The journal o high-perormance businessThis article originally appearedin the 2012, No. 1, issue o
Supply Chain Management
Preparing for theunpredictable
By Gregory C. Cudahy, Mark O. George, Gary R. Godrey and Mary J. Rollman
By adapting their supply chains to lex with the markets, smartorganizations are learning to proit rom permanent volatility—insulating themselves against downside risk, and moving withspeed and agility to take advantage o the upside.
accenture.com/outlook
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Outlook 2012
Number 1
The prices o copper, cotton, oil andother commodities are uctuatingwildly. Currencies and stock markets areon a similar roller coaster. Governments,grappling with debt overhangs andentrenched unemployment, bouncerom fscal to monetary solutions andback again.For companies with a global ootprint,the current volatility looms especiallylarge. Already burdened by hugeinrastructure, labor and logisticsissues as product liecycles shrink andcustomer expectations rise, they nowmust mitigate the impact o shitingcustomer behaviors along with suddenand dramatic price and policy changeson supply lines. Not surprisingly, manyear they are fghting a losing battle.In act, 70 percent o executives whoresponded to a recent Accenture surveyexpressed dissatisaction at their inability to predict uture perormancein the new normal o permanent market volatility and the uncertainty it creates.In addition, more than 80 percent o our respondents were worried about theresilience o their supply chains. Andwith good reason.“Supply chain integration”—theoperations management mantra o the recent past— helped globalizingorganizations secure key relationshipsacross extended supply lines by tying theoperations o critical business partnerstightly together. By its very nature,integration means a supply chain canbe only as good as its weakest link.The slowest supplier defnes a company’sability to respond to market changes. With their ortunes tied to those o their selected vendors, many companiesnow have supply chain structures tooinexible or today’s conditions. Consider, or example, that many USmetro-area grocers leverage supplysources that are close enough toallow them to carry three to fve dayso inventory and depend on the shortlead time or replenishment. Becausethey do not have the exibility toturn to other suppliers who might beslightly more expensive but quicker to deliver in a crunch, they can runout o goods at the worst possibletimes—like ater a major storm.Indeed, the pitalls o integratedsupply chains are plentiul—and areexacerbated by the act that productliecycles or everything rom cars toconsumer electronics have dropped12 percent to 46 percent over thepast decade, depending on the product.Not only have lengthy, inexiblesupply lines limited responsiveness,they have done so in a period withsuch shortened product liecyclesthat the majority o the proft or many new products comes in the frstmonths or even weeks as opposed to years or quarters.Supply lines that are too tightlyintegrated can lead to lost sales, adiminished brand and lower profts. When supply is disrupted and acompany can’t quickly move to analternate source o supply, its ortunescan plummet—as happened withcompanies in Japan ater the recentearthquake and tsunami, and inThailand ater recent ooding. Com-panies whose supply lines emphasizeminimizing costs may not be ableto capitalize on new trends, becauseit can take months to get a modifedproduct to store shelves in North America or Europe rom sources thatare ar away. As players struggle to operate in marketscharacterized by continuous minibooms and busts, tightly integratedsupply chains are actually deepeningthe negative impact o volatility—lockingin excess cost during downturns andseriously cramping upside potentialwhen opportunities arise. Yesterday’ssupply chain strengths, in other words,have become today’s weaknesses. Andall companies should be asking them-selves exactly how vulnerable theyare to volatility—and just how resilienttheir current supply chain structuresreally are.
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Outlook 2012
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Reimagining the supply chain
A number o orward-looking companiesare seizing the initiative, however—risingto the challenge o permanent volatilityby reimagining their supply chainsas adaptable ecosystems o processes,people, capital assets, technology anddata. Rather than trying in vain tomake every part o their operationsas adaptive as possible, they strive or exibility where it matters and ocustheir eorts on operational exibilitythat drives profts, not just short-termefciencies.Research by MIT and Accenture,respectively, has shown that whiledisruptions in the balance betweensupply and demand due to geopoliticalevents and natural disasters get themost press, disruptions due to volatilityrom everyday occurrences like poor supplier perormance, orecast inaccu-racy, and slow or inconsistent executionactually cause more lost profts. Atthe same time, they are inherentlymore addressable. Further, regardlesso the type o risk or cause o disrup-tion, companies that are more dynamicin responding to these anomalies aredisproportionately more proftable—in act, as much as 75 percent moreproftable—than their less adaptivecompetitors (see chart, above).In unpredictable markets, dynamicsupply chains are designed to meetthe specifc needs o each customer channel. I a particular product ishighly sensitive to media trends, or example, suppliers may be willing tocommit to highly exible manuac-turing and distribution networks or the ront end o the product liecycleand then move to more cost-eectivemethods toward the back end. Or i consumers o another product reallycare only about low price, then thesupply chain or that product mustruthlessly drive out every last bit o waste or excess cost.Many consider maximum exibilitythe ultimate objective o every supplychain unction. Such unctionalexibility requently comes at a cost,
Source: Dr. David Simchi-Levi, “Operations Rules: Delivering Customer Value Through Flexible Operations,”MIT Press (October 2010)
Natural disastersGeopolitical risksEpidemicsTerrorist attacks Volatile fuel pricesCurrency fluctuationsPort delaysMarket changesSuppliers’ performanceForecasting accuracyExecution problems UnknownKnownUncontrollableControllable
Planning ahead
Some risks—like natural disasters or geopolitical upheavals—cannot be easily anticipatedand are uncontrollable, while others tend to be more expected and therefore morecontrollable. Research has shown that although only 10 percent of manufacturers havemature systems and processes that can anticipate and control certain risks, those that doare 75 percent more profitable than their competitors.
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Accenture Outlook: Preparing for the Unpredictable - Supply Chain Management
By adapting their supply chains to flex with the markets, smart organizations are learning to profit from permanent volatility—insulating themselves against downside risk, and moving with speed and agility to take advantage of the upside.
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