Preparing for Uncertainty

The changing political landscape of the US brings with it economic uncertainty domestically and abroad.  This uncertain economic outlook can translate into demand volatility for your products.  A robust flexibility plan in your supply chain will help you whether demand goes up or down.   In this newsletter, we will talk about the key steps to developing flexibility plans.

Before we begin talking about flexibility plans and how to drive implementation, let’s separate real or “created” flexibility from what we call perceived or “purchased” flexibility.  Too often companies take the easy path and simply buy more buffer inventory (components, work-in-process, and finished goods) to give them impression that they are more flexible.  This approach can give you more inventory with which to respond to upsides in demand, but it comes at a cost.  With that inventory comes all of the normal ills: extra scrap/obsolescence risk if demand drops, delayed response to quality issues, storage and management costs, delayed implementation of technical improvements, etc.  Created flexibility on the other hand involves taking the time to understand the supply chain and finding solutions to constraints that limit your ability to respond quickly.

When we create flexibility programs for clients, here are four key steps we consider:

  • Segment the need. In our experience, different products have different needs based on their competitive position (Newsletter: Supply Chain Design: Who Needs a Specification?”).  The work to create real flexibility can be significant so do yourself a favor and focus.  Start with the products that are among the most important in terms of margin or profitability but where flexibility is extra important because you face significant competitive threats.  We start with the 20% of products that represent the bulk of the revenue or profit and then split out that set of products that is in an extra tough competitive environment.  This filtered list of products are the ones where short availability might make or break a deal.  The work you do to make these products more flexible is likely to have a direct impact on the bottom line for the company.
  • Understand risk points and inefficiencies in your supply chain. There is no unusual magic here.  You need to collaborate with your suppliers and manufacturing partner to gain a solid understanding of how your products – and the components that go in to them – are built, how supply is pipelined, where you have risks, and where you have inefficiencies.  It is an exercise in curiosity and persistence.  As you dig into the minutia, you are likely to find some surprising facts.
  • Develop and implement customized solutions. Once you have the details, you can begin to craft specific solutions.  Each product, and each supply chain, is going to be different and have unique challenges.  There is no one solution that will work for every situation.  That being said, we have found a few areas that tend to deliver big improvements.  Here are some details on those areas:
    • Touch-time vs lead-time. We recently conducted a study on quoted lead-times for a product versus the actual touch-time, or value-add-time, in producing the product.  On average, the quoted lead-time was about 300 times longer than the value-added portion of the lead-time.  Certainly, you need to allow some time for materials movement and minor wait-times, but where you are motivated to address flexibility on an important product, you can find ways to trim that multiplier closer to 10 rather than 300.  Look carefully at how materials are staged and how capacity is planned.
    • Responsive order management. Companies tend to manage their supply chain in big batches.  They do things in weekly or monthly buckets.  This causes delays in response to changing demand.  By accelerating the flow of information, you can get better results with less inventory.
    • Last minute customization. Special or custom parts tend to have the longest lead-times and are likely to be key to your flexibility efforts.  We often find that a custom part has, at its heart, some very standard components.  Look for ways to delay the customization so that your lead-time only reflects the truly unique portions.
  • Monitor and update. One of the best ways we have found to track progress on efforts like this is a combination of Inventory Exposure (Newsletter: “What Inventory Problem?”) and a metric we call Flexibility Coverage.  Flexibility Coverage is a way to quantify your actually flexibility at the part level and then to see how these parts stack up to give you flexibility at the product level.  The weak link in your Flexibility Coverage will be your limiting factor for your product.  If this minimum meets the business need then you are all set.  If not, you will need to work to correct your plans.

The headlines give us a mixed picture on how the markets will react in the coming months.  No one knows for sure where the economy will go and how this will impact your company and demand for your products.  In either scenario (growing or shrinking demand), your company will be well served to have some real flexibility in your supply chain.  We would welcome the chance to show you what is possible with your supply chain.  Contact us for more information.