Supply Chain News: The Five Challenges of Today's Global Supply Chains

It's an Increasingly Complex Supply Chain World, New Report Says; Managing Five Key SCM Challenges will Determine Success or Mediocrity

A recent survey of some 350 supply chain executives from across the globe by the consultants at PRTM identified five key supply chain challenges for the next few years. Successful management of those challenges, the resulting report says, will be central to a company's ability to capture benefit from an eventual economic upturn.

Those supply chain challenges are:

Trend 1: Supply Chain Volatility and Uncertainty Have Permanently Increased: Market transparency and greater price sensitivity have led to lower customer loyalty. Product commoditization reduces true differentiation in both the consumer and business-to-business (B2B) environments.

Increasing volatility is a major issue. The report says that some 75% of respondents consider demand and supply volatility and poor forecast accuracy to be the biggest supply chain roadblocks they currently face. (See chart: http://www.scdigest.com/images/PRTM1.jpg)

The increased commoditization of products plays a key role here, even beyond the demand volatility associated with the recession. With an increasing ability and willingness of customers to find alternative supply sources, B2B customer demand can move up or down dramatically and rapidly.

"Customer loyalty has significantly decreased in the past 12 months," said one industrial manufacturer participating in the study.

What are companies doing to manage this volatility?

"Companies are focusing primarily on deepening collaboration with key customers to reduce unanticipated changes in demand," the report says. "Half of participants plan to implement joint "real-time" planning with their key customers by 2012, and nearly half plan to develop processes for improved demand sensing—that is, understanding the market rate of demand in real time, rather than having to wait for after-the-fact reporting."

Trend 2: Securing Growth Requires Truly Global Customer and Supplier Networks: Future market growth depends on international customers and customized products. Increased supply chain globalization and complexity need to be managed effectively.

Most survey participants expect that future business growth will come primarily from new international customers and/or products that are customized to meet customer needs. "As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012," the report says.

Interestingly, the survey found that while most companies expected growing complexity in the number and location of customers and in SKU counts and product variants, the majority expects a decrease in the number of manufacturing locations, primarily due to outsourcing, and in the number of suppliers they work with.

"Regionally configured supply chains will be the key to success," the report suggests. "These supply chains serve regional customers according to their requirements, while bundling supply chain partners, manufacturing facilities, and distribution centers as much as is economically possible."

 

Trend 3: Market Dynamics Demand Regional, Cost-Optimized Supply Chain Configurations: Customer requirements and competitors necessitate regionally tailored supply chains and product offerings. End-to-end supply chain cost optimization will be critical.

Survey respondents expect gross margins to increase over the next two years, not from better pricing power but - as is always the case it seems - from further reductions in supply chain costs.

Improved globalization of the supply chain and still more outsourcing were viewed as the main two levers to reduce supply chain costs.

The chart below is a good one, showing what supply chain related functions are done internally, either at a local or global level, or outsourced, as well as the percent change expected in outsourcing between 2010 and 2012.

But companies with large expectations for savings from outsourcing need to be careful - "The majority of respondents report that, while they have achieved substantial material and labor cost reductions through outsourcing, most have yet to see significant reductions in process or management costs," the report notes.

Leading companies understand the impact of these hidden costs and are taking aggressive steps to identify and manage them, PRTM says.

 

Trend 4: Risk Management Involves the End-to-End Supply Chain: Risk and opportunity management should span the entire supply chain—from demand planning to expansion of manufacturing capacity—and should include the supply chains of key partners.

The recession was a tough time for supply management, mostly around managing supplier financial risk. Some of those pressures are ebbing, but now many companies are looking to improve their supply chain performance by shifting more risk on to the backs of suppliers - and that means a new set of risk management challenges.

"Leading companies are taking an end-to-end approach in managing risk at each node of the supply chain. To keep the supply chain as lean as possible, they are taking a more active role in demand planning, which ensures that they order only the amount of materials needed to fill firm orders," the report says.

It says leading companies are also limiting the complexity of products that receive late-stage customization, and mitigating inventory-related risks by shifting the responsibility for holding inventory to their suppliers.

 

Trend 5: Existing Supply Chain Organizations Are Not Truly Integrated and Empowered: The supply chain organization needs to be treated as a single integrated organization. In order to be effective, significant improvements require support across all supply chain functions.

We've been at this supply chain game for more than two decades, but most companies still have a long way to go to integrate their supply chains, the report says.

Only by improving that level of integration while empowering supply chain managers to make decisions can the first four challenges be effectively met.

The challenge is to make decisions that optimize the total supply chain, not one function or node - something most companies realize, but still have a hard time achieving.

In 2010, approximately 50% of the companies will manage supply chain planning and S&OP on a globally integrated level, in contrast with 60% of companies projected for 2012, according to the study.

More and more companies of course are appointing a chief supply chain officer (CSCO) and at least have a single executive responsible for the end-to-end supply chain. But that is just one step in building a truly integrated supply chain. A continued focus on finding and retaining top supply chain talent is another.

The supply chain organization and its capabilities need to be seen as a "single resource" to the enterprise, the report says.

 

What is the New Supply Chain Agenda?

Synthesizing this data and insight, the PRTM report suggests the following five supply chain priorities for the coming few years, as below:

1.  Improve customer access and accuracy of supply chain planning

Improved point of sale presence/partnering concepts End-to-end supply cooperation / optimization Real-time demand and supply planningSupply chain response time reduction

2.  Increase upstream and downstream supply chain flexibility

Global network design adjustments Improved supply chain upward and downward flexibility Product and process complexity managementLate stage customization

3.  Focus on Total Supply chain cost engineering

Outsourcing of non-core functions Regionally configured, optimized supply chains Total supply chain cost and process optimizationLow-cost country  utilization

4.  Implement end-to-end supply chain risk management

Demand and supply risk optimization Supplier risk management Working capital and asset optimizationOptimization of key partner's supply chain risks

5.  Integrate and empower supply chain organization

Integrated supply chain organization across all functions Empowered decision making with clarity on global versus local responsibilities and functional decisionsAbility to deploy the right skill sets and expertise

Source: Supply Chain Digest

http://www.scdigest.com/ASSETS/ON_TARGET/10-08-12-3.php?cid=3649