First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  April 1 , 2011  

Supply Chain Whirl



"We didn't start the fire. It was always burning Since the world's been turning.
We didn't start the fire No we didn't light it But we tried to fight it."

I always liked "We Didn't Start the Fire" by Billy Joel, if nothing else for its catchy list of people and events from the 1950s-70s, a musical trip through history meant to remind us that any current craziness in the world and society is simply part of the permanent current of the human condition.

Gilmore Says:

The companies that thrive are the ones who do not fear change, but rather embrace and harness its energy.

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That said, I don't know we've seen anything to match the last decade or so since maybe the late 1960s through the 1980, and these past few since the recession have been astounding. I am a news junky, but almost feel like turning off my radio lately. Anyone else?

Why bring any of this up? As supply chain has gone mainstream, it is now connected at the hip to the greater world and social, political and economic environment, which itself is now global. And as I have noted before, you can't think about the supply chain of the future without assumptions of the world of the future.

Easy example: how the energy situation looks and thus how and at what expense we move goods could certainly be dramatically impacted based on how the current turmoil and disruption in the Middle East plays out over the next few years.

Anyone have a crystal ball on that?

What really triggered this column were the several big news bites this week relative to inflation. We all know commodity and energy prices have been rising rapidly for the past year or more. That has been pushing retail prices up as well, but frankly in moderation versus the underlying cost changes.

That may be over. Hershey, for example, announced a general price increase to retailers of 9.7% this week. That's a big number. Meanwhile, WalMart CEO Bill Simon told USA Today that "serious, rapid" inflation was coming - right now.

Riots over food prices were part of the trigger that led to the demonstrations in Egypt and the overthrow of the government there, by the way.

We have not had serious inflation in the US since the late 1970s, when again oil prices as now were on the rapid march. It's been so long most of us have little real knowledge of how this plays out, generally or for the supply chain, a concept that was just being invented the last time we saw it.

But here are some guesses:

• Procurement strategies become critical - do you forward buy? For how long are you willing to sign a contract - and how long will a supplier offer one? What are the escalators in a contract for price increases? All standard stuff any time, but now the importance is put on steroids.

• Being the low cost producer becomes even more important. WalMart's CEO predicted their lower cost supply chain would lead it to gain market share in an inflationary environment. If you can hold price or have the least increase, there is a lot to be gained.

• Naturally, if the price of Hershey chocolate and many more goods go up 10% or more, workers are going to demand more money to keep up, starting with blue collar/lower paid workers first who can least manage the impact of inflation. That means input costs rise still more, strikes make something of a return for unionized plants, unionization drives become more appealing for non-union shops, and companies look even harder at offshoring (especially Mexico) and automation technology in response.

• As was happening to a degree before the recession hit, some commodity-dependent companies look to some level of vertical integration to take control of raw material sources and costs. Of course, China has been busily doing just that in South America, Africa and elsewhere for some time. But perhaps with say the price of cotton up over 100% in six months some apparel company will decide it should have some interest in a farm or two.

I am waiting for nano-technology to get us out of this.

But inflation is just one of the many turmoils and challenges the supply chain faces today.

I had this thought over the weekend, stemming from the supply chain issues as a result of the earthquake/tsunami and now radiation problems in Japan. There are more than 190 countries in the world today. That means that for large global companies, they are running 190 or near to it different supply chains as they source or sell from all or most of these nations, or soon will.

Think of the level of supply chain risk and complexity there. Procter & Gamble, for example, had to close plants in Egypt during the protests. Japan's problems are playing havoc with automotive, electronic, and other supply chains. Iceland volcanoes, bird flu, etc.

I have been trying to think of the right analogy, and I am liking this one: the supply chain is like a truck driving down a curvy road in some war movie. Every minute or so, a bomb hits alongside the road, shaking the truck, but generally not stopping its forward progress, even though for a few seconds the dust makes it impossible to see. Some blasts are big enough that the officers and enlisted troops have to get out of the truck to inspect the damage, but then they get back in and on the road, maybe not even completely sure of the destination.

Does that sound about right today?

I am keeping it fairly short this week, and will end with this.

1. While many/most companies have adopted risk management strategies of one form or another, is there really a lot of knowledge or science behind how to do this well? I don't think so. We know little about quantifying risk other than a 2 x 2 matrix on impact and likelihood. The industry needs more science on quantifying risk, and just as important, the benefits of agility.

2. More companies should/will develop "emergency response" systems and teams similar to what WalMart and probably some others have in place.

3. Global companies will need to be able to better model their networks to understand the impact of disruptions and market changes and create more optimal responses. Carrier Schneider National did this a number of years ago using consultants from Princeton University to great effect on its analysis and decision-making. UPS has a very powerful network modeling capability. Network optimization tools are increasingly being used for immediate analysis and decision support.

4. As some are already saying, is the "strategy" era over, and now what really counts is the ability to more nimbly navigate in a dynamic environment with a general but looser strategic framework?

5. As my friend Jim Tompkins has said for many years, and as Jack Allen of Cisco said last fall at the Georgia Tech Supply Chain Executive Forum in a similar way, the companies that thrive are the ones who do not fear change, but rather embrace and harness its energy.

And as I often remind myself, using the old camping joke, you don't have to outrun the bear of change and turmoil, you really just have to out run the other guy.

Those are my thoughts - would love yours.

How do think a high inflation environment would play out for the supply chain? Is the global environment more challenging these days really, or just better reported? Do we need for understanding of risk management and supply chain agility? Let us know your thoughts at the Feedback button below.

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