Out of sight not out of mind

No matter how efficient your organization, there will always be unplanned events that without co-operation across the supply chain, will negatively impact your business. The tsunami in Japan last year was an extreme example. Some organizations only became aware of their third or fourth tier suppliers and the impact they have on the business, because they were in the tsunami-affected area.

Global supply chains are multifaceted, they’re dynamic and it is essential organizations, wherever they are situated within the supply chain, consider and monitor contributing factors. National taxes, charges, laws and regulations all need consideration. Not to mention the impact of economic, political or market change - and of course natural disaster.

The geographic location of some countries also presents additional challenges. Take New Zealand, relatively isolated from the rest of the developed world, inbound and outbound shipping costs can be a significant factor, but it is the time it takes to get products to and from New Zealand which is the key issue. In the world of lean, transportation time is waste. Moreover, long shipment times expose the supply chain to demand and supply variability. Inventory is typically used to buffer the impact of any variability in supply or demand, but this inevitably increases working capital requirements.

These supply chain challenges can be better overcome not by increased stockholding, but by creating a more agile and efficient supply chain. The first step is to understand what the global supply chain you operate in looks like, end-to-end. Mapping or modeling the extended supply chain can help to recognise the relative size and influence of different entities within the supply chain, and identify the most influential customers and suppliers, as well as areas of greatest complexity and risk. A major supermarket, for example, is likely to be an influential player. Even if they are several tiers away from your own business, you have to consider their impact on the supply chain, because it is too significant to ignore. Likewise, a supplier can be very influential, particularly if their product is in short supply, providing leverage for them to make demands on their customers.

A common problem I have seen in businesses across the world is their small size relative to their global supply chain. Those which are part of a global organization in some cases have little control over sourcing and product decisions, having to fall in line instead with Head Office decisions, made with a global rather than local perspective. It is particularly important in this instance to really understand your supply chain, so you have the opportunity to negotiate terms and conditions, or else develop products differently, so as not to be constrained moving forwards. Segmentation, for example, can be an effective way of satisfying individual product and service needs whilst maintaining economies of scale. And the strategy to customize or configure products locally may be one which can satisfy both global and local needs.

Once you have established a good understanding of your supply chain, partnerships need to be formed with those which have the greatest impact on your business, i.e. influential players and any weak links. Good communication is essential for this, and for ongoing understanding. I never cease to be amazed at the number of businesses which have very little dialogue with their supply chain partners, and as a result have very poor visibility of drivers behind customer demand and supplier costs.

Visibility is key, and the right processes have to be in place to allow this. Integrated Business Planning (advanced S&OP), a business management process for running the entire organization, not only provides a 24-36 month rolling horizon, it directly links the corporate strategy and financial plans, and exerts control over the extended supply chain.

One global electrical components manufacturer we now work with, saw demand reduce globally by 35% in 60 days in 2008 as a result of the Global Financial Crisis (GFC). Unable to re-plan their supply chains as quickly as the change in demand, inventories soared to over $250 million, decimating profitability. Having come through this, they have now introduced an Integrated Business Planning process which enables them to model different supply chain scenarios, and they are now much better equipped to anticipate and react rapidly to ever-changing demand.

The events of the past few years – not only the GFC, but volcanic ash clouds, tsunamis, floods and catastrophic earthquakes – have made the need to optimize the global supply chain ever more pressing. Understanding your supply chain footprint, communicating effectively and forming strategic relationships throughout the extended supply chain is essential in overcoming the many and varied challenges of today to effectively meet customer demand in the most profitable way.