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Supply Chain - A strategic lever in a weak economy

Today’s news headlines are largely depressing reading. So this weekend I steered away from the newspaper and in fact picked up a relatively new strategy magazine [which will remain nameless]. The magazine headlined a story “Top 7 ways to increase sales” and provided assorted articles on marketing/ how to increase revenue etc. Flicking through the magazine I was pleasantly surprised to see a section dedicated to Supply Chain but was simultaneously disappointed to see only four pages of commentary [out of a total sixty-six pages]on this very strategic lever!

A recently published Supply Chain analysts report also indicated that many companies have begun to recognize the Supply Chain as a strategic differentiator rather than just the cost of doing business. This is validation of my opinion that “The Supply Chain” provides the highest return for a company’s transformation dollar in terms of [shareholder] value created. This is specifically true for any company in an economic downturn.

The Share holder view of the Supply Chain is inextricably linked to margin protection or expansion. In reality supply chain initiatives and projects drive value in equal measure from cost reduction and top line growth. Most managers will recognize this to be true. Let’s consider an - example of how Infosys helped a large CPG Company understand top line impact of a Supply Chain investment.

Supply Chain drives increased RevenueIn a recent project at a large CPG company, Infosys was engaged in helping the client evolve a business case for making significant improvements in their retail fulfillment [Demand] chain. Over 50% of the revenue is driven by different [sales and marketing promotion] events. As you can imagine, this causes significant volatility in their supply chain resulting in unfilled orders and poor on-shelf availability.

Effectively, this was a double whammy. On the one hand the client lost sales while on the other hand they spent trade promotion dollars and did not achieve the estimated lift projected. I have not even started to mention the costs as a result of the inventory build-up in the supply chain because a special product missed a promotion window.

Similarly, in today’s economy, most industries [read value chains] are global in scale. The supply chain can be a source of significant competitive advantage – providing advantages other than lower cost. In the example above a key outcome of the successful implementation of advanced planning capability would be improved fill rates and customer satisfaction (CSAT). While CSAT clearly impacts the top line, it is a major advantage if your supply chain is geared to meet customer requirements more effectively than your competition. This is a simple enough concept …

Essentially, my point is that a supply chain organization must consider itself as much a driver of the top line [through increasing revenue] as the bottom line [through reducing cost and working capital]. Most importantly, the supply chain organization is a source of lasting competitive advantage…

In an economic downturn Supply Chains will see more of the following:

  1. Reduced volume [material flow through] – falling net demand
  2. Volatility of demand – as customers try and forecast changing demand trends
  3. Intensifying competition - unreasonable performance demands on Supply Chain
  4. Shrinking capacities and failing suppliers in the supply network – increasing supply risk

I would propose that a weak economy is an opportunity for the enlightened Supply Chain leader to rethink strategic priorities in the context of the competitive landscape in a recovery cycle. It is critical to do everything to “keep the lights on” [KTLO]. However, the changed economic circumstances should be leveraged as an opportunity to transform the supply chain to become more agile and responsive. Position the company for when the economy starts to recover - Do not shrink your supply chain capabilities in a haphazard fashion but retreat in an organized way with an eye to economic recovery. Plan to “win in the turns”…


Impact of Economic downturn


Easier said than done – That is true. But here are four capabilities to think about. Each, while helping cope directly with the economic down turn also enables the company to build advantages it can leverage as the economy recovers…carrying momentum to leapfrog competition in an improved economy.

  1. Making your supply chain more “Collaborative” implies
    a. Ability to build -execution plans that incorporate inputs from within the organization [product development/ sales and marketing and finance]
    b. Ability to capture planning inputs from customers [extended value chain] and share the plan with an extended supply base

  2. Making your supply chain more “Responsive” implies
    a. Ability to capture changes to plan from supply network and customers
    b. React swiftly to new inputs  [smaller order sizes, LTL capability, order changes etc]

  3. Making your supply chain more “Agile” implies
    a. Visibility to supply chain performance


One more point that needs to be considered is strategic supply chain design. This needs to be revisited in the current environment. Strategic Inventory Optimization can yield good results in terms of what are the ideal levels of buffers to be maintained. This can minimize costs, while improving customer service.

I agree completely. Supply Chains are configured for optimal cost and performance based on an assumption of material throughput. That is to say that any enterprise Supply Chain would be engineered/ designed [location of DCs/ Inventory locations and safety stock buffers] to meet a range of demand needs. When this demand situation changes, the supply chain must re-configure to this new demand signal

My only caveat is that this decision should be taken in context of being agile and responsive. It would be counter-productive to reduce Supply Chain capacity to adjust to the economic conditions - only to have to build the capacity/ capability back when the economy recovers [building back is a lot more difficult and expensive]. Instead, consider the option to "continously variabilize your excess capacity"...
1. Look at 3PL vendors to provide transportation capacity rather than owning a fleet of trucks. The same strategy could apply to accomodate warehousing for seasonal peaks in regional demand.
2. Think about shared services in specific supply chain areas [Indirect procurement, Receiving dock scheduling]

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