This article originally appeared

in the 2012, No. 1, issue of

The journal of high-performance business

Supply Chain Management

Preparing for the

unpredictable

By Gregory C. Cudahy, Mark O. George, Gary R. Godfrey and Mary J. Rollman

B
 y 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.
a ccenture.com/outlook

The prices of copper, cotton, oil and

other commodities are fluctuating
wildly. Currencies and stock markets are
on a similar roller coaster. Governments,
grappling with debt overhangs and
entrenched unemployment, bounce
from fiscal to monetary solutions and
back again.
For companies with a global footprint,
the current volatility looms especially
large. Already burdened by huge
infrastructure, labor and logistics
issues as product lifecycles shrink and
customer expectations rise, they now
must mitigate the impact of shifting
customer behaviors along with sudden
and dramatic price and policy changes
on supply lines. Not surprisingly, many
fear they are fighting a losing battle.
In fact, 70 percent of executives who
responded to a recent Accenture survey
expressed dissatisfaction at their
inability to predict future performance
in the new normal of permanent market
volatility and the uncertainty it creates.
In addition, more than 80 percent of
our respondents were worried about the
resilience of their supply chains. And
with good reason.
Supply chain integrationthe
operations management mantra of
the recent past helped globalizing
organizations secure key relationships
across extended supply lines by tying the
operations of critical business partners
tightly together. By its very nature,
integration means a supply chain can
be only as good as its weakest link.
The slowest supplier defines a companys
ability to respond to market changes.
With their fortunes tied to those of
their selected vendors, many companies
now have supply chain structures too
inflexible for todays conditions.

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Consider, for example, that many US

metro-area grocers leverage supply
sources that are close enough to
allow them to carry three to five days
of inventory and depend on the short
lead time for replenishment. Because
they do not have the flexibility to

turn to other suppliers who might be

slightly more expensive but quicker
to deliver in a crunch, they can run
out of goods at the worst possible
timeslike after a major storm.
Indeed, the pitfalls of integrated
supply chains are plentifuland are
exacerbated by the fact that product
lifecycles for everything from cars to
consumer electronics have dropped
12 percent to 46 percent over the
past decade, depending on the product.
Not only have lengthy, inflexible
supply lines limited responsiveness,
they have done so in a period with
such shortened product lifecycles
that the majority of the profit for
many new products comes in the first
months or even weeks as opposed to
years or quarters.
Supply lines that are too tightly
integrated can lead to lost sales, a
diminished brand and lower profits.
When supply is disrupted and a
company cant quickly move to an
alternate source of supply, its fortunes
can plummetas happened with
companies in Japan after the recent
earthquake and tsunami, and in
Thailand after recent flooding. Companies whose supply lines emphasize
minimizing costs may not be able
to capitalize on new trends, because
it can take months to get a modified
product to store shelves in North
America or Europe from sources that
are far away.
As players struggle to operate in markets
characterized by continuous mini
booms and busts, tightly integrated
supply chains are actually deepening
the negative impact of volatilitylocking
in excess cost during downturns and
seriously cramping upside potential
when opportunities arise. Yesterdays
supply chain strengths, in other words,
have become todays weaknesses. And
all companies should be asking themselves exactly how vulnerable they
are to volatilityand just how resilient
their current supply chain structures
really are.

Planning ahead
Some riskslike natural disasters or geopolitical upheavalscannot be easily anticipated
and are uncontrollable, while others tend to be more expected and therefore more
controllable. Research has shown that although only 10 percent of manufacturers have
mature systems and processes that can anticipate and control certain risks, those that do
are 75 percent more profitable than their competitors.
Unknown

Uncontrollable
Natural disasters
Geopolitical risks
Epidemics
Terrorist attacks
Volatile fuel prices
Currency fluctuations
Port delays
Market changes
Suppliers performance
Forecasting accuracy
Execution problems

Known

Controllable

Source: Dr. David Simchi-Levi, Operations Rules: Delivering Customer Value Through Flexible Operations,
MIT Press (October 2010)

Reimagining the supply chain

A number of forward-looking companies
are seizing the initiative, howeverrising
to the challenge of permanent volatility
by reimagining their supply chains
as adaptable ecosystems of processes,
people, capital assets, technology and
data. Rather than trying in vain to
make every part of their operations
as adaptive as possible, they strive for
flexibility where it matters and focus
their efforts on operational flexibility
that drives profits, not just short-term
efficiencies.

