Volume 11 | Issue 6 | Year 2008

It seems of late that if it weren’t for bad news there wouldn’t be any economic news at all.
The Dow Jones is behaving like a Jacobs’ Ladder toy, cascading ever downward.

In mid-October, Honda announced a 41 percent drop in quarterly profits.

The average sale price of U.S. homes continues to fall in 48 out of 50 states.

Every major economic indicator that isn’t declining precipitously is hopping around like a flea in a frying pan and the perfect word for today’s global economy is volatile.

It seems the growing global economic crisis began with the sub-prime lending frenzy, as banks bundled up and then sold tens of thousands of risky mortgages as financial derivatives, which were then bought up by other institutions, leaving the nation’s biggest lenders and investors with a ton of bad debt on their books.

It’s actually pretty complicated stuff and hard to understand.

But it’s not hard to understand people recently lining up outside Moscow’s Samokhval supermarkets to buy food in an eerie flashback to the bad old days of communist bread lines. Today, however, the empty shelves reflect a very capitalist problem: the supermarket chain’s suppliers are unwilling to deliver food to the stores on credit, and the stores are out of cash to pay them.

In other words, the trust that forms the basis of the supply chain has been broken and people are going hungry.

That lack of trust extends to the people waiting in line, the consumers. As George Scalise, president of the Semiconductor Industry Association recently put it, “Consumer confidence is essential to the entire supply chain of the global technology sector.” And right now consumer confidence is understandably at a historically low ebb. Not surprisingly, demand is down (people and institutions are holding on to their cash), which means, according to Joel Sutherland, managing director, Center for Value Chain Research, that “excess capacity” is being created, leading to “inefficiencies in transportation, warehousing and distribution.” And lest one miss the seriousness of that, Sutherland points out that “transportation costs already represent some 60 percent of total logistics costs, which, in turn, are 10 percent of overall GDP.”

What all this means is that one of the critical links in the value supply chain – trust – is in danger of breaking, and business is in danger of breaking with it.

Historically, business has responded to times of market volatility by increasing inventory as a buffer against risk and variable demand – the “excess capacity” to which Sutherland referred. But that was when warehousing (labor and real estate and logistics) was cheap and credit was free-flowing. Today, the cost burdens of excess assets are insupportable, and consumer demand is as volatile as the economic markets. What’s needed now more than ever is the ability to better align assets to requirements. And the flexibility that allows business to do that can come from the Supply Chain Operations Reference model (SCOR), developed by the Supply-Chain Council (SCC).

In the SCOR model, Cash-to-Cash cycle time is a Level 1 metric, which is impacted by the Level 2 metric, Asset Turnover, which, in turn, is affected by the Level 3 metric, Days of Supply in Inventory. The longer the Days of Supply in Inventory, the slower the Asset Turnover, and the more extended the cash-to-cash cycle – that is, the less efficient the supply chain is in turning investment into revenue and profit. In other words, increasing inventory can be a path to financial ruin. Clearly, another solution is required: Flexibility, one of the four dimensions of competitiveness (with cost, quality, and response time), as defined by William D. Presutti Jr., and John R. Mawhinney in “The Supply Chain-Finance Link” (Supply Chain Management Review, Sept. 2007).

According to Christian Verstraete, Senior Director, Solutions, Worldwide Manufacturing & Distribution Industries, Technology Solutions Group, Hewlett-Packard, the SCC has integrated flexibility into the SCOR model by accounting for “the amount of change that can be implemented, and the time it requires to get this change going.” For instance, how much demand increase can I handle in a month without penalties like expediting materials? What is the lead time for me to handle a permanent jump in demand? Do I need to assign new manufacturing capacity if my basic lead times are adequate? Building this flexibility into the supply chain – the flexibility that allows a business to avoid excess capacity by aligning assets to requirements – requires, as Verstraete points out, building a collaborative relationship with suppliers, logistics providers as well as raw and finished goods suppliers. The SCOR model, by providing a standardized view of supply chain operations and processes, by giving businesses a common vocabulary to express and thereby optimize those processes, can create a win-win environment beneficial to all parties.

This collaboration, however, is more easily proposed than achieved as it has been long hampered by the traditionally adversarial relationship between the business’ procurement function (which generally is rewarded only for lowering costs and therefore pushes suppliers to cut prices) and its suppliers. But the benefits of collaboration, and the supply chain flexibility it provides, is far from theoretical. A recent Aberdeen Group study, for example, found that integrating a company’s product development efforts with a supplier’s engineering department through e-design technologies could reduce time-to-market cycles (which positively impact cash-to-cash cycles) by 10 to 15 percent.

In times of crisis, an all-too-human response is to circle the wagons. In this crisis, however, circling the wagons is the first step toward increasing the risks inherent in the extended, interdependent supply chains that have, in effect, accelerated the impact of the U.S. financial meltdown and magnified its ripples around the globe. As the World Economic Forum’s recent report, “Global Risk, 2008,” put it, “Should systemic financial risk lead to a serious deterioration in the world economy, the prospects for collaborative (risk) mitigation may be reversed on several fronts simultaneously as attention turns to more immediate concerns.”

In other words, it’s time to reach out and collaborate, not turn inward, gathering nuts for winter. When the snow really begins to pile up, no one ever has enough nuts to see the winter through alone.

Joseph Francis is executive director, Supply Chain Council, a global non-profit consortium whose methodology, diagnostic and benchmarking tools help nearly 1,000 organizations make dramatic and rapid improvements in supply chain processes. Visit www.supplychain.org.

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