Supply chains in our economy will experience volatile product offerings and demand shock waves in the next year or more. Most companies’ automated supply chain systems cannot handle this level of volatility.
The result is chaos in both customer service and the search for suppliers unless managers take a completely different approach to managing their supply chains.
The shock waves in today’s supply chain reflect the wide range of companies and consumers in all sectors. Since each company and individual has a unique pattern of supply and demand and each entity will close and grow differently, the net effect will be chaotic. This will take at least a year or more, especially as the economy is starting to fall out of balance again.
The situation is aggravated by the nature of consumption after the economic recovery. In the past few months, tens of millions of people have been unemployed. In the pre-crisis period, our economy was driven by a large consumption of debt and a general lack of savings for retirement. During the Great Depression, a generation of formerly unemployed workers became “depressed children”, focused on saving and afraid to spend money. The same effect will shape our economy in the years to come.
Shock waves in the supply chain
Today’s chaotic supply chains are in the headlines. This situation reflects the interaction between the shock wave distribution and the limitations of the supply chain system.
Shock wave propagation
Take an example of a company with rapidly declining demand. To save money, management is reducing its inventory, especially for slow-moving products. After weeks of reducing this stock, the company was forced to replenish its stock. The automatic replenishment system requires twice the normal order so that it can replenish the safety stock while meeting current demand at the same time.
The company’s distributor sees a few weeks without the demand for these products, followed by more than double the demand. The distributor cannot get the real demand, so he sends all of his stock to this customer. The replenishment system interprets this as an increase in demand, so it increases its forecasts for domestic demand and safety stock and sends the resulting increase to its supplier, a manufacturer.
Supply chain system limitations
Most automated supply and order acceptance systems in the supply chain cannot withstand the supply chain shock waves that occupy our economy today because they are designed to operate with relatively little variation in demand.
Current supply chain data does not reflect actual underlying demand. As end-users hardly stock goods, their buying behavior no longer reflects their actual consumption, which exacerbates the problem.
This chaotic situation has become the “new normal” in one sector after another and will remain so for a year or more. It will take a long time for consumption patterns to stabilize and supply chains to be reconfigured.
Manage your shock waves
Companies can manage their shock waves in the supply chain and avoid being overwhelmed by them, following a three-step process:
- Plan a paradigm shift in the supply chain.
- Prioritize your customers and suppliers.
- Adjust your current systems.
Managers can quickly implement this hands-on process, but all parts of their organization must be involved.
Supply plan for the supply chain paradigm
To effectively manage a company’s supply chain shock waves, the senior management team must understand the strategic nature of the problem: how the supply chain shock waves are generated and the concrete steps required to control them. This is extremely urgent today when demand volatility is increasing rapidly. Without that understanding, events simply overwhelm managers across the economy and freeze their ability to respond effectively.
Prioritize your customers and suppliers
The starting point for setting priorities is to segment customers based on profitability. By developing a comprehensive P&L for each transaction (necessary because prices and costs vary widely from customer to customer and product to product, even within customers), managers can identify their customers with maximum profit (big, high profit) and customers who profit (big, loss of money) and customers of the profit desert (small, with little profit) benefit from it.
Typically, the customer with the highest profit represents about 10-20% of the customers and contributes 150% or more to the potential profit; profit-drinking customers account for about 15-30% of customers and perhaps 40-50% of the contribution made by customers with the best profit, and profitable customers represent 50-75% of customers but do not contribute a significant profit.
Adjust your current systems
Some existing supply chain systems may specify delivery ports, such as limiting order fulfillment to specific customers if they exceed a certain percentage of the customer’s historical demand (without replacing them manually). Some systems also have the ability to specify ports for replenishment requests, such as avoiding requests to specific suppliers for quantities that exceed a certain percentage of those suppliers’ historical supply requests (again, without replacing the hand).
Most supply chain managers are not familiar with these system features, as they are rarely used in the normal course of business. An office’s system specialists must be urgently appointed to verify that replenishment and order fulfillment systems have this capability and if so, to actively manage these settings.
Manage the process
The implementation of this management process is complicated. It affects almost every part of the business organization and has many moving parts: teams that work with profitable customers, other teams that work with profitable customers, and yet others that work with profitable customers. A series of parallel teams must work with the three comparable providers. This interaction must take place on a weekly and long-term basis to monitor and manage the situation of individual customers and suppliers and to monitor and respond to long-term secular trends.
This process is practical and manageable and can be developed relatively quickly. The managers who do this guarantee the success of their business and the loyalty of their customers, both in the current crisis period and in the coming years.