Pathways to Profitability – Learnings for Operations

Profitability has again taken center-stage when evaluating the near-term operational performance of Product companies, and their long-term prospects.

This article highlights some of our learnings & experiences regarding –

What are the different pathways to profitability, or growing profits?
What to watch out for?

These learnings are from the vantage point of Operations leadership, and for all who lead, or support cross-functional operations.

In the current backdrop of an ongoing pandemic, persistent inflation, the corrective actions being taken by central banks, its confounding impact and a widespread feeling of uncertainty, Profitability has taken center-stage again when evaluating the near and longer-term operational performance of Product companies.

This article highlights some of our experiences and learnings to answer the questions –
What are the different pathways to profitability, or growing profits (for companies that have achieved profitability)?

What to watch out for?

These learnings are for Operations teams, their leadership and all leading or supporting cross-functional operations (Finance, IT, Engineering).

Putting Profitability on the back-burner will burn your enterprise

Companies that pursue ‘growth only’ approach, without careful attention to “profitable growth”, risk losing sight of the insidious effects of factors that will erode eventual economic value of the enterprise. How? Growth, especially growth at a breakneck speed* invariably leads to poor quality of attention being paid to anomalies in ‘cost of growth’. Growing costs creep in even when a company grows in line with plans. With unplanned growth, growing costs become bad news that arrives too late, eventually derailing the path to profitability for larger and mid-size product companies alike.

A Company that loses their ‘path to profitability’ (including sustaining their profits), loses the chance to maximize its own value and provide maximum value to customers. Key questions for company leaders –

  • As you make Plans, especially those with longer-range impact (e.g., adding factory or warehouse capacity), do you have a clear picture of its impact – on existing customers, on profitability?
  • What if (.. list any of the many changes here) happens?

* Seen in the pandemic times circa 2020-early 2022 in a subset of IT goods and e-commerce industry

Manufacturing & Supply Chain Operations teams are core to any product company’s mid to long-term survival and profitability; their evolving mandate

Over the last 2+ decades, this author has observed the slow, almost inexorable slide downwards, of the role of “Manufacturing and Supply Chain Operations” teams in companies that design, make and ship branded products – across many industries (from Hi-tech electronics to consumer appliances, to name a few).

As ‘outsourced manufacturing’ in several industries, stripped away the ‘physical assets’ (machines, tools, materials) that Operations teams were responsible for, operations teams shrank – often, with good reason. Unfortunately, the Operations function’s importance as a strategic partner of the CEO, as a part of the executive team, shrunk too, overwhelmingly – except, in those organizations where the Operations leaders were strong change influencers and facilitators, and the CEOs and other influential leaders were clear about it. Clear about the fact that – Operations team and their leaders are core to the company’s success – whether manufacturing is outsourced or not.

This phenomenon was upended by the global pandemic starting circa early 2020, as factories, materials needed, ports, and people working these, froze up, and buckled under their weight of the pandemic.

Only those companies can serve growing markets profitably in the longer term, when key leaders and the CEO are clear that Operations team and their leaders are core to the company’s success – whether manufacturing is outsourced or not, and the Operations mandate will need to evolve

It appears that this, among other reasons, have resulted in a shift, which is yet a ‘work in progress’. Indeed, Operations teams are now playing key roles at companies, at least among stronger ones, often in new, strategic settings – in some cases, the Operations leaders getting invited to share their “supply chain insights” in quarterly, financial, market-facing calls, alongside the CEO and CFO.

This is the right time for Senior leadership at Product companies to work closely with their Operations leadership team and build out the necessary competencies and capabilities needed, so they are not caught flat-footed, and new ways of operating are developed and implemented, as the pandemic persists, and other major “supply constraining” events take place (war, weather-related/ climate-change induced disasters, and their aftermath, etc.), some of which may seem deceptively “further out”. Key question –

  • What key Operations capabilities and competencies are needed now?
  • How will the Operations function evolve – Can Ops step outside of the ‘cost control’ function (traditionally, a “comfort zone”), and contribute directly towards the ‘profitability’ function?

How can Operations step outside of the ‘cost control’ function (traditionally, a “comfort zone”), and contribute directly towards the ‘profitability’ function?

We have seen transformative results when Operations leaders have such a mandate. However, a ‘mind-shift’ is needed.

For example, during a time when one of the largest integrated Steel plants in India, Tata Steel, was facing severe input constraints, our founding advisor’s work to optimize operations directly helped expand profit contribution even as total output volume went down, resulting in a radical rethink of how to manage operations (International award-winning work by Dr. Gopal P. Sinha**).