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Research by MIT and Accenture,

respectively, has shown that while
disruptions in the balance between
supply and demand due to geopolitical
events and natural disasters get the
most press, disruptions due to volatility
from everyday occurrences like poor
supplier performance, forecast inaccuracy, and slow or inconsistent execution
actually cause more lost profits. At
the same time, they are inherently
more addressable. Further, regardless
of the type of risk or cause of disrup-

tion, companies that are more dynamic

in responding to these anomalies are
disproportionately more profitable
in fact, as much as 75 percent more
profitablethan their less adaptive
competitors (see chart, above).
In unpredictable markets, dynamic
supply chains are designed to meet
the specific needs of each customer
channel. If a particular product is
highly sensitive to media trends, for
example, suppliers may be willing to
commit to highly flexible manufacturing and distribution networks for
the front end of the product lifecycle
and then move to more cost-effective
methods toward the back end. Or if
consumers of another product really
care only about low price, then the
supply chain for that product must
ruthlessly drive out every last bit of
waste or excess cost.
Many consider maximum flexibility
the ultimate objective of every supply
chain function. Such functional
flexibility frequently comes at a cost,

Prognosticating: So who can you turn to?

Historically, companies have turned to third parties for reliable forecasts on everything
from commodity prices to inflation levels. They typically use these forecasts to plan
strategy and operations over the next three to five years.
But in an environment of permanent volatility, how effective are those prognostications?
Consider the results of a leading financial firms recent performance in predicting trends
for a single commodity: oil.
In 2008, the company published five different forecasts over a five-month period (from
May through October) for the average price of a barrel of oil in 2009. These forecasts
were, in order, $200, $148, $150$200, $110 and $50.
The actual average price of West Texas Intermediary crude oil per barrel in 2009:
$61.65. Had a company planned its distribution and transportation around the May
average, it would have had a very different plan than if it had used the October
forecast. And the price of oil is only one variable to consider in a supply chain.
Unfortunately, companies cannot just abandon the notion of planning or consulting
third-party forecasts. But they must do so understanding which factors matter most
to their operations and then prepare for different scenarios with partners that can
help them execute better instead of relying on companies that prognosticate without
consequences.

Different growth
strategies demand
a different set of
functional flexibilities
no two dynamic supply
chains are alike.

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however, which may or may not meet

the value equation of a given customer
segment. A truly dynamic supply
chain, synchronized end to end with
such critical functions as sales and
marketing (especially adaptive pricing
and promotion) to both sense and shape
demand, optimizes the level of flexibility
at each link in the supply chain based
on the value proposition of the specific
consumer targeted.
The degree of supply chain dynamism
varies, to be sure: Different growth
strategies demand a different mix
of functional flexibilities. And our
research confirms that no two dynamic
supply chains are alike, even within
the same industry or geography, and
that they frequently vary within
business units of the same company.
All, however, strive toward optimal
agilityand thus speed to outcome
within each functional domain. By
continuously re-optimizing as market
conditions change, they enable leading
players to better plan for (and mitigate)
a host of risks.

It is also important to note that this

approach differs from traditional
supply chain management in two broad
areas: fit with business strategy and
ability to execute. Simply put, those
with excellent strategic fit but poor
execution are effectively operational
dreamers, while outstanding execution
without a tight strategic fit results in
a supply chain system that, although
efficient, underperforms. High performers must excel at both strategy and
execution (see chart, page 6, for critical
characteristics).
Accenture research reveals five
imperatives critical to the success of
any dynamic supply chain.

A more adaptive operating

model and variable cost structure
that is fit-for-purpose to business
unit strategy
Building an appropriate supply chain
operating model is a key first step in
becoming dynamic. And an adaptive

model, optimized by a variable cost

structure, is becoming increasingly
criticalespecially considering the
steadily diminishing benefits of pursuing
lowest-cost sourcing focused narrowly
on labor rates. Taking a total landed
value view, where all costs are consideredinventory, lost opportunities and
other risk factorsfrequently yields very
different answers than the strategies of
many more traditional models.

and vastly more efficient, end-to-end

system. The entire purpose of standardization changes dramatically under the
dynamic model: Whereas standardized
processes under integration were all
about driving out variance and costs,
standardization in the new era is all
about being able to adapt rapidly with
extreme precision while minimizing cost
of response.

In many cases, labor frequently

represents less than 10 percent of
direct costs (and an even smaller
percentage of total landed costs) for
many items. Transportation costs,
by contrast, continue to consume a
rising proportion of total costs, as do
commodity-related costs. And companies
with lengthy supply lines struggle to
achieve timely responses and swift
execution, needlessly building excess
inventory that must eventually be
either discounted or written off.

