PRTM Identifies Five Supply Chain Challenges

Stephen DeAngelis

October 27, 2010

A study by PRTM Management Consultants titled Lessons Learned from the Global Recession identifies five key challenges that manufacturing and service companies will face over the next several years [“PRTM study highlights five key supply chain challenges,” SupplyChainStandard.com, 22 June 2010]. According to authors of the study “many companies lack the capabilities critical for meeting growing demand or for managing an increasingly complex and global supply chain.” The five trends identified by the study are:

1: Supply chain volatility and uncertainty have permanently increased
Market transparency and greater price sensitivity have led to lower customer loyalty. Product commoditisation reduces true differentiation in the consumer and business-to- business environments.

2: Securing growth requires truly global customer and supplier networks
Future market growth depends on international customers and customised products. Increased supply chain globalisation and complexity need to be managed effectively.

3: Market dynamics demand regional, cost-optimised supply chain configurations
Customer requirements and competitors necessitate regionally tailored supply chains and product offerings. End-to-end supply chain cost optimisation will be critical.

4: Risk management involves the end-to-end supply chain
Risk and opportunity management should span the entire supply chain—from demand planning to expansion of manufacturing capacity—and should include the supply chains of key partners.

5: Existing supply chain organisation are not truly integrated and empowered
The supply chain organisation needs to be treated as a single integrated organisation. To be effective, significant improvements require support across all supply chain functions.

A senior IBM consultant, who writes a blog entitled @ Supply Chain Management, penned a series of posts discussing these challenges [PRTM Study: Five Key Supply Chain Challenges – Challenge 1, PRTM Study: Five Key Supply Chain Challenges – Challenges 2 & 3, and PRTM Study: Five Key Supply Chain Challenges – Challenges 4 & 5]. Here’s what he writes about the first challenge — Supply chain volatility and uncertainty have permanently increased:

“So what is the situation with supply chain volatility and uncertainty?

Survey results clearly show that concerns about continued demand volatility hamper companies’ ability to effectively manage supply chains in an upturn. In fact, three-fourths of respondents consider demand and supply volatility and poor forecast accuracy to be the biggest roadblocks they currently face. Volatility concerns were not assuaged during the recession, nor have most companies successfully implemented strategies for managing volatility in the years ahead. Recent shortages, such as those in electronic components and selected raw materials, indicate that many companies do not have the flexibility to meet an increasingly volatile demand. The rapid ramp up or ramp down of capacities seems to be a big challenge for many study participants.

“The biggest roadblocks faced by respondents are demand and supply volatility and poor forecast accuracy. But surely, one is the cause of the other and this can only be exacerbated in a global supply chain with long manufacturing and transportation lead times. Does not poor forecasting of demand beget supply volatility whereas demand volatility is a function of the economic cycle? Now, when both situations occur simultaneously, then it is quite believable that firms are in for a rough time. The actions that respondents plan to take doesn’t make much sense to me – they don’t hurt but more importantly, they don’t help. The action items can be broken down as follows:

The best-performing companies have already taken steps to improve supply chain response time and visibility across all supply chain partners.

“I believe this is the key to cutting down volatility – reducing the supply chain response time and if no reduction is possible, then at least making certain of it. Both the magnitude and variation of supply chain response time create uncertainty (and consequently volatility).

Others plan to implement new strategies within the next two years. Companies are focusing primarily on deepening collaboration with key customers to reduce unanticipated changes in demand.

“I believe that this is a no-go. Key customers themselves face volatility and therefore partnering with customers to reduce one’s own volatility is unlikely to bear fruit unless the key customer’s customers are not creating volatility. The first point above i.e. reducing supply chain response time is the more important factor.

Half of participants plan to implement joint ‘real-time’ planning with their key customers by 2012, and nearly half plan to develop processes for improved demand sensing—that is, understanding the market rate of demand in real time, rather than having to wait for after-the-fact reporting.

Again, real-time planning is quite useless when you cannot obtain real-time response. You can create a plan as soon as a trend/micro trend is recognized but if you cannot create a response to it, then you’re just printing numbers.”

The IBM consultant makes a good point about the importance of being able to respond to demand. Supply chain analyst Lora Cecere believes that we are heading towards a future in which demand-driven supply chains will provide a significant competitive advantage for manufacturers that can master them. She agrees that volatility can best be addressed by collecting better data and collecting it faster. She writes:

“The issue is that 99% of companies have no demand visibility. They cannot see. Orders are not a good reflection of demand. So the supply-centered processes of source, make and deliver focus on lean, while the sales and marketing processes induce more variability. I find that it spins the organization out of control. What to do? Focus on the design of value.” [“Lean Bigot and Proud,” Supply Chain Shaman, 24 September 2010]

The IBM consultant next turns his attention to the second challenge — Securing growth requires truly global customer and supplier networks:

Most survey participants expect that future business growth will come primarily from new international customers and products that are customized to meet their needs. As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012.

“This I don’t understand – where are the respondents coming from? If business growth is going to come primarily from new international customers, what does that mean other than the fact that overseas growth is going to be met largely by overseas means of production. In that case, the complexity in the supply chain decreases not increases. The control of the supply chain from overseers stateside is going to be more difficult but why must it be controlled from far away?

Nearly 30% of respondents expect the number of manufacturing facilities to decline until 2012, which reflects the expectation that their companies will increase outsourcing to external partners. Similarly, a nearly 30% decline in the number of strategic suppliers indicates that many companies expect to further consolidate their supplier bases. In general, companies in North America and Europe will consolidate their manufacturing and distribution footprint, while companies in Asia will further expand their entire supply chain network.

