By SCM journalist Poul Breil-Hansen
How can we actively manage complexity and risk whilst constantly striving to take out cost and release cash from our supply chains? This was the key question posed by the "Be Prepared" web conference held on 21 January 2009 and organised by SCM World.
The speakers addressed five aspects of the current financial crisis, namely:
- Global recession and the "cash crunch"
- Increased volatility in the marketplace
- The significant increase in complexity and uncertainty in our global supply chains
- The need to become demand-driven rather than forecast-driven
- The potential future threat – when growth returns the price of oil will increase dramatically
1,500 SCM managers from Venezuela to Winnipeg and Venice to Vanuata took their seats in front of their computers on 21 January at 1500 GMT to take part in a web-based conference where three professors and two practicians discussed SCM in a time of global crisis. The discussion was steered by Professor Martin Christopher from Cranfield University, and the four other panel members included Professor Yossi Sheffi from MIT, Dr. Hau Lee from Stanford, Executive Vice President Supply Chain Reuben Sloane from OfficeMax and Senior Vice President Global Supply Chain Operations Robert Blackburn from BASF.
"We are currently experiencing changes of seismic proportion in the supply chain landscape. Everyone is under tremendous pressure and the big question is how to respond to the challenges. Let’s begin by looking at the possible reactions to what we have termed the cash crunch," begins Martin Christopher.
The cash crunch is also an opportunity
The speakers all agree that cash flow is one of the major current themes and one requiring our full attention. Having said this, they offer different perspectives on the cash flow theme, touching on supplier risk assessment, closer collaboration, flexibility, operational excellence and innovation.
Robert Blackburn: "Our short-term priorities include cash flow and security of supply. There is a clear sense of crisis throughout our entire supply chain, from the sub-tier supplier network to our customers and their customers. This means we have to maintain tight control of operations and cash flow, and be extremely vigilant when it comes to risk assessment of sub-tier suppliers".
Yossi Sheffi: "We are seeing increased volatility in nearly all markets, the price of capital has gone up and stock levels are coming under increased pressure. The key to tackling these challenges is flexibility. Here it’s important to point out that Lean isn’t a hindrance to flexibility but rather it can create flexibility and increase our ability to respond quickly to changes".
Reuben Slone: "Our response to volatility is to increase our degree of collaboration with customers and the supplier network. In these uncertain times there is an even greater need for collaboration because it creates transparency about what is going on in the other tiers of the chain. This, in turn, generates security and insurances as well as a better basis for predicting how things will develop".
Lau Hee: "In my opinion the most important thing in the current situation is not to be gripped by panic and to begin oversimplifying things. The world of supply chains is complex and there are no quick solutions. The current crisis is a golden opportunity to use SCM to penetrate new markets and create new services and other innovations that can increase value creation. I’m both talking about reducing costs and creating new added value".
Volatility: We are our own bank
The speakers also agreed that in future we will see far greater volatility and that this will pose a serious challenge to supply chain management. "Volatility is increasing, and the world has gone mad." Martin Christopher asks the four speakers: "How can we, as supply chain managers, respond to this challenge?"
Reuben Slone: "One day is like a whole year at the moment. It’s impossible to plan well into the future because the market is characterised by constant fluctuations and major change". According to Reuben Slone, MaxOffice has established three principles aimed at helping global companies to deal with market fluctuations. The principles include:
- We try to be our own bank
- We face up to reality as it is and not as we would like it to be
- We seek to solve problems quickly
Robert Blackburn from BASF points to Sales & Operations Planning as a relatively effective precaution against the notorious bullwhip or Forrester effect. "We see bullwhip effects but S&OP helps us to limit the negative effects and keep them at a reasonable level," he says, adding: "Our KPIs are customer-oriented, allowing us to quickly register changes in patterns of demand and respond to them. We focus on tighter goal-oriented management than before."
Dr. Hau Lee argues that more streamlined strategic collaboration with suppliers can contain the worst whiplash from the bullwhip effect.
Network: We are dependent on each other
"Are we going to see more pressure on sub-suppliers at the cost of collaboration?" asks Martin Christopher.