Risk anticipation and

rapid mitigation

These pressures are driving more and

more organizations to abandon the
wholesale offshoring strategies so
popular a few years ago in favor of
strategies that include hemispheric
sourcing, closer to home. Witness,
for example, how some European
TV manufacturers shifted production
from China to Europe to be closer to
the customer and to keep manufacturing
costs and market response times down.
Companies that make televisions for the
US market have similarly reemphasized
the Mexican maquiladoras that just
a decade ago were almost completely
abandoned in favor of China and other
East Asian production locations.
Such companies are also using
standardized processes and systems to
make themselves better able to rapidly
scale or shutter operations based on
short-notice demand.

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A European food company, for instance,

recently integrated a previously
heterogeneous supply chain organization,
spread across 54 production facilities
(most of them abroad), into a single

Speed of response is a critical capability

of dynamic supply chains, and the key
to mitigating risk and swiftly implementing the changes that will make the
supply chain still more resilient. But
response time hinges on the companys
ability to proactively identify highrisk events, and to decide whether to
design the operation to flex to known
risksthose that are unpredictable but
relatively more likely to occuror to
have contingency plans for the unknowablerisks that are unlikely to occur but
are potentially catastrophic.
Most companies are woefully inadequate in this regard. Only 11 percent
of our global survey respondents
reported that they actively manage
supply chain risk. Indeed, only 18
percent have formal supply chain risk
management systems in place. And
fewer than 20 percent of respondents
have made the executive team responsible for this crucial function.
Our experience suggests that being
able to distinguish among and between
risks is a key differentiator. And there
are predictive and real-time risk management technologies available that
companies can use, in combination
with scenario planning and execution
technologies, to drive far greater levels
of supply chain dynamism.
Some companies choose to use the
services of third parties, such as intel(Continued on page 7)

Evolution of a key business function

Since the 1980s, supply chain management has gone through several phases, beginning
with functional excellence and then moving through integrated supply chains and
extended enterprises. We are now entering a new phase of dynamic supply chains, in which
companies are constantly adapting and adjusting to changing conditions in the economy.

Functional
excellence

Integrated
supply chain
1980s

Fit with
business strategy

Ability to execute

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Extended
enterprise
1990s

Dynamic
supply chain
2000s

Onward

Role of
supply chain

Meet internal
commitments

Meet a customer
commitment

Design and fulfill

Design, fulfill
and drive profit

Extent of
influence

Departmental
boundaries

Company
boundaries

Selected partners

Ecosystem/
network

Financial focus

Cost

Cost and service

Drive value

Dynamically
optimize
trade-offs

Operational focus

Compliance

Interdependence

Collaboration

Agility

Order
management
philosophy

First come,
first served

Available to
promise

Capable to
promise

Profitable
to promise

Partner
integration

Arms length

Tight integration

Rationalization
(less is more)

Interchangeable

Supply/demand
balancing
approach

Produce to
a schedule

Fulfill aggregate
demand

Forecasting and
differentiated
fulfillment

Sense, shape
and respond

Decisioning

Siloed

Team-based

Rapidly address
the urgent

Rapidly address
the important

Risk factoring

Afterthought

Buffers in
the system

Contingencies
and redundancies

Predictive and
responsive

Event horizons

Months

Weeks

Days

Near real time

Technology

Standalone
applications

MRP/DRP

ERP & bolt-ons

(can plan)

Adaptive layer
(cant plan)

Talent

Job functional
specialist

Multitasking:
Expert in
several areas

Career:
SCM as a broad
professional

Leadership:
SCM as a business
to be run

(Continued from page 5)

ligent risk services providers. Using

a cadre of professionals, sophisticated
predictive systems and a global network
of data gathering resources, services
of this kind can provide information
almost in real time, predicting risks
such as port shutdowns, calculating
the probability of labor unrest in given
geographies, and assessing the impact
of natural disasters or political strife
on in-region operations. Making these
alerts part of a companys global
operations can help businesses respond
much more quickly than their competitorsby rerouting shipments around
projected problem areas, for example,
or by committing to incremental
production capacity to fill in for
potential shortfalls.

Enhanced visibility and profitable

allocation of capacity
Dynamic supply chains are networks,
not only of inter-enterprise collaboration
but also of external relationships.
And the information they supply can
enhance decision making and enable
successful responses.
Consider, for example, how Procter &
Gamble leverages crowdsourcing to
boost its innovation capabilities and
supply chain responsiveness. This is
not purely for the value of new ideas,
although the exercise is valuable for
this reason as well. It also allows the
company to capitalize on immediate
market trends that a more traditional,
inflexible R&D environment might not
be able to adapt to. In addition, other
functions within the company can see
the potential new product portfolio
which gives them a greater ability to
plan for sourcing, manufacturing, distribution and servicing well in advance of
the launch of the new items.

