Tuesday, August 19, 2008

Trends that Will Define Future Supply Chain Strategies

The sands of supply chain strategy planning are shifting again. It has evolved a lot, and changed a lot; and, it is happening again. The imperatives driving the supply chain for the next few years are becoming visible and they will shape this phase of supply chain evolution.

Supply chain was MRP in the 80s, that evolved to constrained based planning in the 90s, giving way to an integrated view of planning and execution currently through corporate-wide visibility and rich analytics.

Still so far, only a handful of companies have treated supply chains as a core part of their corporate strategy. These corporations have seen ample rewards in doing so. But most others had just started to seriously consider investments in supply chain strategy, when the new ground rules seem to be emerging for the next generation of supply chain thinking.

In making these statements, I want to differentiate between the automation of supply chain execution versus a truly strategic thinking that reviews the corporate supply chain from a strategic point of view that drives business functions and decisions.

  • The automation of supply chain transactions simply provides for efficient operations. Its value lies in the productivity enhancements that such systems provide. The business transactions in this category are largely standard, unvaried, and are supported through a multitude of vendor solutions available for all budgets. A good example in this category is warehouse management systems. While they do have a good ROI, these systems do not necessarily provide any competitive edge. These systems are no more elite, but have rather migrated into the “required” category if you wish to do business.
  • The strategic view of the supply chain attempts to view the corporate supply chain as a business strategy that binds together the assortment, sourcing, demand and supply management, planning and operations as a “whole” rather than the sum of its parts (like managing a warehouse). This is where the visionary corporations are focused and should be investing. This is what drives Walmart to review Brazil as a major market, GE to invest in the middle-east, and Halliburton to move their HQ to Dubai.

And it is the latter (strategic view of the supply chain) that is going to undergo major transformation in the coming years as corporations adjust to the environmental changes underway for the last year or so. We will talk about the two overbearing trends that are driving this change. Over the next few weeks, we will go into the details of these trends and the shape of things to come.

Merchandise Costs: “Rise of the Rest”

This trend has been recently highlighted by Fareed Zakaria in his new book, “The Post-American World”. He makes various arguments and illustrates them in multiple ways, but at the core of this trend is the fact that living standards are rising all around the world. The developing countries are growing at a faster pace than ever. And the combination of growth and higher living standards is pushing the wages and cost of production specifically in these regions, and generally all over the world. People have argued that this growth is also pushing the prices of food, commodities, and energy everywhere.

This trend affects the cost basis for everything that is manufactured and distributed, through the increased cost of materials, cost of higher wages, and finally the cost of transportation. The changes in the cost basis will change the outsourcing equation in manufacturing.

The commodities index for all commodities has gone up by 44% from 1998 to 2008 (Source: Bureau of Labor Statistics, Jan 1998 versus Jan 2008). Over the same time period, the index for Metals and Metal Products moved up 65%, and Industrial Commodities by 45%. All the indices were still trending upwards for 2008 at the time of writing.

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The wages in China have nearly doubled in past four years outpacing the growth of GDP. (See the full story at Forbes at http://www.forbes.com/markets/2007/07/02/china-wage-growth-markets-econ-cx_jc_0702markets1.html).

According to the Department of Energy, the cost of diesel fuel has almost quadrupled in the same time from 1998 to 2008, (see, http://www.supplychainmusings.com/2008/05/optimization-transportation-versus.html).

These changes are not isolated spikes in a stable data series anymore. These changes have become trends that will define the cost equations for the decades to come. And these new cost bases will define the sources of our goods and services in the next few years. The change may not be subtle, China may not be manufacturing capital of the world any more, and India may not remain the back-end services capital. Consider some of the recent changes on manufacturing front: BMW starting a manufacturing plant in the US, Inbev buying Anheuser Busch and Chinese investments in manufacturing coming to GA facilitated by the Georgia China Alliance.

Business Costs: Environmental Evolution

The second trend that will shape the supply chains of the future is the environmental awareness, and the social pressure to address the issues related to the environment. This can manifest itself through various legal and regulatory requirements, such as the carbon trading; or in more stringent ways that affect the whole chain of raw materials, manufacturing processes, disposal and recycling. There is talk of “carbon labeling” in the industry that would require the retailers not only to gather the information but also share it with the consumers (see http://www.carbonlabelca.org/). These changes, legislative and otherwise, will drive the companies to review their existing processes and enhance them to align with the changes in the external environment.

These changes in the environmental sensitivities have the potential of affecting almost all of the organizational supply chain processes. Some of the processes directly impacted will be assortment planning, sourcing, vendor selection, manufacturing processes, packaging, disposal, distribution.

Over the next few weeks we will dig deeper to find out how these two trends affect the supply chain strategy and planning for the corporations. Till then...

©2008; Vivek Sehgal

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