Anticipatory supply chains Business Trends 2014
Supply chains are evolving into rich, data-intensive networks that not only perform efficiently and recover quickly from disruptions, but may also be able to spot and avert risks.
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Toyota got a wake-up call in March of 2011, and by extension so did everyone else who believes in disciplined operations management. That was when an earthquake registering 9.0 on the Richter scale hit northern Japan, unleashing a massive tsunami. In the coastal communities directly in its path, the human toll was devastating and the rebuilding task a monumental challenge. The world watched nervously as the damaged Fukushima nuclear power plant threatened to melt down. Later, for Toyota, it became evident how awful this natural disaster was for its global business. The company had recently attained the position of best-selling automaker worldwide, in part because of its tightly managed supply chain. Over the course of many years, it had taken the slack out of its operations, using just-in-time delivery of parts to keep inventories to a minimum. But having pruned its supplier base severely, in some cases to single suppliers of certain parts, it now found itself more vulnerable than it imagined. The disabling of a few parts makers in Japan meant that assembly lines ground to a halt as far away as China and North America. Globally, March production dropped by 29.9 percent. It took six months for suppliers to get back to delivering products in required volumes.1
Stung by the experience, Toyota set out to revamp its supply chain in such a way that the time required to recover from large-scale disruption would be reduced to at most two weeks. It wasn’t possible to get to that goal simply by learning to mobilize better in the aftermath of disaster. Toyota’s supply system had to learn to anticipate problems—if not always the catastrophic event itself, then the knock-on effects it would have. Management embarked on an initiative to expose vulnerabilities and rank them in terms of likelihood and potential impact. The company worked with more than 500 suppliers to create greater visibility throughout a multi-tier supply network and to either spread production across multiple locations or maintain larger inventory buffers. Most strikingly, the automaker decided to reengineer many of its 4,000–5,000 vehicle components so that across different models, common parts could be used. The point was to raise the order volumes of those parts to the point that suppliers could justify building additional manufacturing facilities, providing a hedge in case one went offline.2 Put the changes together, and Toyota now has a more forward-looking, prepared, and effective supply chain.
Toyota’s example offers an extreme form of a problem many others are experiencing, and a particularly rich version of a solution that other leading companies are pursuing. In all kinds of product businesses, supply chains that were first formed accidentally, then optimized for efficiency, are now being reworked with an important goal: to make them anticipatory.
What’s behind this trend?
Increasingly, supply chains are being designed and built to anticipate disruptions and reconfigure themselves appropriately to mitigate their impacts. What’s behind this major trend in operations management? Certainly, advances in information and communications technology are making it more possible. At the same time, a volatile business environment is making it more necessary. Whether it’s a spike in demand for a particular product in a locale, act of war or terrorism, labor dispute, regulatory change, or supplier bankruptcy, companies are learning to count on the unexpected.
More than anything, the trend reflects a growing belief that operations management in the past has overemphasized certain themes. A decades-long focus on optimization, seeking ever-lower costs, has resulted in supply chains that are too lean and too brittle. Even the more recent emphasis on resilience, while important, casts companies in too much of a reactive mode.
Like so many realms, supply chain management has been marked by eras of theory and practice. To appreciate the importance of the current trend, it is useful to review that evolution.
The accidental supply chain
It is easy to forget that before the 1980s, the term supply chain was not in common use. The first era of supply chain management came about as information and communications technologies were invented that enabled better coordination of activities taking place in different facilities. As coordination costs dropped, operations that had been most economical to keep under one roof splintered into separate functions and then further into independent, subcontracting businesses. Meanwhile, products themselves grew in complexity. As “de-verticalized” organizations produced more component-packed offerings, traditional logistics managers suddenly had many more “links” to worry about.
As globalization and other developments complicated their operations further, managers made hundreds of adjustments. Serving a new market, working with a new acquisition, or accessing a new resource location required that things be changed about where goods were made and moved. In most cases, managers made pragmatic decisions that were right for the particular moment and allowed the company to meet each new challenge. However, the cumulative effects of these stopgap, piecemeal measures were “accidental supply chains”—unintentional mixtures of components that often worked at cross-purposes.