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Adaptive technologies can also help

ensure the most appropriate and efficient
allocation of resources. This includes
applications such as global freight

and customs optimization from GT

Nexus, Amber Road and others, as
well as retail merchandise allocation
from Predicitx and other cloud-based
providers of adaptive software-as-aservice. It also involves integrating
supply chain systems with pricing and
promotion systems.
Of course, even the most adaptive
supply chains cant be infinitely
responsive. There are not only cost
limitations but actual physical limitations as well. By linking supply chain
technologies to sales and marketing
systems, companies can sense and
respond to real-time market needs;
they can also send triggers back to
the pricing and promotion side to
shape demand where the operations
do not have the capacity to fulfill the
need. Companies such as Dell and
Amazon.com have become masters at
this particular capability.

Executional excellence
consistent with the stated
operational strategy
Excellent execution is critical to the
daily operation of a dynamic supply
chain. Agile, accelerated processes
help make execution predictable,
thus ensuring certainty of outcome.
And leading practitioners of dynamic
supply chains have invested in core
business processes that are fully
aligned with their business strategy
and operating model.
Take one of the worlds largest
container manufacturers, with more
than 20,000 people working in dozens
of plants around the globe. As part
of its supply chain transformation,
the company extended its supply
chain beyond the traditional four walls
of manufacturing and distribution
across all functions and value streams
including new-product development
and supplier management.
As part of its product development
process, unique templates must be

Adaptive execution: Dealing with the Oprah Effect

For years, American television personality Oprah Winfrey was
able to drive major consumer demand simply by featuring a
product or service on her TV show or in any of the other channels
in her media empire. Nowhere is this truer than in the publishing
industry, where being featured as part of Oprahs Book Club
resulted in a near-instantaneous spike in demandturning a book
with a small first printing into an immediate bestseller of more
than 1 million copies. To protect the integrity of her Book Club and
the freshness of her topics, Oprah clearly didnt share who or what
she was planning to promote.
So a publisher must be super happy to get all that incremental
demand, right?
Well, sure, if you have the stock. But few have an extra eightfold of stock just lying around a warehouse. And since the most
cost-effective printing companies are frequently far offshore
(using onshore printers on short notice is likely to mean significant
expediting charges), the choices seem poor: Either print close to
the market at major cost or miss the brief demand spike, during
which profits could be dramatic.

While the advent of the Kindle and other digital readers has clearly
been a major help, physical books still represent a significant
source of profit, especially for new releases.
A leading US-headquartered publisher addressed the issue by
making several changes to its processes to improve the companys
ability to adapt to demand spikes. First, it created a set of analyses
to determine which titles were most likely to be selected in
venues similar to Oprahs Book Club. Second, for these titles, the
publisher arranged to have electronic files ready for production at
a select group of onshore and offshore printers.
Finally, for those titles that do indeed see demand spikes beyond the
publishers initial forecast, production is allocated to nearby (albeit
somewhat more costly) printers to capture the demand for the
short lifecycle the book is likely to have. Only enough production
is allocated to the higher-cost printers to cover the time it takes
to produce and bring to-market the inventory from lower-cost
offshore producers. The result? A major increase in profits, and
significantly less customer dissatisfaction from the book not
being available.

designed and produced to generate

prototypes for customer approval
and, subsequently, for manufacturing.
Company executives recognized
the immense advantage of reducing
template-development time and did
so, delivering a more than 60 percent
reduction in cycle time. Coupled with
ongoing improvements in manufacturing
and logistics, the company dramatically
reduced end-to-end design to deliver
time. This led to improved customer
satisfaction, increased market share in
the high-margin end of the business
andmore importanta more agile
organization, ready to respond to future
changes in demand.

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Even if there are setbacks along

the waya prototype is completely
different than expected, or a customer changes his or her mind
unexpectedlythe companys industryleading response time allows it to
recover and still deliver faster than
its competitors. This excellence in
execution trumps the need to forecast
with perfection.

