Over the last couple of weeks, I have been invited to a couple of meetings that were related to event planning. One was for the annual Material Handling and Logistics Conference (HK Systems), another I can’t mention here yet.
In the course of those meetings, which included supply chain managers and/or execs from a variety of companies, attendees offered a number of salient comments about the state of the supply chain right now in Feb. 2010. I am going to combine those observations with a few other supply chain executive discussions I have had in the past three weeks to offer a modest “state of the supply chain” in Q1 2010.
Hope you enjoy it. More detail on some of these topics in upcoming weeks either in this column or in SCDigest’s On-Target newsletter.
First, supply chain managers are simply worn down. This was a consistent theme like I have never heard articulated in my career. The focus on cost reduction is relentless and grinding. The staff layoffs we saw in 2009 were bad enough, but the extreme cost cutting pressure just makes it feel like your “bicycling against the wind all day,” as one manager commented.
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"Radical inventory cut backs many have seen are causing a number of changes – especially as many believe a lot of the inventory decreases will be permanent."
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As just one example, a supply chain VP noted that his company is “just mercilessly playing our carriers off against each other.”
Is this the right thing to do? Yes, I suppose, if it can save you money, and acknowledge there is often a strong element of that approach most times, except during the few periods when circumstances leave the carriers temporarily in control. But it has reached an ugly and brutal phase for many shippers and carriers.
Maybe this cost reduction imperative and “worn down” feeling is largely the same in every corporate department, but when you manage 50-80% of a company’s total cost structure, as supply chain usually does, naturally you are the at the center of the cost cutting radar.
One manager from a very large company said they have been sharing hotel rooms on business trips for a few years now (ala Walmart), and that it may come to “six to a room” before too long. We all laughed, but with a sense that maybe four to a room is not that out of the question.
The result of all this has been that supply chain staffs (and again, maybe most other departments too, but I don’t think to the same degree) are dispirited. I think it is important that supply chain leaders craft some pro-active strategies to address this drift in some way. I don’t have a magic bullet, but if “attitude is altitude,” as Zig Ziglar says, you can’t lose track of this people dynamic.
From my recent interactions, I would say about 20% of companies are cautiously getting more strategic about supply chain again, but almost no one aggressively so (other than network changes to take out costs). About 70% are mostly hunkering down, waiting to see what happens with the economy. In supply chain, the always critical dimension is whether the units of demand of whatever widgets a company sells are up or down. Rising unit volumes are what generally trigger supply chain improvement/expansion initiatives. But for most companies, while unit volumes have stopped falling, they have been rising at best very modestly from the bottom.
10% or so of companies and their supply chains are simply still in retreat mode.
While most managers in general feel better about where the US and the global economy are heading, companies just don’t think we’ve seen anything like a “clear signal,” that the recovery is really on, as one exec put it.
We’ll have more detail shortly, but as I have mentioned once in an earlier column, early insight coming out of the annual Gartner-SCDigest supply chain survey shows that the supply chain investments companies plan to make or will make as things start to look better will be focused on significantly increasing productivity. In other words, as volumes do start to rise again, companies are looking to be able to manage that increase with fewer people (white and blue collar) than the company had before the crash. Smart in a sense, I guess, but not exactly bullish for the employment numbers.
One executive said “We are looking to do more with fewer, better people in the management ranks.” [I will note, as something of a counterpoint, some evidence that forecast accuracy has taken some steps backward as companies cut back demand planning staff levels in recent years.]
Related directly to this, I suppose, is what seems to be a bit of resurgence in vendor managed inventory programs. Several companies at these meetings were piloting or expanding VMI initiatives. Why have staff when the vendor will do it for you?
Interestingly, the investment bar has been rising dramatically for many companies. One Fortune 50 company said they have gone from historical “hurdle rates” of 12-15% to now about 30% or more. In financial terms, relative to return on invested capital metrics, 30% is a huge number. The simple message – it has to be a really, really good investment for a company to make the cash available. That even as in many companies, actual balance sheets are sterling and cash balances at record levels. In fact, many investor groups are calling for companies to start increasing dividends as they see these piles of cash sitting in the bank rising higher and higher.
One manager said a move somewhat in the direction of higher investment thresholds was actually a good thing, “as there are usually a lot of soft costs in software or automation projects that don’t get really factored into the ROI numbers.”
The radical inventory cut backs many have seen are causing a number of changes – especially as many believe a lot of the inventory decreases will be permanent.
For example, a number of managers said the new “Lean-ness” is causing them to rethink how much bulk storage they need in distribution centers. Several companies said they have not only stopped sporadic use of offsite storage, but also pulled out of more permanent 3PL arrangements. Others are looking at how that perhaps now excess space in the DC can better be deployed – for example, by increasing value-added services/postponement or supporting ecommerce in that facility (versus outsourcing).
“Green” of course is still in – but no one is doing anything that doesn’t have a strong ROI. Most privately say that while the Green message from their companies has perhaps even increased over the last year, many (but not all) said that there has been some loss in Green momentum in the downturn. A few acknowledged that having “Green” as part of a project certainly helps get it passed the executive committee. A big focus, many said, is decreasing energy use in manufacturing and distribution facilities.
Of course, there is still a lot of interest in Lean as a core tool in achieving the cost cutting imperative. A few companies, however, said they have not found the Lean results they expected. Several large and medium-sized companies at both meetings said their initial Lean investments were too “top heavy” – investing in a relatively few numbers of more senior people and black belts/training that took too long to generate results. Better and quicker returns were ultimately found from basic “5S” training for operators and front line supervisors on the floor.
On a more practical level, many companies are looking to keep equipment longer (surprise!), and think materials handling and automation vendors need to do more to make that possible.
“We’re tired of cutting down a tree just to plant another one,” is how one manager described it.
During that discussion, one participant said Wal-Mart is pushing its materials handling vendors for seven-year equipment warranties. This would be a dramatic increase from the current state of affairs, and frankly not possible for vendors given current price structures and the equipment that can be built for that price – but it is an interesting vector nonetheless. My bet is Walmart and others will push changes forward over time.
There are some very interesting and emerging uses of video in the supply chain, from many angles. More on this soon.
There was a lot more, but this I think capture the essence. Would love to know if you agree or can add some additional perspective.
Does this mini “state of the supply chain Q1 2010” ring true for you? What would you add? Are supply chain managers being worn down? Can anything be done? Let us know your thoughts at the Feedback button below.
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