The optimized supply chain
For many organizations, the 1990s brought a strong focus on operational processes and supply chain rationalization. Effective management of extended supply chains was perceived as a technical, optimization problem. Major overhauls were undertaken, targeting greater overall performance and maximum cost efficiency. Where tradeoffs were involved and a balance had to be struck, there was a strong new understanding that operations decisions must be guided by the product strategy spelled out by top management. For suppliers, there were often more rigid contractual terms, such as service level agreements. Supply chain managers focused on transactions that were narrowly defined and highly structured and recognized clear distinctions among buyers, suppliers, and competitors.
As a result, most organizations had supply chains built to support an existing strategy—they identified the value drivers and aligned the supply chain with them. Global control was exercised from central locations, which worked well in an environment in which companies faced infrequent changes or disruptions. Organizations created “backbone systems,” which instilled a form of predictable order to a supply chain, but also created inflexibility.
Increasingly, supply chain success was driven by the organization and management of data. Integrated systems afforded an overarching view, and businesses began to realize the value of this improved visibility. As they gained the ability to share information instantaneously within and across enterprises, managers realized that a system traditionally based on a “push” model could flip to a “pull” model. That is, rather than predicting what would sell where, and translating those inevitably flawed forecasts into manufacturing and distribution schedules, producers could wait for demand to reveal itself, then respond in an agile fashion, facilitated by “just-in-time” arrangements with suppliers. System-wide inventories could be minimized in very lean chains.
The adaptive supply chain
After a series of shocks heightened the awareness of supply chain risks, companies moved into a new era of operations management. The “backbone” approaches to supply chains had proved too rigid and slow to respond to the dynamism of the global marketplace. The theme now was to make the supply chain more adaptive and resilient. Supply organizations evolved, in both their structure and their goals, from linear supply “chains” into broader and more complex supply “networks.” Supply chain top-performing companies, “supply chain leaders,” are roughly twice as likely as other organizations to take steps to increase the flexibility and resilience of their supply chain to respond to disruptions or unexpected changes in demand (see figure 1).3 These steps usually focus on collaborating better with key suppliers, increasing speed to market, and implementing more flexible transportation policies.4
At the same time, sustainability imperatives found their way quickly into supply chain agendas. The need for closer tracking on this front led to new investments in collaboration and transparency. Heineken, for example, implemented a new IT platform to store and share data on suppliers in 100 countries. The system rates each supplier’s performance against 21 environmental and social criteria.5 Nike committed to zero discharge of hazardous chemicals throughout its supply chain by 2020. To assist with that commitment, Nike has partnered with Bluesign Technologies in order to use more sustainable materials and chemicals in its products. These tools improve and hasten Nike’s ability to evaluate its suppliers on sustainability performance. In addition, the Bluesign tool can be used by Nike suppliers to improve their sustainability results by accessing data from pre-screened, sustainable textile preparations including dye systems, detergents, and other chemicals used in manufacturing processes.6
While most companies focused on recurrent, low-impact risks, some also worked to protect themselves against improbable but massively consequential events—the kind of occurrences Nassim Taleb refers to as “black swans.”7 Their analyses and simulations led them to urge component makers and sub-assembly service providers to disperse their manufacturing geographically and for any given set of parts to avoid concentrating facilities in single countries or regions. The more adaptive supply chains they built helped their organizations compete amid rising uncertainty in the global marketplace.
Fast-forward to today, and leading global corporations are building resilient supply networks not just to withstand but to expect shocks. They know that in order to succeed in the next wave of globalization, it is important to embrace this new era of operations management—the anticipatory supply chain.
For other organizations, the implication is very clear: Competing successfully will depend on keeping pace with this trend. The details of how to create an anticipatory supply chain will vary from sector to sector and even company to company. However, a few principles will apply in general. Going forward, supply chains must rely more on advanced analytics to gain predictive power. They must not only be aligned with business strategy after it is set, but be integral to its formulation. They will require new kinds of leadership, and diversified talent in the ranks. And paradoxically, in businesses that are more truly global than ever, many will benefit by being more regionalized.
