The future will differ from the past
Major downturns in business activity are when the ‘deck of cards’ of industry get reshuffled. So, what strategies will be in place for your organisation’s supply chains to respond?
Developing a supply chain strategy for when the peak of the pandemic has passed will be a ‘clean sheet’ exercise. Typically, plans are designed based on situations with which the developers are familiar. Whatever strategic planning has been done within supply chains, will not have factored in a possibility of the future being dramatically different from the past.
The overriding economic driver in developed countries (and among the middle class in developing countries) has been consumerism – ‘choice is available for consumers to have whatever they want, whenever they want it’. This approach has led to the ‘$5 tea shirt made in low cost countries’; extremes of wealth and underemployment, illustrated by the ‘gig’ economy (with its objective to eliminate all human involvement in transactions). But maybe, after months of unemployment and change to routines, people may consider that making a living is actually not the same as making a life. They could change their priorities.
Governments will also be making economic choices for their countries. There is a realisation that business and shareholders have capitalised the previous economic gains, but losses must now be socialised by government. This could lead to a realignment of economic and political priorities by countries, Some may implement capital controls on cross border financial transactions. Many will revisit and question their economic and industry policy, asking questions concerning what is a ‘critical’ industry or product? Should it be produced or inventoried within the country or economic region, as an economic defence against other countries monopolising supply?
Change will happen
The enormous financial impact on economies and businesses will force change throughout supply chains. Much uncertainty will exist in the global economy, making it extremely difficult to know how suppliers, customers and consumers will respond. And remember that another pandemic will occur; when that will be is unknown, but it will happen, assisted by increasing global warming activity.
When business is in a growth environment, supply chain executives will focus on their company, industry and core supply chains. Forecasts and plans will be accepted even if they largely ignore factors such as how the national government is responding to financial and geopolitical pressures.
However, in response to the new economic uncertainties, macroeconomic factors must become a part of strategic thinking. For supply chain professionals, they will need to consider factors such as structural changes within industries and country specific risks and how these will influence the structure of their supply chains. A recent blogpost discussed some aspects of supply chains to consider.
To gain an understanding of the future and better understand the impact of alternative supply chain realities, will require an increased focus on scenario planning and risk analysis. This will require the gathering of relevant intelligence from many sources, to structure the range of possible outcomes and then create contingency plans for each.
A strategic planning approach
An approach to developing the new supply chain strategy (a consolidation of strategies from Procurement, Operations Planning and Logistics) is to have a dual approach which combines two planning processes, as explained by Derek Abell at IMD in the early 1990s.
One process is a longer term (say five-year) ‘top-down’ supply network plan. This is based on broad assumptions for between seven and eleven variables at a qualitative level, that the supply chain group should be assessing (such as the stability of commodity prices and freight rates, geopolitical events and supplier capacity). The plan incorporates a base, high and low set of expectations.
The other process is a short term (say two-year) ‘bottom-up’ plan that consolidates operational plans of the three main supply chain disciplines. The plan identifies factors such as the operational capacities required and available and supplier availability and capacity The two planning approaches are reconciled to identify inaccuracies and bias and adjustments are made to either plan.
Supporting the organisation’s strategic planning for the supply network is the monthly meeting between heads of the business units, Finance and Supply Chains. This is to collaborate on forecasts for future sales volumes, operations schedules, supplier capacity, inventory levels and the cash flow to support the objectives. It does not matter what the process is called (for forty years it has been promoted as Sales & Operations Planning), but in the face of change, it is a vital process.
Through this operational planning process, the supply chain group and business units are able to identify common risks and work cooperatively to help mitigate them. For example, to better manage the price of commodity materials, Procurement and Finance/treasury could work to implement a price hedging strategy through international commodity futures markets.
With the world and international trading order needing time to readjust to new circumstances, your organisation requires a planning process that is responsive and adaptable. In earlier time a business motto was ‘you will never get fired for buying IBM’ (today it is SAP). But, if your plans are to copy whatever others in your industry are doing (or you think they will do), there may not be a sustainable business in which to work.