Supply chain directors need to focus on bringing agility to their supply chains, not only to manage current volatility in the markets, but also to put themselves in a competitive position. We look at how action can be taken to help organizations prepare for growth by developing a more agile and responsive supply chain
by Andrew Underwood, KPMG and Steve Agg, Chartered Institute of Logistics and Transport
It seems to all come down to volatility: Economic volatility (the Eurozone crisis and anemic economic growth) compounded with political volatility (elections in the US and on-going turmoil in the Middle East) have led to business volatility (bankruptcies, insolvencies and increased regulation) and supply chain volatility (demand fluctuations and gyrating input costs). That is a lot of volatility.
Interviews with the industry indicate that supply chain directors are now increasingly focused on those activities that help them reduce the impact of volatility, enhance flexibility and drive out costs. And while some seem to still be taking short-term actions in order to weather the storm, others are pursuing new approaches and reorganizing their operating models to turn volatility into opportunity.
There are three areas in particular that supply chain directors and corporate executives are particularly focused on:
- identifying opportunities to squeeze further costs out of the end-to-end supply chain to drive profitability; and understand the true supply chain cost to serve
- developing more effective responses to demand volatility in order to reduce fluctuations and reduce costs
- reorienting their operational processes with a ‘LEAN flavor’ to enhance flexibility while maintaining efficiency.
There are also a number of emerging and continuing trends that are influencing the supply chain environment. Some organizations are moving towards globally integrated Sales and Operations Planning processes to create more alignment across the supply chain, while others are setting up shared service centers to centralize order taking, financing, logistics planning and elements of logistics execution. More revolutionary still will be the widespread adoption of cloud services within the supply chain.
Overall, analysis reveals that supply chain maturity has generally increased, though some areas – such as supply chain risk, cost to serve analysis and sustainability – still seem to be slow to develop in many sectors and geographies. In part, this may be due to challenges recruiting and retaining skilled operators.
Cost and profitability
Whilst cost cutting has been the rally cry for supply chain leaders ever since the start of the global financial crisis, our interviews show that the pressure to remove cost has still not let up. And with cost remaining at the top of the corporate agenda across virtually all sectors and markets, it seems clear that the relentless focus on cost and profitability will not ease any time soon.
What is more, costs only seem set to rise over the coming years. One particular area of concern for many supply chain directors has been the potential cost that new legislation and regulation may bring to their balance sheets. Beverage companies in Europe, for example, are trying to grapple with how proposed sugar taxes and bottling deposit requirements will impact their margins. In Portugal, an increase in VAT levied on beverages has also had impact on the final price of products for the end customer, thereby putting additional pressure on cost and the need to identify changes in operating models as a way to maintain some profitability.
Likely the most significant and far-reaching regulatory change, however, will emerge from the development of carbon taxes, and debate continues as to who within the supply chain will bear the brunt of that cost: the logistics provider, the end consumer, or the retailer (some vocal pundits suggest it will likely be the retailer). Many will be keenly watching in 2014 when Australia’s carbon tax expands to encompass the transportation sector to see how the system will impact costs across the supply chain.
Other costs are also on the rise. Fuel costs remain stubbornly high overall (notwithstanding short-term dips due to market gyrations), while in the emerging markets we have seen costs increase for property and operating assets. Labor costs are also mounting – most rapidly in the East – but also in the West as talent becomes scarcer and the cost of living increases faster than margins.
All is not as dark as it seems however; pockets of growth do exist. For example, the emerging markets clearly continue to shine as a region of opportunity, as does the automotive industry which has seen significant growth globally over the past 18 months. But when growth returns to organizations, costs are sure to follow, leading many supply chain directors to turn their attention towards ensuring their previous cost cutting measures are sustainable.
Cost to serve
Understanding the exact cost to serve across each line of product and channel is essential to not only cutting costs, but increasing profitability. With this data, organizations can start to make rational choices about how they serve their customers and which customers or channels may be loss-generators. But while much of the information required to achieve this nirvana tends to be fairly available within organizational ERP systems, many supply chain organizations struggle to convert this data dump into actionable programs and projects that will translate these findings into real cost savings.
With many supply chain leaders now scraping the bottom of the barrel to find costs to eliminate, some are looking to innovative – often even radical – models for slashing further costs from their supply chain. Take the Consumer Packaged Goods (CPG) sector for example, where a small but growing number of organizations are partnering with potential competitors to share logistics and distribution assets (particularly in situations where both parties share common customer bases and product characteristics). On the more traditional end, supply chain directors are also starting to peer further and further down the supply chain and across the extended enterprise to find previously unidentified opportunities for bringing down costs.
Embed finance
One of the common complaints aired was that finance departments were mandating cost reductions
without a clear understanding of the supply chain’s cost drivers and Key Performance Indicators (KPIs). Increasingly, we are seeing finance analysts and managers becoming embedded in the operations team in order to build a bridge between the objectives of the CFO and the realities of supply chain operations. Moreover, our experience shows that once finance professionals are properly indoctrinated into the supply chain world, they tend to uncover veins of untapped cost savings that may not have been apparent to supply chain professionals.