Professor Yossi Sheffi from MIT believes that the time when you could ride out a storm by pressuring suppliers on price and terms of delivery is over. History has shown that companies with their backs to the wall have turned to squeezing the last ounce out of their suppliers as a means of survival. "A few years ago we saw how GM pushed their suppliers right over the edge. But those days are gone, and today the situation is that we all swim or sink together. If our outlook and activity is limited to our own cash-to-cash cycle then we are doomed to extinction. We live in a network society where everyone depends on everyone else," explained Yossi Sheffi.
To a great extent Robert Blackburn agrees: "Supplier collaboration and supplier sustainability are utterly essential now. It is crucial that we consider the circumstances of the supplier when it comes to optimising our business. If the crisis causes us to sacrifice collaboration with suppliers then we have no future".
Reuben Slone from OfficeMax agrees: "We aim to be our supplier’s best customer – even when the going gets tough. One of the ways we do this is to help a supplier with debt refinancing if they find themselves in financial difficulty. We try to understand the needs of our suppliers".
Risks: How we tackle the crisis
Yossi Sheffi also points to two other risk assessment factors that he feels have been ignored. The first is that there are other risks than a lack of cash flow, and that it would be a huge risk management advantage to build up a corporate culture where everyone in the organisation is trained to respond appropriately to unforeseen critical events. The other factor is that the use of postponement strategies whereby you adjust the product or service to the customer’s needs as late as possible in the value chain process will mean that businesses will be far more robust and less exposed to risks.
Dr. Hau Lee emphasises the importance of communication and awareness of emerging markets. "Good open communication can prevent many risks in the supply chain. It is also important to be aware of new opportunities and potential in emerging markets".
Robert Blackburn rounds off the discussion about risk management and the increased complexity by underlining the importance of operational excellence. "Operational excellence is the key factor when we are talking about managing and preventing risks. The better we are at managing our daily operations, the better we are at tackling crises. In particular this relates to transparency throughout the entire value chain, from receipt of the order to receipt of the product or service by the customer".
Demand must replace forecast
All the speakers agree that the ideal for any supply chain is to be driven by actual customer demand rather than uncertain forecasts.
"Organising supply chains so they are driven by customer orders represents a major challenge. It requires a high level of integration, visibility and knowledge sharing," explains Hau Lee. He points out that there are great possibilities for differentiating one’s supplier network through stable components and flexible components and mentions the production of TV sets as an example. TV manufacturers have been successful in producing their basic TV set in China, sending them by container to Romania where final customisation takes place before the sets are delivered to European customers.
Professor Yossi Sheffi agrees with Lau Hee and recommends that companies segment their purchases into sure and unsure segments, selecting supplier relations and contracts according to different needs and conditions.
"At BASF we had to accept the need to follow our customers very closely so we can continually respond to their needs quickly. One of the ways of doing this is to move our production sites when the customer enters new markets," explains Robert Blackburn.
What happens when the crisis is over?
"Can we expect oil prices to rise dramatically once the crisis is over, and if they do, what will this mean for the supply chains?" is the opening question from moderator Martin Christopher in the closing phase of the discussion.
"I’m not sure that oil prices will rise in the future. The USA has begun to show a real interest in alternative energy so I don’t think we’ll see increased consumption in the immediate future and I believe we will see a reduction in the overall transport volume," says Professor Yossi Sheffi from MIT.
Professor Lau Hee supports this view and adds: "I would warn against companies overreacting to isolated events. One or two commodities must not be allowed to control the supply chain strategy. On the contrary, it’s important to maintain a fixed course. I agree with Robert Blackburn that process improvements are the best way of maintaining continued development and a steady course".
Reuben Slone from OfficeMax argues that the most important thing is to strengthen collaboration intensity in the supply chain. "Most of the problems are not related to oil prices or other prices. In my experience the best approach is to constantly try to eliminate inefficient processes – preferably in close collaboration with supply chain partners".
The four speakers agree that for some the crisis will be a golden opportunity to develop new business models and identify new potential while for others it will mean a fight for survival.
"For us the crisis is a chance for self-improvement, for others it is a chance to totally rethink their business models, and for some it will mean an end to their business. Our strategy is to continually remove waste and inefficiency without loss of customer differentiation. In relation to our suppliers we have to achieve robustness in certain product categories via multi-sourcing while strengthening supplier collaboration in relation to other categories," concludes Robert Blackburn.