A tighter connection with strategy
In the past, supply chain arrangements were kept separate from conversations about strategy. The supply chain team had to determine the best method for meeting a product strategy’s requirements once the big goals had been set—which, of course, gave rise to “accidental supply chains.” Driven by greater global complexity, supply chain considerations are becoming central to strategy-making. Leading supply chain companies acknowledge the critical connection between supply chain and strategy; less successful companies focus more on how the supply chain contributes to operational performance. In Deloitte Consulting LLP’s 2013 supply chain survey, 98 percent of “supply chain leaders” said that achieving global growth objectives was an extremely or very important objective of the supply chain.8
Particularly given their focus on risks, anticipatory supply chains should be thoroughly integrated with the formulation of business strategy. An interesting implication of this is that executives at the highest levels of an organization may likely expect and demand greater leadership of supply chain functions.
New kinds of talent
A new type of leader, and new types of talent, may be required in many companies’ supply chain organizations. In the recent past, an executive could make a brilliant career out of managing supply networks and heroically responding to periodic supply disruptions. Not much deeper into the past, supply chain leaders tended to be veteran managers steeped in industry and institutional knowledge and interested in mentoring junior staff in the long-established ways of doing things. No more was needed when supply chains confronted a limited number of repeatable risks that could be managed through annual risk mitigation processes.
But the age of the anticipatory supply chain will require a more integrated background—executives who combine global experience with creative problem-solving and analytical skills—true innovators who are also disciplined operators. Already, many companies are giving more authority and responsibility to supply chain executives because they are recognizing that supply chains are vital to the future of the organization. Increasingly, top supply chain executives have gained that coveted “seat at the table” in strategy development. The results of Deloitte’s recent supply chain survey underscores this phenomenon. Fifty-six percent of supply chain leaders’ companies are headed by a supply chain EVP or SVP, versus only 33 percent among supply chain followers (see figure 2).9
Career paths like Marillyn Hewson’s may become more common. In 30 years with the aerospace company Lockheed Martin, she has held a variety of roles, including vice president of global supply chain management. In January 2013, Hewson was named president and CEO.10
As multinational corporations embark on a new wave of globalization, it is interesting to see that the drive to make supply chains more nimble and adaptive is leading to greater regionalization.
In the new wave of globalization, the simple trade flows familiar to most managers—that is, low-cost producers in the East supplying products to rich consumers in the West—are giving way to far more complex patterns. In parts of the world that have been centers for low-cost manufacturing, new wealth has been created and consumption is rising rapidly. The trend is most evident in Asia, where powerful productive capacity now sits alongside growing market demand.
Corporations spotting revenue growth opportunities in these markets are scrambling to adapt supply arrangements. In general, they are redesigning supply networks to be able to match demand and supply within the same region. For that matter, as wage rates rise in Asia, more companies are backing away from the sourcing arrangements that made China the “workshop to the world.” The trend is toward “near-shoring,” tapping into production capacity closer to prime markets.
Even in markets not known for low-cost inputs to production, companies are reweighing the costs and benefits of more localized supply networks. Most of the suppliers for blender manufacturer Vitamix, for example, are within 100 miles of its headquarters in Olmsted Township, Ohio. The company sees the proximity as essential to maintaining dialogue with its suppliers about its growth plans and strategic issues. Mutual understanding and commitment are essential because, in some cases, Vitamix asks suppliers to make capital investments before the growth actually occurs.11
We expect that the vision of the anticipatory supply chain will take years to realize fully. At every step, the most effective organizations will be those applying cutting-edge technology to enhance their real-time understanding of activity in complex supply networks, and to improve the economics of having production capacity closer to consumption locales.
As the Internet of Things expands and companies’ analytics become more sophisticated, predictive supply decision making will increasingly become automated. Sensors signaling disruptions or unexpected activity in remote corners of the world will trigger appropriate adjustments in the flows of materials and energy.
Other technologies will reshape global supply chains. The evolution of additive manufacturing, or 3D printing, has the potential not only to transform the manufacturing process for some goods, but to greatly reduce or even eliminate the need for shipping them across long distances. Much of the excitement about the technology is based on the prospect of being able to manufacture replacement parts rather than having to stock large varieties of them “just in case”—or else incur delays while they are shipped from centralized warehouses.
