Weekly News

Lessons in Business Continuity

September 22,2017 08:11

This week, business continuity are front page news. They cross many industries. Toys R Us and Aerosoles announced bankruptcy. Sears and Macy's are restructuring. Ford idled five plants. (Following seven years of automotive growth, automotive sales are ...

This week, business continuity are front page news. They cross many industries. Toys R Us and Aerosoles announced bankruptcy. Sears and Macy's are restructuring. Ford idled five plants. (Following seven years of automotive growth, automotive sales are weakening; and, the car giant did not sense the shift in consumer demand to larger crossovers and SUVs.)
Mother nature is also playing a heavy hand. Earthquakes in Mexico. Hurricane Irma, Jose and Maria are ripping through the Caribbean. Houston is reeling from Harvey.
Corporate Boards are also asking more questions on operational strategies and growth initiatives. Shareholder activism at P&G by Trian questions the operating model of an iconic company. It is a similar pattern that drove the Dow/Dupont's merger that results in the restructuring of Dow/Dupont assets into three new companies.
Insular Supply Chains. They Are Not Tethered
So how do we tether the supply chain to markets? Strategies to execution? Let's start with a discussion on how to tether a supply chain. I feel that the supply chain needs to be tethered to markets--channels, shareholders and suppliers. And, innovation needs to be tethered at the process level. If not, it will swing wildly with the possibility of out-of-control gyrations.
Most supply chains are not tethered. This is true for internal operations and external processes. They cannot sense markets. The primary driver is cost. Risk management is usually an afterthought. In this post, I address two questions. How do we tether the supply chain to markets? And strategies to execution?

Damaged sail boats washed ashore are seen in the aftermath of Hurricane Maria in Fajardo, Puerto Rico, Thursday, September 21, 2017.Puerto Rico braced for potentially calamitous flash flooding after being pummeled by Hurricane Maria which devastated the island and knocked out the entire electricity grid. The hurricane, which Puerto Rico Governor Ricardo Rossello called 'the most devastating storm in a century,' had battered the island of 3.4 million people after roaring ashore early Wednesday with deadly winds and heavy rain. / AFP PHOTO / Ricardo ARDUENGO (Photo credit should read RICARDO ARDUENGO/AFP/Getty Images)

Sole Focus on Costs. Next let's discuss risk and business continuity. As Hurricane Maria rips through Puerto Rico, I think of all of the pharmaceutical companies with manufacturing operations on the island. It is the 5th largest concentration of pharmaceutical manufacturing with 80 manufacturing plants in Puerto Rico. The reason? Tax efficiency. As the roofs of these plants blow down the streets in Puerto Rico will people remember the decisions made to reduce taxation? Probably not. The discussions will be on business continuity. Did the teams that made the decisions to source in Puerto Rico not realize that there are hurricanes in the Caribbean? No, of course not. The tax advantages were appealing and the hurricane level was low at the time. Will this discussion now be rekindled? Absolutely. Unfortunately, adverse events and failure usually trigger the best discussions within a corporation.
Traditional Supply Chain Planning Operating in Isolation. Within the enterprise, multiple Enterprise Resource Planning (ERP) systems and planning solutions, supply chain strategy at a board level does not easily translate into operational decisions. (I work with one company with over 110 ERP systems and 30 planning systems based on many M&A activities.) As a result, procurement teams can make a sole sourcing strategies--single vendor sourcing to reduce costs-- can lead to the bankruptcy of a company like Aerosole. In the conference rooms of Aerosole where supply chain teams fought to regain continuity of supply when their sole-sourced producer failed in 2016, will they remember the decision made to lower cost? As the hard-fought inventory is sold at discount, will they remember this decision? Probably not. The problem is that we do not plan by design, the pressure for cost reduction is intense and the principles of supply chain strategy do not translate into operating plans. The risk for sole sourcing at Aerosole was high, but the short-term reward for cost reduction was higher. The decision was probably made on an Excel spreadsheet within a group in a back conference room on the fifth floor of a large office building. (I lovingly term these groups an Excel Ghetto.)
Need to Sense Markets. Build Outside-in Processes. As the manufacturing plants close at Ford or the stores fold at Sears and Macy's will groups redesign supply chains to be market-driven? I don't think so. Today's supply chains are very focused on supply at the lowest cost. Decisions happen in isolation. Organizations do not sense markets and miss the shifts in real demand. (Forecasts are based on linear optimization based on past history despite a wealth of market data. In contrast, market-driven value networks (or supply chains) are outside in. They use channel data and sense demand and reduce demand latency (the time to sense real market shifts).) In the 2007 recession, it took companies six months on average to sense the market downturn and make corrections. The reason? Companies do not use channel data to sense markets, and the processes are not outside-in. And, when they do, the corporation does not want to accept the data. Most organizations believe that they can beat the 1.5% growth rate of today's markets. (I frequently review strategy documents with 3-5% growth targets.)
Overstatement of Growth. It is a cycle. The pattern looks like this. Companies overstate growth objectives in supply chain strategies. Because the growth patterns are unrealistic, the company fails to meet the goals in the first two quarters and the board then turns to draconian cost-cutting measures in the back two quarters of the year. When this happens, the focus is on cost. Risk management takes a second seat. Bad decisions are more likely to happen. Gone are the days of 3.5% growth of the 1990's. Today's growth pattern is 1.5%. The supply chain teams need to be an engine of growth. Growth has the highest correlation of any metric to market capitalization.

Here are some steps to take:
1) Become Market-driven. Recognize that the order signal is not a good barometer for demand and use channel data. Build processes outside-in from the channel back. Reduce the time to sense true demand and translate accurate signals to supply.

Lora Cecere is a supply chain visionary. In 2012 she founded a company, Supply Chain Insights, to understand supply chain excellence. She actively writes weekly posts on the Supply Chain Shaman blog.

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