Are you a supply manager? Are you working in any part of a supply chain? The last two years have not been fun for any of us, no matter the industry we serve in. I’ve been working in supply chain management for the past 28 years and I have never experienced anything like the total disruption we’ve seen over the past 18 months. The basic tenets that guide our actions have been totally thrown out the window due to the Covid-19 pandemic and more recently, the war between the Ukraine and Russia.
What do we Supply Managers do ?
We manage supply. LOL! We are responsible for ensuring that the business has what it needs in order to function/produce. As supply managers, we are guided by 2 main tenets in terms of the basic mechanics of our function: demand and lead times. We must know how much is needed and when it is needed (demand), and then we need to know how long it will take to arrive (lead time) so we can ensure that the demand is met in a timely manner.
Changes Across the Supply Chain
When the world shut down two years ago, the best laid demand plans were upended in dramatic fashion. As the planet hunkered down behind closed doors and shuttered windows, we saw our traditional routes-to-market shifting as people worked from home, therefore consuming in-home. Items formerly in high demand to support commutes, office work, socializing and entertaining were left to languish while those things that were consumed in home and that brought comfort saw increases in overall demand. Consumers used online channels more as movement was restricted.
Then as restrictions across the globe relaxed, pent-up demand coupled with hot spots in supply chains, impacted by workforces out of commission due to virus flare-ups, led to bottlenecks in supply. In some cases, supply simply could not keep up with demand. In other cases, the logistics could not support timely movement of goods from supply point to demand point. Lead-times went out the window. Huh? Yes they did! Once upon a time we were able to say: “When I order X from Brazil, it will take 35 days to get here.” The best we can do now is: “When I order X from Brazil, it ought to take 35 days to get here.” Then we saw it taking 2 months or 5 months to get here… Did your colleagues in the business look at you as if you had lost your mind when you couldn’t speak definitively to lead times? Only happened to me?
So what did we do? What should we be doing?
Let’s press on. Two years later, how has the management of supply chains changed? How should they be managed in this brave new world?
A (Renewed) Focus on Demand Planning
“How much will you need, and when?”
While an irritating question in most businesses (“just make sure I have what I want when I want” is the general sentiment of those sitting outside of supply management) it is one that absolutely must be contended with today, given the protracted, uncertain lead times, and the uncertainty of supply from traditional or legacy supply sources.
Best in class organizations have build robust demand planning functions that rigorously collect sales and usage data, run them through complex, highly evolved forecasting models, interrogate this projected demand with the Sales and Marketing functions and then agree on the number that the business will be guided by, that all revenue and profit projections are informed by. Simple, right? No. It never is. But it must take on new importance in this even more dynamic world. Focusing more time and energy on getting as close as possible to real demand is a worthy investment. Even if the business hasn’t implemented a best-in-class approach to demand planning with all the attendant bells and whistles, there are steps they can take in that direction.
No Forecasting Models? Start here.
In planning meetings, when discussing past and future performance, in addition to speaking about dollars and cents, be sure to speak in terms of volumes too. Performance is predicated on specific items being sold in specific volumes. This is what the supply chain management function is supposed to make happen: those items in those volumes during those periods. Review past performance relative to the sales plans (volumes please!) and discuss future performance in these specific terms to drive alignment between finance, sales, marketing and supply management.
Get comfortable looking at past performance in terms of actual unit sales vs projected unit sales (not just dollars and cents, but also volumes). Discussing performance at this level will quickly bring to light emerging market trends and opportunities ready to be exploited that may not be evident when simply looking at top-line and bottom-line numbers.
Many organizations are driven by historical performance. But in an environment where demand is increasing, historical sales/usage are lagging indicators and that organization is ceding ground if it remains guided by history rather than by opportunities out there. Historical performance does not take new opportunities into account. As restrictions eased during this pandemic era, I saw demand in the markets I serve, increase in several cases by upwards of 40 and 50%! Typical safety or buffer stocks run in the region of 15-25%. Pro-active demand planning would likely have spotted this massive upswing in demand and provided the basis on which supply management would support the business in ensuring better alignment between supply and demand.
