By Richard Sharpe
CEO, Competitive Insights, LLC
Companies will re-evaluate their supply chain operating networks more frequently to respond to today’s fast-changing business environment. Supply chain operations are being stretched by the changes in off-shore manufacturing and the aggressive positioning to enter new markets, causing supply chains to be pulled in both directions like taffy. In addition, companies constantly have to adapt quickly to the increasingly dynamic changes being driven by operating globally.
Traditional Approach for Defining Supply Chain Operating Networks
The strategic objective for supply chains has been to meet all customers’ orders for required goods and services on time and at the lowest possible total cost to serve. This cost should include storage and handling, inventory carrying cost, inbound and outbound transportation, in addition to sourcing and manufacturing costs.
This challenge of minimizing total costs while maintaining service levels can be a complicated process. It’s often addressed by conducting an optimization study of the current operating network and then examining future supply chain structures. Historically, this type of analysis has been performed every three to five years to respond to changes in the market, industry dynamics and operating considerations. With the pace of change today, companies can no longer assume their operating networks can consistently perform using structures built every three to five years.
The Realities of Today’s World
Let’s look at some of the operating dynamics impacting current supply chain networks.
1. The expansion of the Panama Canal will be a cost-effective alternative for increased transportation from Asia to the East Coast of the U.S. and Europe. Companies are evaluating the cost-benefit to their usage of the Panama Canal.
2. Pressures being placed on today’s ports, which include shifting trade routes, labor contracts, environmental regulations, bigger ships, commuter traffic, changes in bridges and rail lines, channel depth and community response to required infrastructure changes.
3. With global security threats and disruptions, such as Hurricane Sandy, supply chain risk is another growing concern. Eighty-five percent of companies say they experienced at least one supply chain disruption within a year (Zurich Financial Services Group and Business Continuity Institute, 2011) along with an increasing financial impact on businesses by 465 percent over three years (Penn State University, 2011).
4. Given the lackluster economies of developed countries, growth in emerging markets is a high priority for many companies. Seventy percent of the world’s incremental global growth is coming from emerging markets that by 2020, emerging countries will surpass developed countries (2013).
5. The growth of e-commerce will significantly impact how supply chain networks will need to operate in the future. E-commerce revenues in the U.S. will reach $279 billion by 2015 (Forrester Research, 2011) and will be surpassed by China at $360 billion (Boston Consulting Group, 2012).
It Is Not Just About Reducing Costs
Historically, supply chain executives have concentrated on minimizing operating costs. However, with the realities of today’s dynamic world, a shift will occur to also focus on the generation and protection of corporate profits. This reality will force supply chain executives to be proactive in balancing costs, profits and risks and for their operating structures to be agile and not rely on plans established every three to five years, but on a much more frequent basis.
Supply Chain Operating Networks in the Future
How are supply chains going to adapt to support the ongoing profitable performance of their companies? Supply chain executives will mandate a cultural change and perform periodic operating structural adjustments by balancing costs, profits, customer service levels and risks. Adjustments to their network must incorporate the realization that one supply chain structure may not fit all products, channels or customers. Many companies will succeed by taking advantage of Big Data to understand current operating performance and to respond to continually changing business conditions. By intelligently gaining insights from Big Data and continually refining their operating networks, companies can continuously adapt to an ever-changing world and win ongoing competitive advantage. When the stakes are high, adapt and be proactive or go home.
Richard Sharpe is the CEO of Competitive Insights, LLC, a Software-as-a-Service (SaaS) company focused on performance visibility for smarter growth. Richard is a frequent speaker at national Supply Chain Management Professionals (CSCMP) and other industry related forums.