A word of caution here – Do not go back to the old ways – i.e., diminished attention to the Operations function when these “economic clouds” start clearing up and “headwinds” to Revenue growth diminish.

** Franz Edelman Award for Achievement in Advanced Analytics, Operations Research, and Management Science
https://www.informs.org/Recognizing-Excellence/INFORMS-Prizes/Franz-Edelman-Award/Franz-Edelman-Laureates2/Franz-Edelman-Laureates-Class-of-1994

Deliberate & Intelligent Collaboration is the only way for any company to succeed

    While this is true for enterprises of any size, irrespective of their relative position in their industry, it is especially true for younger (growing startups and scale-ups) and mid-size companies that have to innovate and grow their products and offerings. “Collaboration” with a capital “C” can result in many intuitive and non-intuitive benefits. Highlighted below is one –

    Unexpected “value” and “insights” from suppliers and their products, especially those with a “collaborative” approach. Credible smaller providers (i.e., with proven success), may have a lot more to offer than larger providers, since “innovate and execute” is core to their survival and growth.

    For example, in one case, a Procurement executive at a growing, mid-size product enterprise was “surprised” how a system (provided by Zyom) significantly improved collaboration with Finance, reducing time in hand-offs between Ops and Finance, and eliminating errors which resulted in higher supply costs, in addition to other primary benefits. Question –

    • Have you explored any credible, new ideas in managing cost, and improving profitability with all your suppliers?

    Supply driven “Inflation” needs a different mindset & tools

      As the US, Europe, Japan and most free-market economies grapple with the most severe inflation in the last 4+ decades, it is an imperative to approach this ‘inflation’ cycle with a different mindset, in terms of operational execution.

      In this case, persistent inflation was triggered largely by a once in a 100-year pandemic resulting in massive, cascading disruptions to global supply chains, choking supply severely (demand largely intact after the initial shock), the resulting policies (government, central banks, even companies – inducing more demand), subsequent uneven return to normalcy (China, an important global player, has entered a dangerous phase 2 of the pandemic, as of December 2022). Geopolitical unease between the US and China, the attack on Ukraine by Russia, has forced speedy rethinking of supply sources, making matters very difficult for those operating global supply chains.

      The Chief of Operations always had a dual mandate – Right amount of flexibility at an optimal cost, which are at odds with each other.

      Flexibility implies flexibility in the manufacturing and supply network – capacity, inventory, etc.
      Costs include all product and operational costs that impact cost of goods sold.

      Increased flexibility directly leads to higher costs, often a step-function increase.

      In light of the evolving global pandemic and ongoing supply constraints (though, getting better), key questions for Operations leaders and the CFO are –

      • What specific decisions can Operations directly support to address the profitability squeeze (due to inflation)? How? (Latter will require new tools)
      • What key new metrics are needed? What traditional metric/s needs to be revisited?

      What specific decisions can Operations directly support to address the profitability squeeze (due to inflation)? How?

      Stop looking for (system enabled) answers in the wrong places

        To navigate successfully, in this new, rapidly changing environment requires a Rethink – especially regarding process,data and analysis support needed by cross-functional Operations teams. Do not expect a zero-risk mindset to work if you are trying bring on-board any new capabilities that your enterprise currently needs, or may not know that it needs. The right partner can help uncover these ‘unknown needs’. And casting off this zero-risk mindset is a prerequisite to drive profitable operations.

        Too many companies scale operations to reach a certain ‘threshold’ volume, only to decide, without adequate due-diligence, that their growth is being constrained because their existing ERP system cannot “scale up”, and that they need ‘add on’ ERP capabilities from the incumbent, or (worse) start implementing a new ERP system.

        This is a classic “integrated-solution out of the box” logical fallacy which is played upon by entrenched incumbent providers (especially ERP software provider and their cohorts). Why is this a fallacy?

        This is a classic “integrated-solution out of the box” logical fallacy which is played upon by entrenched incumbent providers (especially ERP software provider and their cohorts).

        Most ERP[1] systems have been laggards, even to date (2021 – 2022), in vital areas such as “Planning”, especially context-rich planning, which, ironically, is what the ‘P’ in ERP is supposed to stand for.

        Some ERP suppliers have plugged their holes partly with acquisitions. Despite this, they struggle and make their customers struggle, under the unending burden of their long, expensive implementation cycles, often, even for basic ERP (Accounting/ General Ledger, Inventory) capabilities.

        Unfortunately, since risk-aversion in adopting and implementing systems runs high among decision influencers, the malaise persists. “No-one got fired for buying XYZ” being the prevalent mindset (replace XYZ with any of the afore-referenced providers) – a system largely built to be a repository of transactional data, is stretched and patched to “add on” other capabilities – in the name of “integrated solution”, only to fall woefully short.

