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

May 24, 2012 4 comments

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

Demand Responsive Operations – A Critical Capability for Uncertain times

Chronic macroeconomic uncertainty (since 2008) has affected global supply chains of large and small product companies in the following ways-

i) Increased demand volatility (huge, unpredictable swings)

ii) Hyper-sensitivity to Operational costs

iii) Inclination to hoard cash/ other liquid assets (even inventory)

Apple’s huge inventory of cash (about $97 Billion, as of  quarter-end 2011), underscores how the traditional wisdom – ‘saving for a rainy day’ – takes on a whole new meaning in uncertain times.

Thriving in Uncertainty – Key elements

Taking stock.. of response

Uncertain times open up a window of opportunity for companies. Smaller companies with strong product offerings that are competitive in price/performance can see sales solidify, even increase. How? Industry research [see note1] and our own work reveal companies are focused on building-out a key capability – End-to-End Responsiveness to Customer/Channel demand.

What does this mean? This is what a typical customer of a responsive company experiences:

“When we change demand, they act on it right away. I hear back from them quickly (within minutes) on what’s the impact – on availability and cost? Its quite accurate ..They present me with options. It’s great! I can make smarter decisions.. wish others did the same”.

This is much easier said than done. For Product companies that do not have a large-company’s purchasing power, to excel at ‘Responsiveness’ some key elements need be in place –

i) End-to-End Supply Chain visibility & execution

ii) Measurable Metrics to get an accurate & speedy picture of Total Supply Chain Response & Cost

Responsive Ops– What it is not? What it can be?

This doesn’t require huge investments in consulting or in expensive systems. What is required, to start off, is recognition at the leadership level that it’s a critical competency which needs to be mastered. Left unaddressed, it can become a huge problem.

Explaining a recent disappointing quarter – Meg Whitman, HP’s CEO, summarized the challenges this way – While HP is “world class” in buying components, “I’m not sure I’d say we were world class in terms of how we think end to end about supply chain.”

While this may seem applicable for large companies under duress, it is not. Far from it, this should make smaller, ambitious companies with innovative products galvanize their best resources to focus on this competency – End-to-End Supply Chain Responsiveness to Channel Demand. Reading closely the quote from Ms. Whitman implies – Purchasing power isn’t everything. End-to-End Supply Chain Responsiveness can be a singular disruptive competency that smaller companies can wield!

Has ‘Faster response’ or ‘End to End Supply Chain’ come up in internal discussions as an “issue”? In what context? Would you like to receive a Case Study on this topic?Learn more? Please let me know or leave a comment.

[note 1] UPS 2011 Changes in the (Supply) Chain Survey

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