Just-In-Case vs Just-In-Time Inventory
In Jamaica, many organizations have taken strategic decisions to increase the inventories they carry. Gleaner reporter Karene Bennet in the Sunday Gleaner of May 22, 2022, reported that local organizations have shifted from a “just-in-time” inventory management philosophy to a “just-in-case” one. Larger manufacturing and distribution organizations according to Ms. Bennet are carrying between 35% and 45% more inventory than normal. This is a common-sense strategic decision taken to mitigate the risks of stock-outs due to real supply constraints from source as well as the uncertain and protracted lead times due to logistical challenges globally.
Once upon a time, we supply managers treated lead times as a given. Today, we simply can’t do this. Transit times are longer, space on shipping vessels is limited and shipping containers are short. From where I sit, I see all this happening from almost all supply points: Asia, Europe, South America, North America and Central America. It remains a grave and real situation. No longer can you claim a particular lead time with any degree of certainty. Even if your supplier has product, the transit time from them to you is a moveable feast, with delays and roll overs being the norm today.
Carrying more inventory to hedge against supply risks comes at a cost though, and resources are not infinite. The prudent business will therefore need to make strategic decisions as to which products are important enough to incur the costs associated with carrying higher inventories. The business needs to contemplate three factors to make these strategic decisions:
- Which products bring in the most revenue?
- Which products bring in the most profit?
- Which products best represent our brand and will keep it alive even as we cull other products in order to channel our resources where we’ll get the greatest returns?
Time for new suppliers!
Another risk mitigation strategy that we supply managers ought to be implementing is strategic sourcing. What exactly does this mean though, Kelly. You’re bandying the word “strategic” around. Make it real please! Ok. Stay with me now…
For those in the food business, climate change has been a real risk that supply managers have been managing for years now. Crop failures due to drought, flood, or disease in one part of the world have made it necessary to approve and appoint alternative supply sources in another part of the world unlikely to be experiencing the same disruptive forces. The war over in Europe I know has prompted supply managers to look elsewhere for inputs previously sourced from that region as production and supply have been dislocated because of the conflict. Gone are the days when you combined your demand and placed it with one supplier to provide to benefit from volume price discounts. Supply reliability has been brought into sharper focus today. Alternative suppliers and a diversified supply base ought to be standard features of today’s optimized supply chain. This is strategic sourcing: identifying the risks impacting your supply chain and making supplier choices aimed at mitigating these risks.
Yes, it is more work. It means assessing and testing the alternative products. It means harassing Production to test and approve. It means negotiating for credit terms. It means working out new logistics arrangements for this new source. It is an iterative, back and forth process that doesn’t always end the way you want. But someone’s gotta do it. And if we say we “manage supply”, this means we’re the ones that gotta do it.
The Cheese Stands Alone. The Supply Management Function Doesn’t.
To survive and indeed flourish in this increasingly complex and uncertain world demands even further actions on the part of the business as a whole if it is to remain viable: scenario planning, strategic foresighting and contingency planning around current products and services are critical! With the supply environment as dynamic as it now is and with all its attendant risks, it suits businesses to undertake these three activities with the supply management function as an active participant in the process. It is beyond the scope of this post to go into detail on how the supply management function can add value to scenario planning (coming up with “what if” situations then planning the business’s response) and strategic foresighting (exploring different plausible futures that could arise, and the opportunities and challenges they could present). Suffice it to say, planning without input on the supply outlook is setting yourself up to be blindsided by risks that the supply function is familiar with and that the wider business may not be aware of, and also to possibly overlook emerging trends that the supply manager is aware of coming out of interactions with suppliers.
Certainly, the supply chain management function can and should be part of contingency planning. What if the supply of your key input or product is suddenly cut off for whatever reason? It happens. Does the business fold up and die? Contingency planning provides the business with a pathway to survival and even profits in the event something as catastrophic as this happens. Again, with the new and emerging risks in global supply chains, it only makes sense to involve the supply management function in these plans. If A isn’t available, let’s sell B. What is the supply outlook for B? Can we ramp up inflows of B to compensate for the shortfall in A? Only the supply function can answer these questions.
So, Dear Supply Manager: What You Doin’?
Now more than ever, it is critical for the supply chain management function to be guided by demand plans arising out of more focused planning, to proactively manage risks around actual supply in relation to demand by diversifying the supply base, to mitigate the impact of shipping and logistical disruptions which continue to wreak havoc across supply chains by carrying more inventories as determined by the strategic plans of the business, and to participate in future and contingency planning exercises.