SCM: Streamline your supply chain
With most businesses having made aggressive budget cuts last year – from staff layoffs and business travel bans, to the elimination of virtually all “perks” – it may seem to some that there is little fat left to trim. According to research firm Gartner, in 2009, CEOs initially placed cost cutting at the top of their priorities to cope with the sudden and severe recession.
In 2010, however, the focus for the vast majority of business leaders is a return to revenue growth.
“GASPING FOR GROWTH”
“Business leaders are gasping for growth after a long period holding their breath,” says Mark Raskino of research firm Gartner. But supply chain analyst AMR Research, a division of Gartner, warns that breakdowns in companies’ supply chains could threaten that recovery.
An AMR survey of 150 global businesses found that 44 percent of executives believe the recovery cycle is the biggest risk in 2010. Executives cited potential commodity price increases, limited internal skills after workforce reductions, and problems meeting new demand with constrained capacity, low inventory, and transportation constraints as their chief concerns.
“Even as the economy begins to recover, the impact of the recession on manufacturers and retailers will be long-lasting,” explains Noha Tohamy of AMR Research. “Global supply chains will continue to face major risks in 2010 and beyond. As such, designing a supply chain risk management strategy is still crucial.”
Paul Cowley of global procurement finance specialist, Basware, cautions businesses to re-evaluate all areas of operational performance and supply chain tactics.
“When headcount reductions and unit cost savings are harder to realise, businesses must turn their attention to address more systemic inefficiencies,” Cowley says.
He says an unrelenting focus on cost cutting and uneasy relationships between finance and procurement professionals further combine to create an environment where supply chain risks, if left un-checked, can threaten companies’ stability.
“As cost reduction and control becomes the ‘new normal’, automation will continue to be a key component of realizing cost savings via operational changes,” he adds. “Organizations that will thrive going forward will be those that lift themselves out of purely reactive cost cutting directives and begin to think more strategically, adding a more systemic approach to address supply chain risk.”
BENEFITS OF PROCURE MENT
Though the advice might seem obvious, Professor Adrian Done of Barcelona’s IESE Business School says that, in spite of a high-risk economic environment, CFOs are failing to recognize the importance of closely managing supply chains through procurement. Research conducted by the university, in conjunction with Indiana University’s Kelley School of Business, found that less than a third of finance executives believe procurement has a significant impact on financial risk exposure.
“Businesses today are defined by their supply chains and some of the business failures of the last 12 months point to this as a root cause,” Done explains. “Finance departments across the globe have been guilty of ignoring the real value that their procurement teams can bring for decades now, so there is real truth in the suggestion that CFOs aren’t making the most of what can be an invaluable asset in the fight against the recession.”
He added, the subsequent finding that only 46 percent of the 100 global financial chiefs recently surveyed by the university see real integration between purchasing and finance processes is particularly alarming. “This represents a major break between two departments that should be working closer than ever to combat the downturn.”
If companies are to survive the turbulence of this year’s economic recovery, then more effective collaboration with key suppliers is critical, according to McKinsey. This is particularly true as CFOs’ traditional budget cutting options narrow.
THREATS TO RECOVERY
Fostering closer relationships with preferred suppliers is especially critical to helping companies identify operational efficiencies and potential cost savings, as well as the source of potential threats.
For example, new environmental legislation taking effect in the UK in April will require companies to improve operational efficiencies to reduce their energy consumption and associated carbon dioxide emissions. Those firms that fail to comply with the law will be subject to penalties equal to as much as 10 percent of their turnover.
These types of regulations mean businesses may have to re-negotiate the terms of their contracts with energy suppliers and put more pressure on electricity and IT providers to deliver energy efficiency products – or be prepared to look elsewhere.
The increasing threat of climate change to developing nations, such as China and India – core manufacturing bases for many big retailers in the west – should also be a consideration.
Currency-driven inflation and the weakening US dollar pose other risks that could interrupt the supply chain or create a logjam of orders, thereby reducing operational efficiency and increasing costs.
Rising commodity prices before the crisis, for example, led to the stockpiling of excess inventory. Now, however, falling commodity prices give customers an incentive to postpone orders and await better deals.
Meanwhile, a new factor – the dash for cash – exacerbates today’s difficulties, as the evaporation of traditional financing channels leaves companies desperate to shed inventory, reduce working capital, and squirrel away cash, according to McKinsey’s Christoph Glatzel. “One company’s working-capital reductions are another’s cancelled orders.”
The firm reports that some of its clients are establishing supply chain “war rooms”, with business leaders across production, procurement, logistics, and sales departments, to enable them to make fast decisions to cope with potential problems. These teams meet weekly, or even daily, to devise near-term operational plans.
“As companies rethink the way they plan, they must also learn how to act on the resulting decisions more quickly and flexibly,” says McKinsey.
“Remember that, for many organizations, a return to growth could, paradoxically, close the window of opportunity to improve the supply chain, so companies should take advantage of this time to work more efficiently with their partners.”
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”