        Looked at another way- a largely “commodity” software with “General Ledger/ Accounting” as its core, has been stretched and bloated to be utilized for highly specialized and often strategic needs, without having qualifying capabilities or people to support the extensions (at the ERP provider). This is damaging in the short and the long run for the product enterprises deploying these, given the predictable longevity of these implementations.

        The questions to ask internally is –

        • Can we wait 2-3 years to get these critical operations management capabilities***? And incur the costs (of waiting)?
        • Do we understand our “systems” decision blind spots and biases?
        • Are we even looking at the right type of system solution or provider partner?

        *** 2-3 years based on actual data from Zyom. less than 50% probability of expected outcome in areas of planning, context-specific analytics, operations execution

        On Leadership, in brief

          With a seasoned Operations leader at the helm, who has seen a few operating seasons, and knows about “why” and “what” of specialized Operations Management systems, these de-risking debacles (“let’s do it all in our ERP system modules”) are pre-empted – i.e., cognitive biases and fallacies mentioned before, avoided or overcome. However, the very companies that need such leaders – growing mid-size companies or younger, faster paced scale-ups – do not have access to such leaders in a timely manner.

          The question for the CEO and senior leadership team is:

          • Do we have a seasoned Operations leader who not only understands the business needs (what’s needed in the supply chain, team) but also recognizes the unique data and system enablement needs of operations? If not – identify a suitable partner (internally, and externally).
          • Do they know (or have adequate support to identify) what types of software systems outside of ERP are available and effective to support Operations teams?

          Implementation is It.

          Perhaps this is the most important learning of all.

          In fact, this is where most worthy operational change goals can bite the dust, especially if “lets extend the (heck out of out) ERP system” mindset persists, when considering system enablers. This is where specialized providers (such as Zyom) create a better world for Product companies and its system users, by being laser focused on Implementation, no matter what. This is the only way meaningful changes are implemented and benefits realized.

          Once the initial “visioning” has happened, the hard and soft requirements have to be “implemented”, whether in changes to processes, or to software systems enabling the process change. This is where many, if not most, ambitious digital enablement efforts fall way short. Digital transformation remains a distant pipe dream.

          A sizeable volume of words won’t be enough to cover key learnings about such system implementations and how it is effectively integrated into processes (potentially, a future post). Needless to say, to attain/sustain/grow profitability, a new way is required – new collaborations and potentially new systems and tools.

          .. to attain/sustain/grow profitability, a new way is required – new collaborations and potentially new systems and tools

          Because, this is where the rubber hits the road, and things can go flat and flounder, or zoom forward, even soar.

          With a new 2023 starting, this is the right time to sketch out such a change, talk to such a partner.

          Reach out. Start a conversation.

          products@zyom.com


          [1] ERP (Enterprise Resource Planning) providers – SAP, Oracle, other larger ones (trademarks, etc. owned by the respective companies)

          Lead time – A Time to Refocus

          Lead time metrics seldom gets senior leadership level attention outside of Supply Operations, until something blows up badly, such as the 2011 tsunami overwhelming Japan’s economy and its swift, cascading impact on automotive and electronics supply chains world-wide.

          More recently, in the midst of the world-wide pandemic, there has been a spate of headline-grabbing bad news from large auto makers and other industries, all traced back to growing lead-time of parts/ component and products [i].

          Auto makers, after seeing an unexpected surge in demand starting Q3, 2020, are now stuck in neutral, exposed to painful revenue and profit shortfalls due to semiconductor chip shortages over the near-term (calendar Q1 through Q2/early Q3, 2021), possibly longer – forced to idle factories and people, for months. Unexpectedly large (and growing) lead-time of critical parts are squeezing both top and bottom lines. All this at a time when auto, and other industries, are trying to get back to some semblance of ‘normal operations’ after intermittent and prolonged shutdowns earlier in the pandemic.

          The current lead time debacle need not have been this bad, the pandemic and subsequent sharp surge in demand (across some segments) notwithstanding.

          Lead time of products, key components and raw materials are critical variables which require timely and regular attention of (yes) CEO/ COO of any product company serving multiple geographies and relying on global supply networks. Now, with long and uncertain lead times in the form of persistent shortages, it has the CEO’s attention again.

          How do we break out of this endless cycle of using lead time as a ‘reactive’ metric, and use it to gain an operating advantage?

