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Embrace the unpredictable

Embrace the unpredictable

31/07/2006 | Channel: Business

The age of ‘permanent volatility’: dynamic supply chains. By Rob Woodstock
and Greg Cudahy

Local disruptions - from natural disasters, to geopolitical unrest or financial shocks - can set off global reverberations that can disrupt supply chains in any industry in any corner of the world.

For example, in May this year, Icelandic volcanoes were once again top of the news agenda. One year after the Eyjafjallajokull volcano sent a stream of ash into the sky and shut down a major part of European airspace, another eruption was threatening to wreak havoc on global supply chains, underlining in stark terms the unpredictable and volatile environment in which global supply chains now operate.

Our multi-polar world of interconnectivity and interdependencies, marked by continually changing global financial and economic forces, commodity instability, currency fluctuations, regulation and compliance rules and unpredictable geopolitical events, is creating a state of ‘permanent volatility.’ Coupled with increasingly complex consumer and business landscapes, this state of ‘permanent volatility’ has a direct impact on global supply chains, which need worldwide, cross-enterprise, real-time visibility and flexibility to quickly adapt to sudden shifts in markets, achieve business continuity and lead their companies to high performance.

A new way of looking at the supply chain

To continue to thrive, companies need to balance long-range planning with more adaptive, ‘dynamic’ supply chains that continually sense changes proactively and then quickly execute mitigation plans to address the changes before they impact market share and critical financial metrics. Companies that understand how to successfully manage risks, and design supply chains for both long-range operational excellence and rapid responsiveness, will be well positioned to thrive in the face of unpredictable events.

A dynamic supply chain can become a financial engine for enabling growth and managing operations through disruptions. Inherent in a dynamic supply chain is an expansive look beyond cost and operational excellence to include generating cash flow and driving higher returns on invested capital. These benefits offer the resilience to survive through increasingly turbulent times.

For example, mastery of the dynamic supply chain strongly supports one consumer electronics company’s ongoing success and ability to meet rapidly high demand for innovative products at prices competitors cannot beat. As the earthquake in Japan shut down production and hindered transport of critical memory chips, the market reacted and its stock slightly dipped. However, the company’s ability to secure a new source of chips to support its product launch is a testament to the dynamism of its supply chain and as a result; the company’s stock price rebounded.

Creating a more dynamic supply chain
Changing the definition of the supply chain to integrate the product value chain and the physical supply chain is the central tenet for creating a more dynamic supply chain and requires a fundamental shift in thinking. Optimising the intersection points of the product value chain and physical supply chain represent opportunities to enable the overall business strategy and create flexibility. Traditional methods of benchmarking and leading practices do not work when developing a truly dynamic supply chain. The design must be led by the company’s overall strategy in terms of products, markets and geographies.

Five levers of a dynamic supply chain
A more dynamic supply chain is achieved by improving awareness, responsiveness and financial strength. Five components infuse the supply chain with more dynamic characteristics and help turn it into a financial engine that drives growth, improves cash flow and generates higher returns on invested capital.

1 - more adaptive operating model and variable cost structure
Companies with dynamic supply chains continually review their strategy to ensure alignment with the overall business strategy. The supply chain operating model is a critical first step in becoming dynamic. It must be well defined and understood by the entire organisation.

Globalisation is challenging companies to find the right supply chain operating model for both traditional markets as well as emerging markets. The balance of functions that are locally, regionally or globally owned and managed may be unique in the two markets. As demand shifts to emerging markets, products are being designed for the values of the new consumer. In addition to new products to produce, distribute and service, supply chains have the added challenge of navigating variable and complex distribution networks in emerging markets and predicting future requirements without any demand history. Making large investments and adding to the fixed costs of supply chains is risky, finding the right balance of variable and fixed costs is critical.

2 - tight linkages to specific product/channel/geography value propositions
Assessing financial implications should be a core component of supply chain decision-making. Tradeoffs are an inherent part of managing a supply chain and decisions should be based on the most optimal financial result.

Electronics and high tech manufacturers are well aware of the challenges that a natural disaster in Asia can have. When Japan recently experienced a strong earthquake and tsunami that halted production of critical electronics parts, the dynamic supply chain became a key driver in preserving profitability. Organisations with strong sales and operations planning processes very quickly called together the function’s executive team to review and analyse the changes to demand and supply. The executive teams were able to quickly analyse supply chain data. Once the teams understood all of the data and facts, they analysed tradeoffs, created model scenarios, and made decisions that would optimise profitability.

