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Friday, January 28, 2022

Resilience reaps rewards

Before the end of Summer, we started to see headlines about supply problems for Christmas. Whether it is toy retailers warning of difficulties sourcing products from China or major grocers highlighting the potential impact of HGV driver shortages on stock availability, supply chain disruptions continue to make the news. In a world where next day delivery is mundane and we are routinely spoilt for choice, this is a new experience. Operations that took place seamlessly in the background, and were given little if any thought, are now in the spotlight.

The COVID-019 pandemic, with lockdowns and self-isolation requirements, has meant operations either cease or run well below capacity, which, even for short durations, has had significant impact on supply chains programmed to work on tight, lean schedules. It has also led to the tying up of containers and the skewing of equipment flows, not helped when key ports have had to limit activity. Whilst we have not yet seen long queues of trucks at the channel ports, when the new Brexit regime kicks in for imports from January 2022, more administration time will likely be added into many supply lines as well as a steep learning curve for some businesses to overcome.

What we have seen is that previously developed operating models, geared to suit stable, benign conditions, have struggled and questions are now being asked about their design and fundamental suitability faced with the headwinds of climate change, shifting trade policies and consumer expectations.  The key question for many businesses now is ‘how sustainable is our supply chain strategy?’.

The supply chain operations of a business need to fulfil market expectations, balance service, cost, and capital to generate required financial returns, meet regulatory requirements, and match environmental, social and governance (ESG) commitments. Such a strategic ‘fit’ is only achieved and maintained by a supply chain design that is resilient and an organisation that can prioritise necessary change and drive innovation. This should not be a one-off exercise; supply chain strategies need to adapt and ensure that they remain relevant and robust to changing conditions. Building such resilience requires the coherent combination of people, process and technology initiatives. 

People

Operating in rapidly developing environments asks new questions of people. Managing projects to develop new operating models calls for skills in planning, communication, organisation, negotiation and problem-solving to name a few; combining these demands with running day to day operations can often be a very tall order. That said, it is a common fallacy that people in current roles cannot develop as the operation needs to adapt. A good starting point is to review capabilities with a structured competency framework; this will not only highlight any critical gaps, it can also set motivating development paths. Regular updates to training and development plans are essential to ensuring skills and capabilities not only remain relevant but also pre-empt emerging trends and support competitive advantage.

Supply chain management is not a departmental function; it is fundamentally about the co-ordination of processes across internal activities and other organisations in a network.  Organisational designs along with roles and responsibilities need to be shaped such that they support collaboration and focus teams across the business on common priorities. Incentives and key performance measures are critical in shaping behaviours and resulting actions and should drive alignment. ‘Creative tension’ in performance indicators for commercial and operational teams is a myth that creates unnecessary conflict and often leads to perverse decisions.

Combining targeted skills training, process oriented organisational structures, and coherent incentives provides a powerful foundation for supply chain excellence. If people are an afterthought, then no technical masterpiece of supply chain design will save the business from struggle and potential failure.

Processes

Pausing to reflect on the sources of complexity in the supply chain is likely to be time well-spent. Homing in on the variables that drive complexity in the business will allow these to be proactively managed. The scale of a supply chain is not necessarily the problem, it is the multiplier effect when poorly designed processes, systems and organisational structures are compounded. Opportunities to simplify processes can quickly boost reliability and resilience.

There are many proponents of ‘one number’ planning for the core process that aims to align supply with demand, Sales and Operations Planning (S&OP) and these processes are very often geared to producing consensus on a number that all functions can live with. Therein lies the problem; how to achieve compromise when conflicting objectives and strong incentives can inherently bias inputs? Mindset is at the core of the issue. If the demand forecasting and planning process is a means to confirming a desired output, be that a functional plan or target, a reconciliation with a budget, then inconvenient data and analytics risk being ignored, and errors perpetuated.

To drive improved accuracy and derive maximum benefit from an S&OP process, businesses need to be comfortable with, and value, estimates of demand that do not match plans, budgets, or targets. They also need transparency on supply reliability and risk. By creating an unconstrained forecast of demand and building supply visibility, the business can:

  • apply a data-driven approach, using the ever-increasing amount of data available to gain dynamic insights
  • remove, or greatly reduce, bias in the generation of forecasts and plans
  • respond pro-actively to emerging demand, with coherent cross-functional actions.