          What’s your Lead time? A Measurement Gap

          Wildly swinging lead-times are usually the tip of the iceberg. Below the surface are many causal forces –

          • inadequate manufacturing capacity, new industries competing for scarce capacity and supply (e.g., auto industry vying for the same fab capacity used by electronics makers), or
          • gaps in planning and collaboration processes (with supply chain partners), missing system capabilities, or simply not knowing what innovations are available to tackle lead-time unreliability. This is the purview of this write-up.

          One of the primary needs is the ability to measure the lead-time of products – quickly and accurately. To date, planners, buyers and analysts, even in larger, well-run companies find themselves leaning on spreadsheets and “notes” (from their latest calls with supplies) when asked –

          “What’s the lead time of XYZ product?” – their own product, which is getting supply constrained.

          Most often, the product’s lead time data in their ERP systems is dated. Makes sense – most of the lead-time info in their ERP system is supplied by the buyer/planner’s spreadsheet.

          For component parts and critical sub-assemblies that are procured from suppliers, product companies are often totally dependent on the lead-time data they get from their manufacturing partners – CM[1] in hi-tech electronics product makers or Tier 1 suppliers in automotive and other manufacturing-intensive supply chains. With an arms-length relationship with the eventual parts’ suppliers (either Tier 2, or sometimes upstream), it’s not surprising that these numbers fed to the product companies can be dangerously stale.

          Astute operations and supporting IT teams understand these gaps – that ERP is a system for ‘recording’ (storing) lead-time data, and not designed to measure lead-time. They need a different approach, different processes to capture this data quickly and accurately, and often, a new enabling system.

          Astute operations and supporting IT teams understand these gaps – that ERP is a system for ‘recording’ (storing) lead-time data, and not designed to measure lead-time. They need a different approach..

          Tackling unreliable Lead times – Focus on right Process & System

          However, before embarking on a project to plug the gap – ‘fix lead-time’ data and systems, it’s important to identify any bottlenecks in the end-to-end processes from demand through supply planning and all the steps that lead to the subsequent shipments from suppliers. For supply chains that are impacted by long lead-times on components that are further upstream of their Tier 1 supplier (or CM/ODM[2]), analyzing this end-to-end process is just a start, and may not close the gap due to variability in component lead-times.

          If you have not done this, it is best to wrap your arms around product lead times looking at processes and interactions with the immediate upstream tier of supply, at the get go – i.e., between the product company and its Tier 1 supplier (CM/ODM).

          Once the process bottlenecks and disconnects are removed, the company is in a position to systematically measure the lead-time of their products from this vantage point (with Tier 1 supplier).

          As soon as companies gain visibility and some control over product lead time, they can plan the more demanding and potentially uncharted territory of expanding these processes to include critical Tier 2 supply.

          Design for Implementation and usage

          Once process related constraints are identified and resolved (via suitable agreements with supply chain partners to share data), companies can proceed to the next step, namely – providing a system enabler that works in simple manner to capture lead-times.

          Specialized solutions built on the cloud are ideal, since most processes are executed collaboratively. Ensure that the system is fast to implement and quickly gains traction with all users, including the supplier users. A “large, ERP mindset” (‘small army’ of people, ‘large’ implementation centered) and ‘hit-and-miss’ post implementation stabilization and usage, is a sure shot to an expensive failure.

          Take the lead with your Lead time

          A recent article outlines our findings of new approaches and innovations in process and system from younger, dynamic growing product companies that are successfully scaling operations while facing larger competitors, as well as larger technology companies with leading supply chain operations practices, both of which have navigated supply chain disruptions – large and small.

          Use the information from this article to brainstorm with your senior leaders (CEO/ COO) specific areas that need to be re-thought through and acted upon, both at a macro and micro-process level

          For example, in the case of macro-process, answer key questions such as –

          • How can product Lead times be measured systematically which is closer to reality (if not real-time)?
          • What is the end-to-end process and supporting system needed that can measure lead-times accurately?

          What is the end-to-end process and supporting system needed that can measure lead-times accurately?

          For micro-process dive into specific processes and system changes that are economically implementable, such as –

          • A Lead-time review process to identify lead time outliers and take corrective actions rapidly.

          Ideas from the above referenced article can help you define the extent of your lead time challenges and opportunities, providing you an outline of a few key process and system areas that need to be rethought, redesigned (as needed) and retooled. Use these to bring your lead-time picture into much sharper focus, gaining an operating advantage in the process.

          Lead time requires focused leadership on process and system. Falling behind is not an option.

          *Please email contactus@zyom.com with questions or additional information needs.


