After two years of un-precedented pressure on margins, maximizing profitability during the upturn in demand tops the agenda for most companies.
That's the goal. Looking at what stands in the way of that goal, however, I wonder if Canadian companies truly have the
capability to meet demand growth that is becoming more complex while warding off costs that eat into profitability.
Three-fourths of respondents to a global supply chain trends survey I recently read considered demand and supply volatility and poor forecast accuracy to be the biggest roadblocks they currently face. Yet as the publishers of the survey, PRTM Management Consultants, pointed out many companies failed to do their homework during the downturn and surging demand now increases supply chain deficiencies in scope, scale, and speed.
Not only did many companies not implement strategies to prepare them for the upturn and future volatility but in the worst hit sectors companies put in place short-term survival measures to tightly manage inventories, costs, and cash flow that may be harder to transition from than one may think. That may be especially so with companies where key members of the supply chain team were laid off as a cost saving.
Respondents also expressed concern that the current demand volatility is not just due to the recent financial crisis and, therefore, will create a bullwhip effect during the recovery. "Many products are becoming more and more commoditized, with multiple competitors offering very similar features," said one industrial manufacturer participating in the study. Many B2B and end customers are simply shopping for the lowest price, overlooking their loyalty to particular products. And a lack of robust forecasting and planning tools contributes to the problem, as companies and their suppliers frequently find themselves scrambling to meet unexpected changes in requirements.
Most participants in the PRTM survey expected future business growth to come primarily from new international customers and products that are customized to meet their needs. As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012.
Specifically, more than three-fourths of respondents expected an increase in the number of international customer locations, and more than two-thirds expected a higher number of products or variants will be required to fulfill customer expectations and counter shrinking revenues. At the same time, nearly 30% of respondents expected the number of manufacturing facilities to decline until 2012, which reflects the expectation that their companies will increase outsourcing to external partners.
However, globalization and continued focus on offshore manufacturing and sourcing points to continuing struggles with issues yet to be resolved. The majority of respondents report that, while they have achieved substantial material and labor cost reductions through outsourcing, most have yet to see significant reductions in process or management costs. A vice president of supply chain for a leading industrial electronics company explains: "Unit costs are easy
to measure. When we move to a 'less expensive' supplier, we can see the improvement right away. But a lot of costs are hidden - costs associated with things like quality, site visits, and the loss of flexibility. We often spend more
expediting parts from a 'less expensive' supplier than we save on the material cost."
To overcome these challenges and achieve significant profit margin improvement is going to require a supply chain organization that is truly integrated across all functions and empowered to take action.
The survey results show we have a long way to go towards achieving that. A sub-stantial number of survey participants said that problems with the supply chain organization prevented their companies from capturing the benefits of the economic recovery.
Approximately 30% mentioned the lack of integration between supply chain functions like product development and manufacturing. Nearly one-fourth of survey respondents pointed to their organizations' inability to make quick decisions in response to sudden changes in demand or comparable challenges. The corporate supply chain department may be
in place but many firms have not yet empowered their supply chain managers to execute end-to-end improvement initiatives.
It's time they did so.