What a difference a year – what am I saying, a few months – makes. It is indeed a year since we saw big increases in oil prices having an effect on the supply chain and it was only about 6 months later that we fully realized the scale of the economic crisis. As Kevin O’Marah of AMR points out, in that time the oil price dropped from $140/barrel to less than half that. (The monthly average domestic crude oil price for June 2008 was $126.16/barrel, and for December 2008 was $32.94/barrel, which is very close to a quarter of the peak price.) The price of NYMEX Light Sweet Crude on June 04, 2009 was $68.81/barrel, more than double the average price for December 2008. Unfortunately manufacturing demand followed the same down curve, but has not yet exhibited the same up curve. The AMR article is aptly titled “Supply Chain Risk, 2008–2009: As Bad as It Gets”. In this environment of fluctuating oil prices it is extremely difficult to determine whether an order can be satisfied profitably because so much can change from the time the order is taken to the time it is delivered. (Of course this is especially true for heavy and long lead time items.) Long term plans for outsourcing and off-shoring have to be re-evaluated very frequently. Yet the AMR study finds that one of the consequences of the economic crisis, supplier failures, tops the list of supply chain concerns. As Thomas Wailgum points out in a recent article on CIO.com, the Fortune 500 is relying on a smaller and smaller group of suppliers, the result of both the economic crisis, which has resulted in many suppliers going out of business, and years of “cheaper, better, faster” mandates from the CEO to the supply chain.
As Kevin O’Marah points out, this has resulted in a refocus of supply chain risk management from dealing with natural disasters to dealing with more near-term (and immediate) risks such as the oil price, which affects not only transportation costs, but also commodity prices and the cost of operation of facilities. Interestingly, the AMR study found that the most successful risk mitigation strategy is “closer collaboration with trading partners” going from 10% in 2008 to 18% in 2009. There was a concomitant drop from 14% in 2008 to 9% in 2009 for “increase in IT investment for better visibility across supply chain”, which is surprising since visibility is a precursor for collaboration. Perhaps they are doing it the old fashioned way: Talking.
While undoubtedly talking to each other, and more importantly the associated building of a relationship based on mutual trust, the speed of business is simply too fast to base all communication on talking. For one, the time zones across which most supply chains now operate mean that it is extremely difficult to hold a conference call when everyone can attend during regular working hours. While an occasional conference call is possible, this is not feasible for conducting day-to-day business. Yet, as Thomas Wailgum points out, over 40% of executives rely on “gut instinct” in making decisions rather than relying on supply chain, business intelligence, CRM, and ERP systems, principally because they don’t trust the data and “and just over half (55 percent) said their decisions relied on qualitative and subjective factors”. Without a doubt human judgment should always hold sway over decisions made by machines. However, decisions should be made in the context of quantitative information. Alternatives should be compared side-by-side using agreed metrics so that executives can get a feel for the likely consequences of their decisions on financial and operational metrics such as revenue, margin, inventory levels, and customer service.
I have no doubt that the executives have reached their positions because they are intuitive, yet it strikes me that making decisions without any quantitative analysis is very risky. The first step of mitigating supply chain risk is the ability to understand what has changed, the next step is to understand the consequence of the change, and the third step is to identify the people responsible for dealing with the consequences. People, both internal and external to the organization, need a collaborative environment in which they brainstorm ways of dealing with the consequences, and evaluate the consequences of taking certain actions on both financial and operational metrics and targets. Decisions need to be recorded and approved for regulatory and commercial reasons, and, as importantly, for organizational learning. Without these capabilities, you might as well spend the weekend in Las Vegas, where the “house” will be as stacked against you as making supply chain decisions in the absence of quantitative information.