For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.
David Blanchard is the editorial director of Penton Media’s Supply Chain Group, which includes
Material Handling Management and Logistics Today. He previously served as editor-in-chief of IndustryWeek. He is also the author of Supply Chain Management Best Practices (John Wiley & Sons, 2007), with a second edition forthcoming in 2010.
Kinaxis: We are experiencing a rapid and perhaps long-lasting downturn in the economy. What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?
Dave: All business is cyclical, although based on some of the more hysterical reporting from the mainstream media, you would think we’ve never seen a downturn before. In the course of writing my book, Supply Chain Management Best Practices, I discovered that top-performing supply chains consistently do things differently than everybody else. They relentlessly attack their inventory problems, they commit resources to improving customer service, and they partner with their key supply chain partners to ensure they’ve got the best transactional data at all times.
Supply chain success requires commitment at the highest levels of a company. “Short-term supply chain management” is something of a misnomer since the whole idea of SCM involves the integration of processes and activities within your company and outside the four walls to your customers and suppliers. But when things aren’t going well, short-term reactive thinking tends to trump long-term proactive planning. For instance, a recent front page article in the Wall Street Journal points out that electronic component manufacturers probably overreacted when the downturn hit and cut inventories too close to the bone; as a result, they cost themselves sales by not being able to adequately respond to the demands of the marketplace. While nobody wants to be stuck with inventory that doesn’t move and has to be warehoused, cutting production and workforce simply for the sake of cutting is a bad idea, too. Hence, it all comes back to having as clear and accurate a picture of the total supply chain as possible.
Kinaxis: What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?
Dave: Again, the goal of supply chain management isn’t necessarily focused on short-term quick-fixes, but that said, there are plenty of problem areas that you can address by taking a supply chain approach to them, rather than the more typical silo approach.
Supply chain people are always talking about the Perfect Order, getting the right product in the right quantity from the right source delivered to the right destination in the right condition at the right time at the right cost. So any company looking for some of that short-term “low-hanging fruit” can start by addressing whichever area of their supply chain is the least perfect.
Whenever one of these “rights” isn’t met, somebody in your supply chain is going to bill you for the discrepancy. Customers today are very, very picky. They don’t want a truck to pull into the dock five hours early, and they certainly don’t want it there five hours late. They’ll give you a window of opportunity, but if you don’t hit it just right, you’re going to pay more. Similarly, you’re going to pay more if you don’t deliver the right amount of widgets to your customer, and you’re going to pay more if some of those widgets are damaged in transit. So achieving the Perfect Order translates into “don’t spend a dime more than you have to, but make sure you do everything right”
Focus on where the most money is spent or where the most network disruptions occur. Inventory optimization seems to be where a lot of companies are focusing their attention, and rightly so since it can pay off both short- and long-term: carrying less inventory when the economy is down, and turning more inventory when the economy is up. In either situation, the ideal is to carry the “right amount” of inventory.
Kinaxis: Outsourcing has been widely adopted in the developed world over the past two decades. Will the trend of using off-shore contract manufacturing continue, or will near-shoring and even local sourcing become more dominant?
Dave: I’m sure U.S. companies would love to hear that near-shoring is the coming trend, but there are only isolated pockets of activity to suggest that might be the case. The reality is, manufacturers are going to continue seeking out the least expensive alternatives to produce their goods. If your competitor can make their widgets cheaper overseas and then sell them for a dollar less here in the United States – even after factoring in the transportation costs and the longer supply chain cycle – then unless you can find a competitively-priced domestic source, chances are you’ll be off-shoring some of your production, too. If the economy was more robust right now, the near-shoring trend might be more popular given all the negative reaction to tainted products overseas.
“Outsourcing” and “off-shoring” aren’t really the same thing, though. The idea of using a third-party to perform key logistics tasks, such as transportation and warehousing, is part-and-parcel of the 3PL movement, and that trend will continue to become more dominant. The reason for that is simple: There are some jobs that you’d rather not do yourself, such as maintaining a private fleet of trucks, so if you can outsource that activity to a third-party specialist, you can concentrate instead on your core competency. So 3PLs are here to stay.