Today's new international marketplace demands that suppliers and manufacturers create a more open and honest relationship--one that acknowledges demand variations, and shares risks and rewards with both businesses.
As consumers, we have realized enormous benefits from supply chain globalization, which has made a new world of options available to us. Suddenly, we can choose a laptop or cell phone in our favorite color, with customized features that meet our own specific needs.While we used to wait for August to look at next year's car models, today we can walk into a dealership at any time of the year to find brand-new vehicles waiting for us, or order one to be delivered in a few weeks' time. And our local department store, which used to change its assortments only a few times a year, seems completely reinvented each time we visit.
While we enjoy this amazing abundance--and, often, the lower prices that have resulted from global competition-- today's international marketplace has created seemingly insurmountable challenges for supply chain managers. Spread around the world, driven by fickle fashion trends, supported by ever-changing selling seasons, and dispersed across a seemingly infinite number of product categories, consumer demand has never been harder to predict or manage.
There is no doubt that suppliers have done their best to rise to this enormous challenge, especially in expanding the capacity of their operations. But, while global supply chain capacity has risen to answer the new level of demand, suppliers still face natural and inevitable limitations in such areas as raw materials and physical infrastructure, which have made it hard to keep pace. Additionally, they must manage their capacity investment: they cannot assume infinite demand. Their success really depends on one central competency: ensuring that the right amount of the right material is available at the right time, at the right place, and at the right cost to meet promises and sustain profitability.
How can supply chain managers hope to balance this combination of business needs and imperatives? Today's new demand uncertainty cannot be managed unless both manufacturers and suppliers are willing to shift to an entirely new mindset--one that encourages a truly global view, and that eliminates the traditional barriers that separate trading partners. By taking a more global and collaborative view of their shared supply chain, manufacturers and suppliers can work together to manage and even leverage the demand uncertainty that characterizes the worldwide marketplace.
Think globally--act globally
The reason so many manufacturers struggle with the ramifications of offshore and low-cost-country sourcing is that they are trying to apply traditional strategies to a completely different business paradigm. The old adage "think globally, act locally" doesn't hold up when the supply chain is distributed around the entire world, and the entire concept of "local" no longer applies. Modern supply chain managers must embrace a new mantra: Think globally--and also act globally.
Instead of building a series of regional supply chains that serve each of their manufacturing locations, supply chain managers must take a truly global view. They need to aggregate demand across the global business, evaluate total supply needs, and examine the best trade-off opportunities when the unexpected occurs. Faced with a potential materials shortage at one facility, they can reassign materials from other locations or re-route inbound material from the source in order to capture the greatest return across the entire value chain. Then they can make intelligent allocation decisions that maximize the volume of the highest-margin products, meet critical regional selling season deadlines, fulfill especially large orders, or satisfy the needs of key customers.
Today, offshore lead times and delivery costs can be roughly equivalent to closer-to-market onshore locations, whether products are being delivered to the United States, Europe or South America. Redirecting supply can be a relatively straightforward decision; that nearly loaded ship in a faraway port can be routed to Rotterdam instead of Houston at approximately the same delivery time and cost.While offshore and low-cost-country manufacturing have presented challenges, today's new global supply chain does offer significant advantages in terms of flexibility-- benefits that most supply chain managers have not yet fully embraced or realized.
For many organizations, the ability to see and balance the global demand and supply picture requires process and organizational changes. Once centralized at the regional level, supply management will need to take place on a much broader international scope. This new global perspective enables manufacturers to more effectively manage demand uncertainty. Armed with an enterprise-wide view and a new sense of agility, supply chain managers can honor their traditional inventory and velocity targets, while also minimizing the costs associated with expedited shipments.
Make your supplier your partner--really
There is yet another mindset shift required of supply chain managers who want to successfully manage fluctuating consumer demand--and it involves redefining their historic relationships with suppliers in order to make them true partners.
We all know that serving consumer markets means operating with a given amount of uncertainty every day. No matter how talented a manufacturer's employees, how well-honed its processes and how advanced its technologies, meeting the changing preferences of an international population will never be an exact science.
But the traditional manufacturer-supplier relationship has been based on the notion that end-user demand is predictable; that a certain amount of product or material is absolutely required on a given day. In many respects, the historic manufacturer-supplier relationship has been characterized by a sort of unfounded optimism.
While manufacturers know that their materialsrequirement forecasts will always be somewhat inaccurate, they have asked suppliers to commit to these estimates anyway--and then adjust upward or downward as the true demand level reveals itself. Recognizing that manufacturers' initial forecasts are usually overly optimistic, suppliers have responded by making delivery promises that they could never realistically fulfill. A true desire to partner has too often degenerated into a series of gaming and hedging exercises--with neither party emerging as the winner.
Today's new international marketplace demands that suppliers and manufacturers create a more open and honest relationship--one that acknowledges demand variations, and shares risks and rewards among both businesses. For example, manufacturers can assign a tiered cost structure to capacity usage at supplier facilities, negotiate specific cost terms for the use or non-use of this capacity, and pay in advance to reserve capacity. In return, suppliers can provide additional upside volumes without the usual price premium, or agree to incur penalties if they fail to deliver the promised volumes.
This kind of manufacturer-supplier model requires an improved level of trust, which is enhanced by sharing and calibrating uncertainty. Instead of engaging in gamesmanship and overestimating, manufacturers can make their demand uncertainty more explicit, just as suppliers can make their actual assignable capacity more explicit. Manufacturers can restructure their demand forecasting in order to make it more collaborative, as well as basing it on a "range" of uncertainty that is more realistic and informative than a definitive forecast.Â
The old adage "think globally, act locally" doesn't hold up when the supply chain is distributed around the entire world.Â
For example, demand can be partitioned into three tiers: 80 percent confidence, 50 percent confidence and 30 percent confidence. As both organizations progress through the forecasting horizon, uncertainty will shrink and confidence will increase. This creates a manufacturersupplier relationship based on informed confidence, where uncertainty is visible--and so are the costs and consequences of missed deadlines. This type of approach is especially valuable when supply capacity elasticity is low and dependency is high--for instance, when a manufacturer relies upon a second-tier supplier for a critical component required in the late stages of product assembly.
A new world requires a new perspective
There is no doubt that supply chain globalization represents a significant challenge for even the best-managed businesses. But this challenge is difficult to meet for those manufacturers--and suppliers--who try to adapt old ways of doing business to a world that has been completely transformed.
Today, achieving supply chain excellence requires entirely new perspectives and strategies. Two imperatives are clearly emerging. One, companies need to globalize supply planning and management--often through the use of an enterprise-level demand-supply process. Two, they need to establish more honest, collaborative supplier relationships that acknowledge and share uncertainty. These innovative approaches must be embraced by any business that seeks to gain competitive advantage in today's transformed business environment--where the entire world is a potential customer.
Bob Anson is senior director of Total Supply Management at i2. For more information, contact supply_chain_leader@i2.com. |