Ever more sophisticated robotics will also allow for manufacturing schedules to turn on a dime. This is why Apple is investing a reported $10.5 billion in advanced production automation. The company is striking deals that will give it exclusive access to technologies for all kinds of tasks, from polishing the colored plastic of iPhone® 5c mobile device cases to laser-cutting the aluminum bodies of MacBook® computers.12
In late 2013, Jeff Bezos, the Amazon CEO, used the opportunity of a 60 Minutes interview to unveil what he see as an inevitable development in package delivery technology:13 unmanned aerial vehicles, akin to those employed by the US military for targeted strikes on enemies, used to drop parcels at consumers’ doorsteps. Given Amazon’s dozens of huge fulfillment centers scattered across the United States, the drones could enable a customer placing an online order to have it in hand within half an hour.
New technologies like these—and this is only a sampling—will guarantee that supply chains grow ever more anticipatory, and that the ideal way to buy, make, and move a given product will perennially need rethinking.
By Kurt James, VP of supply chain, McDonald’s Japan
McDonald’s’ supply chain is designed to be efficient, adaptive, and collaborative, providing a unique competitive advantage that has enabled McDonald’s to enter new markets at a scale and pace that is unmatched by our competitors. From my perspective, the heart of an outstanding supply chain is trust and transparency, features that contribute to natural resilience and provide a level of nimbleness not possible in more guarded systems.
We talk about the supply chain at McDonald’s as a shared system, rather than as our system. This mentality of joint ownership allows us to work as one efficient organization with our suppliers, planning for the future and adapting to the present in a cohesive and integrated way. Whereas a traditional supply chain may show cracks under the pressure of unforeseen political, environmental, or competitive changes, I view the McDonald’s supply chain as having a fundamentally cooperative core that can absorb the shocks produced by unforeseen circumstances and rapidly adapt to frequently changing demands, specifications, and volumes. The flex comes from mutuality and collegiality. It is resilience built from trust.
This flex, and the trust it is anchored in, is produced by the interplay of a few factors, including our open protocol policy, an infrequent use of contracts with suppliers, and the type of people we choose to hire into supply chain leadership at McDonald’s. Our open protocol policy creates a two-way street of transparency, allowing McDonald’s clear views into the operations of suppliers and, in turn, providing suppliers with equally clear sightlines into our operations. When hiring, we look for people with character traits uniquely suited to our supply chain—namely, an innate sense of fairness and an ability to consistently empathize with the challenges suppliers face in meeting our often aggressive deadlines, standards, and evolving needs. Instead of gravitating toward contract reviews as the essential means of adjusting our supplier agreements, I often encourage my colleagues to approach negotiations through open and honest conversation followed by handshakes and good-faith commitments to doing the right thing.
The resulting system is one of unparalleled connection, collaboration, and mutuality—a deeply human system enabled by state-of-the-art technology and information flows—that has allowed McDonald’s to set and achieve aggressive growth targets, test innovative supply chain practices, and ultimately provide the quality expected by our customers regardless of location, external environment, and other potentially disruptive factors. I often feel as though I can make demands of my suppliers that our competitors cannot, because our suppliers understand the strategic underpinnings of our demands and trust that we all ultimately share the same goal—consistent adjustment of the system toward the better. I’ve learned that doing the right things for the system as a whole provides all participating players with the highest odds of long-term success.
The bottom line
For companies competing on a global scale, things can change quickly, and not only due to unexpected breaks in the supply chain. Sometimes it’s a disruptive technology or abrupt market shift that forces a reconsideration of how a company operates. Five years ago, Dow Chemical, a US chemical company, was moving its domestic manufacturing to the Middle East to take advantage of cheap natural gas and proximity to Asian markets. Gas prices in the United States were expected to keep rising along with labor costs. The advent of new drilling technologies such as hydraulic fracturing, though, unleashed an abundance of cheap, domestic natural gas. As US prices plunged, the company moved quickly to shift manufacturing back to its home soil. It’s now spending $4 billion to build a plant in Freeport, TX, and to reopen another in Hahnville, LA.14
Companies can’t rely on supply chains they built piecemeal as they grew. Nor can they expect that simply adapting or reacting, however quickly, to disruptions or market changes will keep them ahead of the competition. As linear supply chains evolve into rich supply networks, the companies that are best positioned for growth may be those that see these networks as core to their business strategies. Their supply chains will not only perform efficiently under normal conditions, or recover quickly from disruptions, but may also be able to spot risks and avert them, and help leaders throughout organizations to anticipate the future.