It only hit me when I could not find my Economist magazine in its usual place behind the front door this Friday. The Royal mail is on strike! Now, on the upside I also didn’t receive any bills whilst I still can go to the shop to get my magazine, assuming that the news agents have received their deliveries today. Have they?
Unfortunately a disruption can impact people differently; ask the many businesses that rely on the Royal mail for their outbound delivery to the customer. Some businesses would have made arrangements with alternative delivery services providers, most haven’t. It shows that a disruption can have different impact on different people and organisations based on the alternatives which are at its disposal and how well prepared they are.
It reminds me of the infamous story of the Philips factory in Albuque, Albequer.. Ablaquerque….. well, somewhere in New Mexico, USA, when it got hit by lighting and caused severe damage to the chip production hall in the factory. This factory being one of the few providers of a type of chip used in both Nokia and Ericson mobile phones; it was interesting to see the different impacts that this single event had on these competitors.
Nokia had a contingency plan in place which ensured that; the impact and extent of the disruption was recognized, and alternative sources were quickly identified and secured. Ericson was less responsive; it hadn’t recognized the extent of the problem when Nokia already had monopolized the consumption of the chip in question for several months to come. Ericson had no Supply Chain Risk contingency plan and no access to alternative sources.
And that is, dear readers, why I am now using a Nokia and not an Ericson, to ring my local news agent to see if he has any copies of the Economist left.
All the best
Richard van der Meulen
Friday 23 October 2009
Thursday 22 October 2009
So what’s next? (The golden age of Supply Chain Management?)
Well, the recession is over, or at least, we can now talk about “green shoots”, “light at the end of the tunnel” or use any metaphor describing the start of the economic recovery without putting ourselves in a political danger-zone. But does this mean that we are going to be operating in a business-as-usual environment or will we be operating in a new equilibrium? And where does Supply Chain Management fit into this?
It certainly seems unlikely that it will be business-as-usual. Lets take a look at the macro economic situation. One of the main contributors to the 2008/9 recession was the lack of savings in the western world. Sure, it all got triggered with the failing banks but the underlying problem was and is the lack of savings. The Economic expansion of US and Europe has been debt fueled, leaving us in the paradoxical situation that we now need to spend even more to get us out of the recession through bank bailouts and quantitative easing. In the US alone, the cost of the credit crunch amounts to $3 trillion. An amount only match by the monetary cost of World War II with $3.6 trillion in inflation adjusted terms[1]. Somebody has to pay for this eventually, which of course is going to be you and I, the tax payers. The likely effect of all this is that we will see a lower trend of growth in the west for the foreseeable future.
Another major trend is the demographic change. Let’s take the UK as an example. The old age support ratio, the number of people of working age for each person of pensionable age, in 1971 was 3.6, in 2006 it was 3.3 and in 2051 is predicted to be 2.0[2]. And the situation in, for example, Italy or Germany is even worse due to lower birth rate and stricter immigration rules. This has some obvious implications; or we need to save more or we need to work longer. The fact that we as tax payers have some government debt to pay off probably means that we will be working longer. Or is there another way?
Well, one of the strengths of the Western Economies has been its historically high productivity levels and the ability to continuously increase it. For example the nonfarm business level in the US in 2008 is 3.85 times higher than it was in 1947. I suggest that the trick will be to push the productively levels to even greater heights in the coming years. And I believe that Supply Chain Management will play a key role in this.
Supply Chain Management is the only discipline that takes a total view of, not only a company but of the full environment a company operates in. The efficiencies and growth opportunities that this discipline can provide are virtually untapped. Supply chain collaboration, supply chain optimization, 3D Concurrent engineering, Sales & Operation planning are but a view of the components under the Supply Chain banner which will help transform whole industries in becoming even more efficient and help them extent into new territories, both geographically and in products and services . Due to its importance, I believe that Supply Chain Management will propel even faster up the organizational tree and find more permanent and prominent place on the Boards agenda.
Is the golden age of Supply Chain Management upon us? Well, we certainly have plenty to get on with……
All the best
Richard van der Meulen
[1] Source: CLSA, Bits & Pieces, 2009
[2] Source: http://www.statistics.gov.uk/downloads/theme_compendia/pensiontrends/Pension_Trends_ch02.pdf.
It certainly seems unlikely that it will be business-as-usual. Lets take a look at the macro economic situation. One of the main contributors to the 2008/9 recession was the lack of savings in the western world. Sure, it all got triggered with the failing banks but the underlying problem was and is the lack of savings. The Economic expansion of US and Europe has been debt fueled, leaving us in the paradoxical situation that we now need to spend even more to get us out of the recession through bank bailouts and quantitative easing. In the US alone, the cost of the credit crunch amounts to $3 trillion. An amount only match by the monetary cost of World War II with $3.6 trillion in inflation adjusted terms[1]. Somebody has to pay for this eventually, which of course is going to be you and I, the tax payers. The likely effect of all this is that we will see a lower trend of growth in the west for the foreseeable future.
