A “new normal’ for supply chains – will there really be one?

We started asking that question last week, and included highlights of some fine thoughts from leading supply chain thinkers such as Dr. Tom Mentzer of the University of Tennessee, Dr. Jim Tompkins of Tompkins Associates, Bill Read of Accenture, and Rich Sherman of Gold & Domas. (You can read the full comments of Mentzer and Tompkins here: The New Supply Chain Normal: Supply Chain Gurus Weigh In.) Read and Sherman’s comments will be in On-Target next Tuesday.

So, let’s go back to the beginning for a second. I first heard the term “new normal” late last year in a financial context. Market pundits started talking about a “new normal” for the investment world following this “great recession.”  The basic idea was that certain assumptions and results that this sector had generally relied on for a number of years were likely to be replaced with new ones. The severe downturn will have caused fundamental shifts in how the investment sphere operates.

The term has since turned up in all kinds of places. I just received an email this week from transportation industry analyst John Larkin at Stifel Nicholas for a webinar on the “new normal” for the railroad industry.

So, will we have a “new normal” for the supply chain, or will our world pretty much be the same once we get out of this thing?

Yes and No. How’s that for an answer?

All of our pundits last week emphasized that it’s hard to talk much about “normal” in the supply chain, since, for many years, supply chain has been characterized by rapid change and unpredictability. They are certainly right.

On the other hand, supply chain is, in the end, a means for companies to respond to business strategies and the needs and wants of customers – so, if there are important changes in those areas, there will, I think, clearly be some related changes in the supply chain.

I think the depth and breadth of any “new normal” will depend on how much longer the downturn lasts. There are a number of positive signs, but many worrisome ones still out there too. Jim Tompkins has been studying this for many months, and he is convinced economic “comeback” is on the horizon; he makes a convincing case, and I sure hope he is right.

The length and depth of this recession even now, in my opinion, has already made a lasting imprint on today’s consumers and businesses, but one that may fade relatively soon if we do start to pull out before the end of the year. If it goes on much longer than that, the psychological impact will be substantial. If you ever heard parents or grandparents talk about living through the Great Depression, you probably know what I mean.

All that said, I think, for at least a few years, there will indeed be a new “supply chain normal,” in the following ways: 

• The consumer will be different: I don’t think there is any doubt that we will see a multi-year trend towards a more conservative and value-oriented consumer. I liked the term from the Harvard Business Review article I quoted last week: “discretionary thrift.”

This means a few things. Economic growth, or at least retail spending, will remain low by historic or at least recent recovery standards, meaning, in general, we will see a slower ramp in “units.”  It will, in general, mean a lingering tough time for more “luxury goods,” and/or a need to package and price those products in a more “value-oriented” way. It means perceived “discount channels” should have a real edge for some time. Finally, it means demand planning, especially based on what we think we understand from history and experience, will be especially tricky and different.

• Promotions become even more important: Promotions have become ever more important in the supply chain mix, but this will now accelerate. A promotion/package that seems to offer a “great value” will often drive phenomenal sales with the new consumer mind set.

That means “promotion optimization” and close collaboration between market and the supply chain will be more important than ever.

• Cash will remain king: Just as with consumers, CEOs and CFOs will not soon forget this period, even as the economy recovers. Credit will never again be as easy as it was before the crash (or at least for many, many years), and executives will have learned powerful lessons on the value of a strong balance sheet. Cash may not stay king forever, but it will be “prince” at least for a long time.

This has all sorts of ramifications: companies will start to make more supply chain investments, but be conservative in doing so, and favor ones that require less cash outlay, such as “on-demand” software. There will be more (maybe better said - more persistent) attention paid to inventory levels. It also means that with very conservative inventory levels, the supply chain will have to be capable of sensing changes in demand and be able to respond if sales spike above expectations. 

• Simplicity imperative will stick: As we’ve noted, the frequent attempts, rarely successful, to reduce SKU counts is actually starting to work in this environment (see Will Large Retailers Help Manufacturers Drive Out Supply Chain Complexity?) While we may see some swing back the other way, I believe this is another trend that will stay for quite awhile even after recovery. It will be a lot harder to get new SKUs into the system for quite a long time at most companies.

This will reduce supply chain complexity and, simultaneously, put greater emphasis on efficiency (as if we weren’t already highly focused there). But there will be a tilt, in combination with trading partners, on gaining real efficiencies around a smaller number of SKUs. This could also have implications, perhaps unfortunately, for some smaller suppliers, and retail and wholesale channels – though some may thrive by delivering more choices.

• Companies will shed assets even faster: As CEOs learned that cash is king, they also learned that owning supply chain assets and having high fixed costs in a slump is very costly – maybe even fatal.

We all hope this was a once-in-a-several-generation slump, but that won’t matter – companies that can will look to outsource more functions and especially assets (plants, DCs) to third parties. Note that just this week, Dell announced it was selling its US “remanufacturing” facility and operations to Genco, as just one of what will be many more examples.

This means, I’m afraid, that many will find themselves working for third parties rather than the company they have been with, and that many supply chains will find that they have to work extremely hard to justify why given functions should be kept in-house, especially if they involve physical assets.

The financial industry will stay relatively less attractive as a career destination, and more talent will go to “physical product” sectors: That, in my view, is a very positive development.

Beyond that, there are a lot of questions, such as:

• Will this experience put some breaks on globalization, or not?
• How heavy handed will the role of government regulation become?
• Will emerging markets continue to be the growth story, or will they take much longer to recover, as some believe?
• How dominant a role, and how fast, will China achieve coming out of all this (for example, the push to get rid of the dollar as the global reserved currency)?

Some may disagree, but I think looking back, we will say the supply chain world was different for awhile after this, or that it was an inflection point, even given all the change we always see.

A “new normal un-normal,” perhaps.

Do you think we will see any multi-year shifts in supply chain thinking and actions? Will changes in how corporate executives now see the world be a big driver of this? What would you add or take away from Gilmore’s list? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

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4 - the formula, actually, is Inventory in All DCs = Inventory in One DC, divided by the square root of the number of DCs in the tier. At 4, inventory is doubled over that held in a single DC. At 9, it triples.