“I don’t really understand this challenge at all. In fact, it is an observation that the trend of offshoring and outsourcing is going to continue, perhaps, even increase. The first stage of outsourcing and offshoring was primarily driven by the need to improve profit margins vis a vis the consumer in the developed world (who was for quite a period on a debt fueled binge). Today, that consumer in the developed world is all but tapped out – well, the answer to that is the consumer overseas whose consumption habits have yet to be tapped to the fullest potential.”

It’s easy to understand why this was raised as a challenge by respondents. As I noted in a previous post, ninety-six percent of the world’s consumers live outside the U.S. Just because overseas customers are primarily going to be serviced by overseas production facilities doesn’t necessarily mean that supply chain challenges are going to be reduced. Many companies are finding that delivering their products to the world’s poorest people requires quite a bit of ingenuity in order to meet the “last mile” challenge. The IBM consultant next addresses the third challenge — Market dynamics demand regional, cost-optimized supply chain configurations:

Survey respondents seem confident that they will be able to deliver substantial gross margin improvements over the next two years. As was the case during the downturn, gains will not come from price increases, but from further reductions of end-to-end supply chain costs.

“Unfortunately, few firms will confess that this is not a strategy of their choosing but one of the times imposed on them i.e. there is very little by way of pricing power to be had and therefore it is time to resort to the strong arm tactics of squeezing out your suppliers. … The odd thing about … challenges (2 and 3) is that they are seemingly at odds with each other. The modern supply chain is not as regional as it is global. Perhaps, the implication is that it is directed at emerging markets rather than developed ones, the growth in the supply chain has regional constraints on its mind rather than global ones. That does leave the global supply chains originating state side in a nice pickle. No? In conclusion, there is one observation here and one challenge. The observation (emanating from Challenge 2) is that offshoring and outsourcing are set to continue for different reasons and possibly at an increased pace. In fact, I would think that this is the decade when a number of corporations are going to become transnational. The challenge for the supply chain is that it is going to become decentralized in a big way – regional markets, regional supply chains. I’ve frequently said on this blog that these global supply chains don’t have to exist and it looks like that this prediction is beginning to come to pass.”

In a number of past posts, I have stated my belief that regionalization within the larger framework of globalization is going to increase. One of the reasons that I believe that this is going to be the case is that companies will see the advantages of regionalized supply chains — just as the IBM consultant claims. The challenge for many globally-integrated enterprises will be to manage these regional supply chains within their larger supply chain system. Next the consultant discusses the fourth challenge — Risk Management Involves the End-to-End Supply Chain:

“Risk management, to me it seems, has grown by leaps and bounds since the financial crisis – finding applicability everywhere and dare I say rightly so.

“During the global financial crisis, many companies operated with the fear that suppliers would be forced into default, cutting off critical sources of components and increasing the cost of introducing alternative suppliers.

“Yet, the following observation flies in the face of the purported effort to manage risks within the supply chain.

Dealing with cost pressures of their own, many customers have increased their efforts in asset management and have started shifting supply chain risks upstream to their suppliers.

“Is this managing risk or passing the buck? Isn’t the end result of this that the supply chain risks are passed back to the production point? The purpose of inventory within the supply chain is to buffer variability that occurs. In the case of offshored/outsource supply chains, significantly greater amounts of inventory is required to buffer variability because of the longer lead times. Shifting supply chain risks upstream just means that the lead times that are currently experienced (which are long) are about to get longer. You’re about to enter the twilight zone – of worsening lead times that is. Why? Variability in lead times, require greater amounts of inventory to cover it but the greater requirement for inventory is what causes the worsening lead time in the first place. If this is true, then the consequent observation (a few quarters down the road) will be that offshored/outsourced production centers are buzzing to the brim but there [are] all sort[s] of snafus in the supply chain downstream from the production point. And that is the consequence of passing the risk instead of managing it. C’mon folks – If you’ve committed to the long lead time supply chain, inventory is a fact of life. Maybe, the fact of life. If the volatility of demand from the consumer (straining under the economic headline of the day, week or month) is getting to you, the response cannot be to cut inventory because that is the only thing that is keeping the risk of supply chain disruption at bay. Interesting times indeed!!!”

It is understandable why manufacturers and retailers would rather have someone else bear the costs of maintaining inventory (hence, the drive to shift supply chain risks upstream), but I think the blogger is correct that this will probably increase rather than decrease risks — especially if a real-time supply chain risk management system is not in place. For more on this topic, read my post entitled Supply Chain Risk Management. The IBM consultant has little to say about the final challenge — Existing Supply Chain Organizations are not truly Integrated and Empowered. In fact, he concludes with this statement: “Yeah, and which organization is truly integrated and empowered? Thankfully, we have work to do just because of this facet of organizational gaps.” In other words, the lack of integration is good for IBM’s consulting business. IBM’s CEO, Sam Palmisano, believes that future belongs to globally integrated enterprises. He has been promoting that topic for the last four years (see my post entitled Globalization and Resilient Enterprises).

The study makes it clear that supply chain executives see lots of challenges facing them. Unfortunately, challenges are always easier to see than the solutions that can address them. It’s a bit distressing to see that respondents believe that corporate profitability is going to rely heavily on reducing end-to-end supply chain costs. Some supply chain analysts, like Bob Ferrari, worry that cost-cutting measures may have already gone too far and are making supply chains less rather than more resilient.