It’s that time again when the best and brightest roll up their sleeves and dive into ‘reading the tea leaves’ – some even compulsively. No, I am not talking about the November 6th Elections. I am talking about the longer-term (12 to 18 month) business planning cycle.
Dynamic companies all over the world have started, or are well into their 2013 Planning process. Irrespective of their fiscal planning cycles, this is a critical time to pause and invest energies in making projections for the year ahead. Among the many transitions, have you considered this?
Plan carefully and deliberately for Product Transitions – Product transitions (major or minor changes in Products) are a critical time for technology-intensive companies. To stay focused, I will discuss those changes to products caused by “sustaining”  improvements in product technologies. For a computing tablet maker (such as Apple’s iPad) this could be a better display (e.g., ‘Retina’ display), more memory, etc. While many of the critical ingredients needed to run Operations during such Product Transitions are well understood by Product Companies, several key variables remain elusive:
- How will the new product (or new revision) ramp-up in volume? Will it meet targets?
- How will it impact the demand for existing products?
- How to manage the upside and downside risk?
These are just a few of the critical questions that cross-functional Product and Operations teams have to answer. Done right, Product Transitions can generate the next new source of Revenue and Growth. Any slip-ups, on the other hand, can deal a rough hand to the company– millions of dollars of unplanned inventory write-offs, or open the doors for competitors to sneak into a nascent market.
Interacting with cross-functional Operations and Product teams at companies such as HP and Samsung, I got some rare insights. The single biggest one –
Processes & Planning for Product Transitions have unique needs and need to be given focused attention and resources.
So, as you go through your planning cycle, set aside some bandwidth to carefully account for this process. If you have comments or need some thought starters, please drop me a line.
 Clayton Christensen ‘The Innovator’s Dilemma’
The most serious Risk that Companies with extended supply chains face is – the Shortage Risk. In the wake of the Japanese earthquake and tsunami[i], the floods in Thailand and a fire that took significant capacity of a critical automotive industry resin offline[ii] – ‘major supply shocks’ have taken center stage. But these are only a small subset of the Shortage risks that Companies and their Supply Chains face.
Often, the more mundane, ‘garden variety’ shortages that Companies face on a daily basis, can pack a vicious punch – making a serious dent in a company’s competitiveness, if not pushing it off the cliff!
Let’s understand why Shortages are the biggest risk now and examine potential warning signs that shortages maybe just around the corner.
The Destructive Impact of Shortages: For the want of a nail..
Shortages impact all companies downstream of the manufacturer facing shortages – to varying degrees. Sometimes, shortages can cut across industries.
For example, if Amazon buys up significant capacity of TFT glass (a specialized LCD used in different products) for its next new Kindle launch, that can cause shortages in unrelated industries – such as at video-game makers or electronic-toy makers. Even, the most agile Operations executives can get blindsided in such cases.
The impact of shortages can be severe. Dynamic young companies trying to ship products, stand to lose a lot. But even larger companies are not immune (Smartphone Biz Hurt by Own Success as Chip Supply Shrinks [iii]). Beyond the obvious Revenue impact, shortages can:
– turn away new customers (revenue hit),
– put-off existing customers (satisfaction erodes, loyalty and customer lifecycle value diminishes),
– cause unintended consequences (long lead-time for large companies downstream or an entire industry[iv])
– worse (perception of poor management controls, even if incorrect, adverse competitive impact[v])
Any one of these is bad enough. Their compounding effect can be devastating.
Avoid getting Blindsided – Warning Signs
At a time of such a tepid recovery, leadership across companies of all sizes should take note of this threat and ask – What are the warning signs that we are exposed? Here are a few critical ones we have found helpful:
1) Frequent over-forecasting by Channel partners and Field Sales – Manufacturing Operations team frequently asked to jump through hoops to increase shipment quantities at short notice, often to find later that forecasts were lowered.
2) Dependence on very few suppliers – OEMs totally dependent on few Contract Manufacturers (in the Hi-tech electronics industry) or Tier1 suppliers (in the Auto industry) who are also major suppliers for other competitors. BOMs with a high percentage of single-sourced items should also throw up red flags.
3) Visibility limited to key suppliers in the first tier of supply only– For an OEM this means having the ability to manage and monitor the performance of direct suppliers only, in the best case (CM/ODMs or Tier1 Suppliers [vii]), and no visibility beyond that[vi].
4) Frequent Allocations sometimes even on ‘run rate’ products – For products that start approaching stable sales patterns, alarms should go off if shortages occur, before these products go on hard ‘allocation’.
5) Quarterly Business Reviews (QBR) with suppliers showing ‘strain’ or going ‘too smoothly’– If QBRs with Supply Chain partners start showing strains due to unplanned costs,etc.– that’s an early warning. Dangers may also be lurking, if no disagreements arise.
6) Total time to respond to demand changes is unknown or too long – When it takes too long to answer – “How long will it take to ship a 10% upside?” or the range is too wide (“a few hours to a few days”) – that’s a red flag.
There are exceptions to the above. However, time and again, across different companies and industries we have found the above provide a good check-list to harden Supply Chain processes and systems against shortages.
Have you been part of a recent ‘shortage event? Did you see any other warning signs? Other Supply Chain risks that are bigger?