3 - risk anticipation and rapid mitigation
Proactively identifying high-risk events and market changes enables rapid and effective responses for mitigating the impact on the supply chain. This ability also gives companies the lead time to implement longer-term changes that make the supply chain more adaptive, such to changes in operating models, product mix, supply sources, manufacturing networks, distribution strategies and enabling technologies.

Effective risk management is an essential capability for global organisations running a lean operation. The 2010 eruptions of Iceland’s Eyjafjallajökull volcano caused an unexpected shutdown of a major transportation hub in Europe. This very local event created challenges for organisations worldwide as their products were held up in transit. As many supply chains have worked to minimise on-hand inventories, the increased lead times caused out-of-stock situations and service level issues. Dynamic companies were able to quickly reroute products and supplies to meet lead time requirements. They understood their risks and had actionable response plans in place, long before the volcano erupted.

4 - enhanced visibility and profitable allocation of capacity
The ability to quickly transform the supply chain in response to market changes can be helped by maximising the use of inter-enterprise collaboration, adaptive technologies and relationships with external organisations.

With the significantly reduced availability of semiconductor and technology components caused by the earthquake and tsunami in Japan this year, the electronics industry had to address several challenges, including supply shortages caused by plant shutdowns, increased logistics costs caused by damaged infrastructure, higher prices for short supply products, and shutdowns of their own production facilities. Dynamic supply chains need to quickly model the various demand/supply scenarios to understand the tradeoffs and make decisions that optimise the organisation’s financial metrics. Supply chains today are a network of companies. Having the right information for decision-making, the right tools for analysis, and the right relationships to put responses into action are keys to enabling successful dynamic supply chain responses.

5 - a culture of constant change and supply chain as a profession

Talent is a critical component of dynamic supply chains. To be effective, people must understand all components of a dynamic supply chain strategy, embrace their role in the organisation, and recognise their contribution.

The organisation’s culture is a key ingredient in fostering a dynamic environment. Within the culture is the company’s ‘competitive essence,’ its ability to deliver on its customer value proposition. For example, the value proposition an airline company promises to deliver is high quality service at a low cost. As such, the company has reduced complexity in its supply chain by flying only one type of aircraft. This simplifies servicing and service parts management to keep costs low, while allowing for rapid adjustments when delays or cancellations occur. However, this comes with the associated risk of a maintenance issue that could ground a large number of aircraft. Earlier this year, part of an airplane fuselage was unexpectedly compromised in-flight, resulting in the immediate grounding of hundreds of the company’s older aircraft. Quickly shifting passengers to other aircraft and partnering with the aircraft manufacturer to service its fleet, the company was able to minimise both the customer service issues and the potential financial impact. The culture of the organisation enabled their people to think and act dynamically.

High performance in a complex world
All five capabilities must be established in the design and operation of today’s supply chains. Being able to manoeuvre and manage through constant changes and disruptions is a reality for all industries across all geographies. Dynamic supply chains are focused on winning the game, not merely survival.

When supply chains are truly dynamic, they embrace the unpredictable. Operational agility, continual optimisation of financial impacts, and pre-emptive risk mitigation are the foundation for more dynamic supply chains - and dynamic supply chains are the foundation for prospering in the new era of ‘permanent volatility’.

Greg Cudahy

Greg Cudahy is the managing director for Supply Chain Management Strategy and Planning at Accenture. Before joining Accenture, Greg was responsible for global Supply Chain Management for a major European services firm, and he had held a global role in a leading software company where he was responsible for Pricing and Supplier Relationship Management.

Rob Woodstock

Rob Woodstock is the Accenture senior executive responsible for Supply Chain Management practice across the UK and Ireland, working across all industry sectors spanning consulting, technology and outsourcing. Rob helps Accenture’s industry and government clients to develop and implement transformation programmes in supply chain and procurement, to improve their capabilities and realise significant savings.

Accenture is a global management consulting, technology services and outsourcing company, with more than 223,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments.

For further information, visit: www.accenture.com