The term ‘new normal’ has become commonplace as a way to reflect that the business climate will never return to the sustained growth and relatively benign inflation that we experienced up to 2008. Olivier Blanchard, chief economist of the IMF, previewed the ‘new normal’ in 2009 when he said: “The world has begun to recover from recession but the process will not be simple …the recession has left deep scars, which will affect both supply and demand for many years to come”. He went on to say that: “Countries must rebalance their economies to make it sustainable. A ‘new shape’ will be needed”.
The question that has moved front of mind for supply chain leaders as they consider
the implications for their strategies for the ‘new normal’ is how should they adapt
their operations to the expectation of sustained volatility? What will be the models that can accommodate sustained business performance in the face of continued volatility and uncertainty?
A new strategic language is emerging from leading academics to reflect these new priorities. Professor Hau Lee of Stanford, California, proposes an AAAA approach that picks up on the triple A ratings given to companies and national economies when they are in good shape. The ‘A’s’ stand for Agile, Adaptable, Aligned, and Architected. Agile means capable of coping with wide changes in demand; Adaptable means able to handle structural economic shifts in terms of materials and supply as well as geographical demand.
Aligned means meeting the needs of specific customer groups and channels rather than a ‘one size fits all’; and architected means designed and implemented
to be modular in the face of constant change.
Professor Martin Christopher talks about the four ‘R’s’, which overlap considerably with the ‘A’s’. Responsive is the equivalent of Agile; Resilient means able to absorb shocks and Adapt quickly. Reliable is a consequence of being both responsive and resilient – customers get what they want, which could be interpreted as Aligned. Finally Relationship driven is about Alignment with both demand and supply at the relationship level.
However you look at these terms they no longer talk about low cost or efficiency as being the mantra of success. The old model was about lowest cost-to-produce and distribute, in order to capture share through compelling prices; the new model is an addition rather than a substitution to that, tempering the rigid application of the old. It is about maximising sales when demand is volatile and stocks are being kept low to conserve cash; it is about avoiding excess stocks and major write offs in the face of poor forecast accuracy; it’s about accommodating shifts in commodity prices and regional demand variations. Above all it is about continuing to trade profitably and satisfy customers while mitigating the risks of volatility.
To move from the relative abstraction of the ‘A’s’ and ‘R’s’ to a tangible menu of actions that companies are taking we have identified nine general trends in operating models that many companies are already moving to adopt. Not every company will find all appropriate, but there should be something for all to consider.
Firstly, firms will move to further centralise stock to improve global availability (1) while they may also put in place inventory segmentation and ‘streaming’ by rate of sale or supply chain characteristics (2). This means holding the core stock in a single logical location and treating all secondary stocks on a rapid replenishment basis. Implementing this may increase the use of origin warehousing (3) and programmes that localise the product to the final market needs at the last minute – often called postponement (4). The implications of long lead times resulting from global sourcing on the slower moving parts of the product range may drive some reversal of the dash to source from Asia and a switch to near-shoring on short lead times and corresponding order quantity reductions from suppliers (5). This re-segmentation of the supply chain and tighter rules around the conditions of supply require increased process excellence in the management of the chain supported by improved analytics and enhanced skills (6).
Downstream distribution will involve a fresh look at channels to market including increased use of distributors to take out fixed costs on low volumes (7). The new and more responsive downstream requirement will require correspondingly different logistics services in the form of hubs and merge-in-transit capabilities to meet demand in small more frequent distribution quantities (8). Finally, the commercial control of the supply chain will be managed through what we call service attribute pricing models (9). This last point is crucial as it links through a full cost-to-serve process the new operational model to the business returns that can be achieved. Over-provision of service or under charging for services needed will be a recipe for difficulties in the ‘new normal’.
These nine tangible operations models for coping with the ‘new normal’ will blend differently for any specific business. However an operational constant will be that logistics and commercial capabilities with high levels of process integration and data management will have to take the strain.
These practical measures can be lifted to five core supply chain challenges for every company to consider and that will increase their ability to cope with the ‘new normal’. The first is to increase the ‘clock speed’ of the company in order to increase its agility and responsiveness in the face of high volatility. Actions to compress process time and cut lead times of supply have long been important but will be even more crucial going forward. Second, companies will need to put in place more ‘open’ supply and distribution architectures to increase their adaptability and responsiveness to change. This will involve shorter time commitments to marginal capacity (separating the core volume from the volatile peaks).
Third, companies will need to eliminate unprofitable complexity in order to lower total cost and align to customers and channels. This will involve full cost-to-serve analysis with the implications for both commercial policies and operating methods implemented. Appropriate changes in set up times and batch quantities require identification and bedding in to recognise the end-to-end cost of small volumes and the way they are produced and distributed. Fourth will be the requirement to execute to six sigma quality to deliver total reliability of the chain as against quite lax performance today. The hidden cost of this low operating quality is often considerable. Alongside implementing six sigma, challenging KPIs with cross-functional controls and commitments are necessary.
Finally, companies will need to increase transparency and collaboration along the chain with both suppliers and customers to increase adaptability, responsiveness and resilience. This will improve relationships and increase trust; but it will require much improved skills and behaviours.
The nine exemplars of companies’ practical ways to respond to the ‘new normal’ and the five generic challenges for the supply chain for 2012 and going forward have converging themes. From these, we can be clear that no management team can afford to be complacent in the face of the ‘new normal’ and that there is a bundle of practical measures companies can take to improve their ‘A’s and ‘R’s.
Alan is the chairman of LCP Consulting, which he founded in 1985. In more than 20 years he has helped to take the company to be the leading independent consultancy in supply chain and logistics, working internationally and receiving world recognition in its specialisation. He is also a Visiting Professor at Cranfield University. He is a regular speaker at conferences, and the author of many papers and articles.
He is a thought leader and educator and has worked with the LCP team to develop innovative new analytical and design tools including Cost-to-Serve, Time-to-Serve and Carbon-to-Serve to identify the value potential in companies’ supply chainsLCP Consulting
LCP Consulting is a leading specialist in customer-driven supply chain management. With over 20 years’ experience in the field, it identifies where supply chains make major contributions to how businesses operate profitably and compete effectively. The consultancy supports how businesses review, re-design and implement changes to their end-to-end operations. LCP’s fact-based diagnostics pin point exactly where and how to cut costs, enhance operational efficiency and invest for the future.
For further information visit www.lcpconsulting.com