Many of the supply chain directors interviewed for this report say that they have applied LEAN principles to the supply chain. But a common concern is that LEAN may have actually reduced their supply chain flexibility at a time when the business is baying for more agility to support growth. This indicates that organizations may not fully understand the fundamentals of LEAN. Indeed, for many, LEAN has become synonymous with cost savings and efficiencies. But the reality is that LEAN is really about enabling efficient growth. In some cases this may indeed translate into cost savings and efficiency; in others, however, efficient growth may mean delivering greater flexibility to business operations or enhancing innovation in product development.
In short, LEAN is about creating the right processes to allow the organization to respond to customer demands in order to enable growth. So if what your customer values is flexibility, then LEAN methodologies can be structured to supply flexibility. If customers want lower cost, LEAN can provide this. The same can be said for service quality, increased innovation or greater product selection. The bottom line is that, rather than being single-mindedly focused on cost and efficiency, LEAN is actually more about delivering what the customer demands.
And when viewed in this light, it quickly becomes apparent that the supply chain director is often the most important enabler of growth within the organization. It is up to the supply chain director to understand what the market values and then develop the supply chain around those requirements. So while marketing can make promises to customers, it is the supply chain director that turns those promises into deliverables.
So what can supply chain directors be doing to better align the LEAN programs with the enablement of efficient growth? To start, a series of questions must be answered. What is your business strategy? What do your customers value? What activities within the business deliver on these customer demands? And, ultimately, how can those activities be enhanced?
Demand volatility
Clearly, today’s organizations are dealing with high levels of volatility exasperated by a break-neck pace of change. As a result, many of the supply chain directors who participated in our research now say that managing demand volatility has become one of their biggest challenges.
In truth, demand volatility is being driven on multiple fronts. The current economic environment is an obvious driver: as consumer sentiment rises and falls with the tides, so too does demand. Shifting customer preferences have also taken a toll as consumers test out new channels, some of which only accentuate demand volatility (take, for example, the increase in returns that stems from customers over-ordering through internet channels in order to ‘try on’ products).
The economy has also led many organizations to rely heavily on promotions in order to maintain volumes and soak up unused capacity. This, too, has led to greater demand volatility as suppliers are either caught unprepared or unable to meet the sudden increase in demand.
For the most part, this comes down to suppliers not getting promotional signals from their customers early enough to adjust appropriately. But it is also due to the introduction of multiple competing promotions which make reliable forecasting much more difficult. Indeed, whereas retailers used to develop a year-long promotional plan that was shared with suppliers to ensure demand could be met, we are now seeing the introduction of ‘flash promotions’ and ad-hoc strategies that cause havoc for supplier planning and forecasting processes.
As a result, many supply chain directors are now looking to enhance their ability to develop real-time forecasting capabilities to help them understand what products are moving and through which channels in order to become more responsive to spikes and troughs in demand.
Flexibility has been high on the supply chain director’s agenda for many years. Increasingly, we have started to see supply chain leaders shift their scope from ‘supply flexibility’ to instead focus on developing capabilities that enhance flexibility.
In some cases, organizations have developed two-stream supply chains – one to deliver the planned and steady product flow, and the other to manage the promotion peaks. Other supply chain leaders have focused on empowering their sourcing teams to make decisions and problem solve on the fly in order to quickly respond to demand changes in real-time.
Technology investment
Technology continues to be high on the agenda for supply chain leaders around the world. But while some organizations are still implementing new enterprise-wide technology solutions (particularly in the emerging markets and in cases where legacy platforms are simply too old to cope), most seem to be focused on conducting upgrades and applying tweaks to their existing systems to help unlock new functionality.
In part, this focus on smaller-scale technology change is a result of both the economic climate (in which OpEx investment is scarce) and the rapid pace of change within the industry itself (leading to uncertainty about purchasing decisions). The maturing of cloud may also be a factor as organizations wait to see how new cloud-based technologies will impact their operations.
However, while there are still a large number of organizations either embarking on, or engaged in, large-scale technology implementations, our research indicates that supply chain considerations are not always considered when IT purchasing decisions are being made. ERP systems, for example, tend to focus on the finance side of the equation and are often less tailored for the needs of a supply chain and logistics organization.
Cloud opportunity
Cloud is undoubtedly the next generation of opportunity for today’s supply chain. Indeed, while cloud is a relatively new technology, its benefits are already becoming blatantly obvious to supply chain directors and their executives: organizations will be able to enjoy real-time access to critical information, achieve greater transparency across the extended supply chain, reduce their cost to serve, gain flexibility and scalability from their technology, and gain the capability to respond to demand and supply pressures as they occur.
Clearly, volatility is creating new pressures and opportunities for supply chain directors and corporate executives around the world. But while some seem to still be taking short-term actions in order to weather the storm, others are pursuing new approaches and reorganizing their operating models to turn volatility into opportunity.