Another major trend is the demographic change. Let’s take the UK as an example. The old age support ratio, the number of people of working age for each person of pensionable age, in 1971 was 3.6, in 2006 it was 3.3 and in 2051 is predicted to be 2.0[2]. And the situation in, for example, Italy or Germany is even worse due to lower birth rate and stricter immigration rules. This has some obvious implications; or we need to save more or we need to work longer. The fact that we as tax payers have some government debt to pay off probably means that we will be working longer. Or is there another way?
Well, one of the strengths of the Western Economies has been its historically high productivity levels and the ability to continuously increase it. For example the nonfarm business level in the US in 2008 is 3.85 times higher than it was in 1947. I suggest that the trick will be to push the productively levels to even greater heights in the coming years. And I believe that Supply Chain Management will play a key role in this.
Supply Chain Management is the only discipline that takes a total view of, not only a company but of the full environment a company operates in. The efficiencies and growth opportunities that this discipline can provide are virtually untapped. Supply chain collaboration, supply chain optimization, 3D Concurrent engineering, Sales & Operation planning are but a view of the components under the Supply Chain banner which will help transform whole industries in becoming even more efficient and help them extent into new territories, both geographically and in products and services . Due to its importance, I believe that Supply Chain Management will propel even faster up the organizational tree and find more permanent and prominent place on the Boards agenda.
Is the golden age of Supply Chain Management upon us? Well, we certainly have plenty to get on with……
All the best
Richard van der Meulen
[1] Source: CLSA, Bits & Pieces, 2009
[2] Source: http://www.statistics.gov.uk/downloads/theme_compendia/pensiontrends/Pension_Trends_ch02.pdf.
Wednesday 21 October 2009
The double inventory whammy
Last week I had the privilege to present at a Pharma Industry event in Madrid. One of the things we talked about was the sudden increase in inventory per sales around the time that Lehman Brothers left the scene in Sep 2008, the drop of inventory per sales through 2009 and what effect this has on the Supply Chain.
We all seem to have been caught out up to certain degree by the sudden drop in demand in the second part of 2008 and especially the supply chain which are operating on relatively long lead-time with long chains (multiple partners), seem to have been hit hardest. Organisations operating within these supply chains have had to commit to procuring and manufacturing goods many months before the final consumption of these goods. These organizations were left with large stock piles when faced with the sudden drop in end consumer demand.
Some industries had the unfortunate addition that shortly before the drop in demand, demand outstripped supply which would have driven up the price and therefore the value of inventory, just before demand dropped, leaving manufacturing and distributors with a not only high but also very costly stockpile.
The result of all this is that all inventory keeping players are trying to reduce their inventory drastically even if this means selling at a loss. The worrying thing (as if there has not been enough to worry about yet) is that the same supply chains that were caught out with lots of inventory in 2008 are going to be so under stocked that they potentially will miss out when demand recovers again and thereby incurring a double inventory whammy.
This phenomenon is of course not new. The effects described are caused by the infamous Bullwhip Effect (Prof How lee Stanford University). In short the Bullwhip effect is the increased distortion of the end customers demand signal the further up the Supply Chain you go.
Organisations have been trying to minimize the effect of the Bullwhip effect through better forecasting, Supply chain collaboration and visibility, reduction in lead-time and by removing demand signal distorting effect as price promotions and period based sales quota. But the current scenario which is playing out in many supply chains makes you wonder how effective these efforts have been and bags the question if we should not do more.
This double inventory whammy seemed to really strike a chord with the Pharma companies in Madrid. I would really like to know how relevant this is to you and what actions if any you have taken to tackle this issue.
Looking forward to your comments
All the best
Richard van der Meulen
We all seem to have been caught out up to certain degree by the sudden drop in demand in the second part of 2008 and especially the supply chain which are operating on relatively long lead-time with long chains (multiple partners), seem to have been hit hardest. Organisations operating within these supply chains have had to commit to procuring and manufacturing goods many months before the final consumption of these goods. These organizations were left with large stock piles when faced with the sudden drop in end consumer demand.
Some industries had the unfortunate addition that shortly before the drop in demand, demand outstripped supply which would have driven up the price and therefore the value of inventory, just before demand dropped, leaving manufacturing and distributors with a not only high but also very costly stockpile.
The result of all this is that all inventory keeping players are trying to reduce their inventory drastically even if this means selling at a loss. The worrying thing (as if there has not been enough to worry about yet) is that the same supply chains that were caught out with lots of inventory in 2008 are going to be so under stocked that they potentially will miss out when demand recovers again and thereby incurring a double inventory whammy.
This phenomenon is of course not new. The effects described are caused by the infamous Bullwhip Effect (Prof How lee Stanford University). In short the Bullwhip effect is the increased distortion of the end customers demand signal the further up the Supply Chain you go.
Organisations have been trying to minimize the effect of the Bullwhip effect through better forecasting, Supply chain collaboration and visibility, reduction in lead-time and by removing demand signal distorting effect as price promotions and period based sales quota. But the current scenario which is playing out in many supply chains makes you wonder how effective these efforts have been and bags the question if we should not do more.
This double inventory whammy seemed to really strike a chord with the Pharma companies in Madrid. I would really like to know how relevant this is to you and what actions if any you have taken to tackle this issue.
Looking forward to your comments
All the best
Richard van der Meulen
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