æRoad to recoveryÆ
With consumer confidence on the rise, strategies change.
As of late May, many economic and financial indicators are inching upwards. Consumer confidence shot to its highest level since September 2008, and it will likely pull up various other indices.
Not that we're in the clear yet, by any means, but the American public is feeling better about their 'new normal,' having accepted it, taken the hit, adjusted their lives, cut their costs, and survived the recession so far. Simultaneously, companies have significantly cut back production. With inventories finally dwindling down, production will again be stepped up to meet demand, albeit at a lower level than in the past few years.
When the crisis hit last year, several companies made rash moves to cut costs, trim staff, close offices, shutter factories and distribution centers, and generally hunker down until they knew more as to where this was all going. The result: logistics services providers, ports and carriers have all taken a significant hit in demand for their services. For instance, the port of Singapore, a major hub for east-west trade, is running at 60 percent to 70 percent utilization, down from the 90 percent range last year. The recovery is coming, and when it hits, smart companies will be prepared to turnaround rapidly and reap the profits.
'Never waste a good recession'
Not sure who coined the above phrase, but it's brilliant and poignant. Supply chain service providers (SCSPs) ' I'm intentionally going beyond traditional logistics service providers, because as I've said in many recent columns that LSPs cannot afford to be in their little world ' they must expand their horizons and show their clients (manufacturers, distributors, retailers) where the value in supply chain lies in the new normal.
For manufacturers, distributors and retailers, this latter phase of the recession and prior to recovery is the perfect time to take stock of your situation, inventory all the destruction and havoc wreaked on your business to deal with the crisis, and start plotting your way out of the hole.
For this you need a 'Roadmap to Recovery.' It's time to figure out what capabilities you've lost, and which new capabilities this new world will require you to have in order to be competitive, green, innovation-rich, and responsive to your customers, and all while preserving value and cash in your business to deal with the continued havoc that even the recovery period will certainly bear.
Sumantra Sengupta, Hitachi Consulting's vice president of supply chain, wrote a very relevant article in a recent Supply Chain Management Review. He broadly brackets these ideas into cost management, revenue enhancement, and sustainability-related ideas.
We share some of these ideas with you:
Shift focus from traditional Order-To-Delivery to Design-To-Support. Focusing downstream in the supply chain is somewhat of a futile exercise with wildly volatile commodity and fuel prices, which are pretty much out of control for any independent manufacturer, distributor or retailer. Focus instead on what companies CAN control ' upstream, the design and development process for products. By picking the right mix of production technique and raw/packing material, with the right delivery to market approach, there's about 15 percent to 25 percent of the product cost that can be targeted for opportunities.
Look For hidden values in return logistics. 'Reverse logistics costs as a percent of revenue can range between 3 percent and 6 percent, depending on the type of industry and product.' This can be a tremendous source of competitive advantage for putting cash back into the business and generating value. For some industries, returns can be crucial to the bottom line. We are going to find more frequently in the future that companies are going to be held responsible for recycling their own products, such as electronics (think TVs, computers and cell phones). The sooner they get with this program, the more value generating it could be for them.
Manage the supply chain with floor-and-surge to deliver with increased agility and less waste. This one correlates well with our product segmentation model based on demand and supply characteristics of your products. Items with long supply chains are not very responsive in nature, and so you need to build in the mechanisms to deal with 'surge' demand differently from the 'floor' demand. Think responsiveness (surge) versus efficiency (floor).
Some other discussions we've had recently with eminent supply chain figures in the Americas have led to some other valuable insights that are on the cutting edge.
Have SCSPs manage a profit-and-loss line item as a whole new level of collaboration. We have clients who are getting out of their traditional proprietary manufacturing models and moving into the 'generics' space, so to speak. This model means having both responsiveness as well as on-demand flexibility. In order to do this, you can't just go out and contract your way to success. These manufacturers need to take traditional 'collaboration' to a whole new extreme. Imagine giving the entire 'distribution cost' line item of your profit and loss over to, say, Schneider Logistics to manage. It designs the chain, builds it, staffs it, manages it and monitors it as though it is an integral part of the manufacturer's business, not just a third-party contract vendor to be negotiated down every year. They share in savings, risks, returns and rewards.
Expand yield management principles beyond the airline/cruise/hospitality industry. Imagine that manufacturers charge retailers based on the lead time given to them for producing, stocking and shipping products. Orders placed closer to the requested timeframe of delivery cost more than orders placed with a longer lead time, just like your airfare difference when you walk up to a counter versus buying three weeks in advance. Service becomes more costly, and there's no reason for the manufacturer to absorb it.
Take stock, chart your path
Many new business models are coming into play with the recovery phase of this recession, and business has fundamentally changed in many ways. Businesses can no longer afford to run the way they used to. Consumers expectations are different, inter-company dynamics are different, the bandwidth of tolerance has been reduced, and there are more stresses and strains in the system. 'The old order changeth, yielding place to new.'
Deep R. Parekh is a partner with Equus Group LLC, a supply chain advisory services and management consulting firm based in New York and Sao Paulo. He welcomes feedback and comments at firstname.lastname@example.org and (917) 940-7538.