Now more than ever, in a digital age, there is an opportunity to transform demand and supply planning with the abundant data and technology that brings analytics within the grasp of many businesses. Combining these technical advances with a culture and way of working that is data-driven, businesses can reap the benefits that improved insight brings, discern trends, and adapt the supply network accordingly.

The role of inventory in the supply chain has been questioned by recent events. The decades long pursuit of lower inventories and just-in-time operating models has come under scrutiny and, in several instances, been found wanting. Any review of the supply chain design should consider where best to place inventories and involve an evaluation of processing stages to establish if there are opportunities to postpone final configuration of products, shift the decoupling point where supply is to customer order or forecast, and manage lead times. Aside from being a short-term contingency measure, implementing or increasing inventory as a buffer against volatility needs to be carefully analysed and stock placed at the optimum location.

Working in partnership with suppliers can offer significant benefits generally and certainly during operational development. Building collaborative relationships across the supply chain builds resilience.

Discussions should explore how:

  • flexible responses to demand can be supported
  • joint problem-solving could operate
  • local knowledge can be shared, especially when expanding to new markets
  • benefits from new ways of working can be secured and shared.

There may be options to balance supply with a mix of global and regional suppliers but without establishing collaborative relationships any ‘near-shoring’ could have limited impact.

Technology

Much has been written about the opportunities to improve information sharing in supply networks to deliver service gains, drive cost efficiencies and reduce inventories. The reality on the ground has been exposed by the COVID 19 pandemic. Whilst it may seem we are awash with data, moving from pockets of data capture to timely information sharing and improving visibility across supply networks has some way to go. There are significant challenges to improving transparency across tiers in any network but if ever there was a moment that shows the value and potential return on investment for relevant technologies it is now. The supply chain needs to be core to any digital transformation programme in a business.

Creating a comprehensive view of the supply network is also the critical starting point to better understanding risk. A view of the immediate tier of suppliers should be expanded, ideally in collaboration with these businesses, to qualify points in the network (nodes) and assess their criticality. Using a product’s bill of materials can support this assessment and start to qualify the scale of risks these nodes are subject to, for example, operating in an area with higher probability of flooding or with concerns around trade policy changes.

Compliance to labour and environmental standards is very much in focus as businesses seek to deliver on environmental, social and governance (ESG) commitments. Not knowing what is happening across the network and accepting false assurances diminishes credibility and may impact revenues.

Qualifying risk across a supply network can be time consuming and difficult. That said, using artificial intelligence (AI) based analytics can provide a step change in capability. Capturing publicly available data and working in collaboration with immediate tier suppliers can quickly help understanding of network connectivity and vulnerabilities.

Supply chain resilience needs a learning culture

The supply chain disruptions stemming from the COVID 19 pandemic illustrate that strategies have static and dynamic dimensions. Approaches that derive from bargaining power and scale economies, for example, are among the mechanisms that tend to create ‘static’ sustainability. These sources of competitive advantage lend themselves to the pursuit of efficiencies, such as just-in-time operations and cost reduction programmes. It is typically easier to create cost/benefit business cases for such projects along with the associated incentives and performance indicators when exploiting these advantages. Fundamentally, once set, these strategies focus on continuous improvement. Many global supply chains have been built in this way and recent disruptions have demonstrated their vulnerability.

Innovation and change can be the source of ‘dynamic’ sustainability. Re-gearing the supply chain can act as an engine of growth, disrupt markets, and set new levels of customer expectation. Themes such as traceability, circular flows, Internet of Things (IoT), automation, balancing human and artificial intelligence (AI) present many opportunities and challenges.  Combining static and dynamic mechanisms of strategy development and deployment are a real test for organisational leadership and learning. It is about being able to exploit existing competitive advantages whilst exploring potential new concepts. Those that are likely to succeed will be characterised by strong, committed leadership comfortable with the ambiguity that accompanies true innovation.

Calum Lewis, Founder, OP2MA

Calum has extensive experience in leading businesses and delivering exceptional operational and financial performance. With the LEGO Group, he embedded best practice supply chain management to drive five-fold sales growth in the UK/Ireland market whilst supporting LEGO’s climb to No 1 UK Toy Supplier.

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