written-off. On the other hand potential of losing sales to competition if a pessimistic view of demand is taken.


Cash Flow : Despite all governments announcing revival packages & pumping liquidity in the market, the credit crunch continues. To achieve sales targets, some companies may extend credit to their customers. As a result cash flow and therefore business sustainability is severely impacted.

Single sourcing : We all grew up in Supply Chain learning the advantages of single sourcing and supplier collaboration. The current situation calls for a review of the single sourcing strategy. I am not advocating to start developing second source for every item, but have a review of the assumptions for single sourcing.

Currency Risk : Indian rupee has depreciated by 25% in last one year. RMB has been artificially kept low against USD despite balance of trade in favor of China. There will be a day when China sourcing will not be as lucrative as it is today.

Geopolitical Risks : The governments are under tremendous pressure from local population to put trade barriers to encourage domestic business. Obama has come out against outsourcing of services to low cost countries. Many countries are putting safeguard duties on imports to protect domestic industries against global competition.

Supplier Sustainability : The entire supply chain is not under control of a single entity. You have suppliers as well as suppliers’ suppliers. They are all part of your value chain. What if any of these suppliers follow illegal practices, pollute environment unlawfully? It can be a big risk not only due to disruption of supplies but also the dent in the reputation of the companies associated with such suppliers.

Well, there are other risks as well e.g. unrest, terrorism and natural disasters, which is beyond anyone’s control.

Every Supply Chain Manager should start analyzing and prioritizing risks to their business, as part of Supply Chain Strategy and make a plan for risk mitigation. The risk management involves three key steps:

Assessment : Identify key vulnerabilities in supply chain and the potential risk alternatives. Quantify the potential economic impact of current supply chain risk profile.

Analysis: Through analysis, make a business case that identifies, quantifies, and prioritizes critical supply chain risks and potential alternatives.

Roadmap: Develop detailed plans needed to implement the changes required to achieve organization’s future state risk profile. Institutionalize risk-mitigation into the supply chain planning and execution and measure process effectiveness and results.

AMR’s supply risk management guru Mark Hillman said, “The greatest risks are the day to day operational risks that can detract from shareholder value and performance. You need to focus on high probability risks that you can control, such as supplier failure or market risks, and take steps to mitigate these.”