A culture of constant change and

supply chain as a profession
Its essential that the organization as
a whole understands all components
of a dynamic supply chain strategy.
And the culture of the organization
should enable people to think and act
dynamically. Not all the necessary skill
sets will be sourced in-house.
A North American retailer recently
faced significant challenges expanding
beyond its traditional product mix.
The company experienced lost sales,
excess inventories and poor in-stock
performance because of the greater
complexities associated with managing
the global supply chain of the broader
product mix. Specifically, the planning
team lacked the competence and experience necessary to manage the forecasting
and replenishment process and the
additional complexities brought on by
the new categories.
In response, the retailer developed an
innovative solution that segmented

For further reading

The Risk Masters, Outlook 2011, No. 3
The New Game of Supply Chain Risk
Management (Accenture, 2011)
The Dynamic Supply Chain Webinar:
http://www.accenture.com/us-en/Pages/
insight-dynamic-supply-chain-webinar.aspx
For these and other articles,
please visit www.accenture.com.

the complex product categories from

the more traditional grocery categories
and outsourced the forecasting and
replenishment functions to a firm with
the skills, experience and processes
needed. The results were significant
and almost immediate. The company
improved productivity and profitability
and became more agile in handling
rapidly changing conditions in the
marketplace.

Where to start?
Clearly, achieving the optimal level
of dynamism across a companys entire
operating model is not going to happen overnight. But where do you start?
How do you know where to go, and
how far is enough?
While the process of transforming into
a fully dynamic supply chain model
needs to be tailored to the strategic
needs of each individual company (and
even each business unit), there are
three initial steps that any company
can take to jump start the process.
1. T hink portfolio of supply chains.
To create a dynamic supply chain,
companies must first understand
their customers needs and then
define the appropriate kind of
structural flexibility for meeting
those needs. Before defining the
number of unique supply chains in
its operating portfolio, the organization must have an understanding
of current and anticipated business
strategies, and the core value prop-

ositionswhether it be innovation,
customer intimacy or low cost
offered to each customer segment
by product family and geography.
2. Define the dynamic operating
model. Once the organization
understands which inherent characteristics each supply chain needs,
that supply chain must be modeled
and then rigorous sensitivity analysis
performed against a host of business
and economic conditions. Rigorous
modeling also enables the organization to understand the day-to-day
risk sensitivities that really matter
to the bottom line, with contingencies for events that, although
unlikely, are possible.
3. Establish a value-sequenced transformational roadmap. Since every
company must deal with managing
change without putting existing
business at risk, sequencing is every
bit as important as timing. Furthermore, todays economic environment
does not allow for big bang efforts,
where results first begin to accrue
years into the future. A proper
dynamic supply chain roadmap is
grouped into a series of capability
releases that build upon one another,
starting with foundational activities
and early wins that generate quick
cash flow, and produce measurable
operational and financial results at
each step in the journey. Thus, the
majority of these transformations
rapidly become self-funding.

The efficient-at-all-costs integrated supply chain model is a thing of the past

in an era of permanent volatility. By carefully tailoring their supply chains
for optimal end-to-end flexibility, companies can embrace the unpredictable
anticipating and mitigating risk, enhancing visibility and capacity allocation,
and facilitating much more adaptive execution.

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About the authors

Gregory C. Cudahy is the North American managing partner of Accentures Operations
group. With more than 30 years of experience across management consulting and
technology, he leads a team of specialists in supply chain management, rapid profit
improvement, cross-enterprise process-led transformation and operations management
services. Mr. Cudahy is based in Atlanta.
greg.cudahy@accenture.com
Mark O. George heads the global Operations and Process Transformation group in Accenture
Operations. His experience in operations and business transformation spans three decades.
Mr. George, who is based in Dallas, is the author of The Lean Six Sigma Guide to Doing
More with Less (John Wiley & Sons Publishing, 2010) and holds US patents in Lean analytics
and Enterprise Speed.
mark.o.george@accenture.com
Gary R. Godfrey leads Accentures Global Integrated Planning and Fulfillment group.
In his almost 20 years with the company, he has served a diverse set of global clients
with supply chain strategy, network design, managed supply chain services, supply chain
transformation, transportation management, logistics planning and direct store distribution
systems. Mr. Godfrey is based in Atlanta.
gary.r.godfrey@accenture.com

Outlook is published by Accenture.

The views and opinions in this article
should not be viewed as professional
advice with respect to your business.

The use herein of trademarks that may

be owned by others is not an assertion
of ownership of such trademarks by
Accenture nor intended to imply an
association between Accenture and the
lawful owners of such trademarks.

For more information about Accenture,

please visit www.accenture.com

Copyright 2012 Accenture

All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.

Mary J. Rollman, a senior manager in Accenture Operations, has more than 15 years
of experience in supply chain management across several industries, including retail,
consumer packaged goods and pharmaceuticals. Ms. Rollman is based in Los Angeles.
mary.j.rollman@accenture.com