          [2] ODM = original design manufacturer (using in hi-tech electronics supply chains)


          [1] CM = contract manufacturer (in hi-tech electronics supply chain)


          [i] Reference: Chip Shortage Spirals Beyond Cars to Phones and Consoles Bloomberg, February 7, 2021
          https://finance.yahoo.com/news/chip-shortage-spirals-beyond-cars-200059989.html

          Collaboration – One small step.. A big operating advantage

          Collaboration is powerful! Dan Tapscott, in his TED talk, explains how starlings, small birds, can take on larger predators when they fly in formation with hundreds or thousands of other starlings[1].

          To date, the word ‘collaboration’ has been used profusely in business text and talk. However, we have barely moved the needle in product innovation, production and distribution that smart collaboration can result in. This is surprising given the transformation that has taken place in the technology world – from a ‘desktop centered’ to an ‘internet-enabled’ consumption, creation and distribution of information –that is fairly ubiquitous world-wide.

          Poor responsiveness of far-flung supply-chains

          A recent Economist Special Report[2] highlights how poor responsiveness becomes a big Achilles heel in extended supply chains with offshored or outsourced manufacturing. It points out how GE home appliances and Chesapeake Bay Candle have decided to ‘reshore’ manufacturing operations back to the US (from manufacturing sites in China and Mexico), to become “more responsive”.

          In 1999, I had the opportunity of designing supply chain collaboration software for companies such as HP and Dell. However, the promise remained unfulfilled, due, in big part to the relative immaturity of internet technologies. That has completely changed in the last 8-10 years. As a part of a startup – Zyom – we have been hard at work trying to realize this dream of internet enabled smart collaboration.

          At a recent webinar hosted by Zyom, Fred Harried, VP of Operations at Ruckus Wireless, explained – how collaboration was one of the key factors that enabled him to scale his Operations several X in the last 4 years, and how Zyom’s MozartCC system was a key collaboration enabler. Attached is a brief 6 minutes overview of some of the Q&A highlights from the webinar[3].

          This example highlights how a small step – the innovative use of internet for collaboration across partners provided a boost to a startup in handling changes much faster, ensuring low inventory exposure for all supply network partners – a true Win-Win.

          We are at the very early stages of utilizing the huge untapped potential of the internet for connected enterprises, their value chains and beyond – Collaboration may indeed be a disruptive advantage for Operations… more on that in the next blog.

          Drop a line – Do you think collaboration could provide a competitive advantage? Fuel growth? Be a Disruptor? Or, none of the above.


          [1] Don Tapscott: Four principles for the open world; POSTED JUN 2012; TEDGlobal 2012

          http://www.ted.com/talks/don_tapscott_four_principles_for_the_open_world_1.html

          [2] The Economist, Special Report – Outsourcing & Offshoring, Jan 19th, 2013

          http://www.economist.com/blogs/schumpeter/2013/01/special-report-outsourcing-and-offshoring

          [3] ZyomTV – Scaling Operations-Zyom Webinar Q&A Highlights (Dec 7, 2012)

          http://youtu.be/GvSTb2nmoq0

          Operating in 2013 – Have you considered this Transition?

          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” [1] 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.


          [1] Clayton Christensen ‘The Innovator’s Dilemma’

          The Biggest Risk to Supply Chains (circa 2012) and How Not to get Blindsided

          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:Scaling Mount Moving Target

          –          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?


          [i]  Japan and the global supply chain: Broken links; The Economist; March 31st, 2011

          http://www.economist.com/node/18486015/print%205/8/2011

          [ii] German Chemical Plant Fire Threatens Auto Backlog; April 23, 2012
          via NPR, http://n.pr/Jjco6q

          [iii] Smartphone Biz Hurt by Own Success as Chip Supply Shrinks; King, Satariano and Culpan – May 14, 2012
          http://www.bloomberg.com/news/2012-05-15/smartphone-biz-hurt-by-own-success-as-chip-supply-shrinks.html?cmpid=yhoo

          [iv] Automakers Avoid Crisis After Scramble For Resin;  Fri, 04/27/2012, AP
          http://bit.ly/auto-resin-supply-shortage-2

          [v] Report: UMC benefits from TSMC 28-nm supply shortage;  May 17, 2012
          http://www.eetimes.com/electronics-news/4373239/UMC-benefits-from-TSMC-28-nm-shortages

          [vi] Don’t let your Supply Chain Control Your Business; Choi & Linton; HBR, Dec. 2011
          http://hbr.org/2011/12/dont-let-your-supply-chain-control-your-business/ar/1

          [vii] Case Study – Accelerating Demand Responsiveness while facing Uncertainty and Growth
          http://www.zyom.com/Education/CaseStudyindex.php

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