(This article was originally published by Supply Chain & Demand Executive. It was submitted by Steve Keener from River Rock Advisors and is being reprinted here.)
Previous best practice definitions will never be the same.
It’s likely that in today’s environment, supply chain executives and leaders view their work and discipline from two perspectives that carry a great deal of contrast: “before the pandemic” and “today.” Unfortunately, there is no “after the pandemic” when it comes to supply chain best practices — at least not yet. As this article will explore, the reason for this is that no one can define what that means.
Before the pandemic, many organizations believed they had achieved supply chain best practices capabilities. Inventory levels were lean and managed using just-in-time (JIT) approaches that reduced costs and prevented excess goods in warehouses and distribution centers. Sources of supply were plentiful, allowing organizations to explore options that enabled them to further optimize efforts. Manufacturers were able to continuously replenish customer inventories without unexpected lead times.
These upstream advantages allowed organizations to offer a more diversified portfolio of products to a broader audience, at a competitive price, and with high availability — meaning in-stock rates were strong as were associated customer service metrics. Unfortunately, as we all know, this situation was about to change dramatically — and it would continue changing in ways supply chain professionals didn’t expect.
The black swans take flight
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. They are characterized by their extreme rarity, severe impact, and the widespread insistence — in hindsight — that they were obvious. The term has an extensive history, but it is perhaps best known from statistician and author Nassim Taleb, whose books Fooled by Randomness and The Black Swan discuss the concept in-depth.
While the potential of a pandemic has been statistically predicted for years, its size, rapid worldwide spread, and ongoing presence were clearly not taken seriously or prepared for by the now clearly-seen-as-fragile global system.
Then the pandemic enabled a number of other “lesser” black swans. Supply chain professionals around the world likely would have overcome these lesser events had they occurred on their own. However, it’s the collective, cumulative impact of these events that has made doing so virtually impossible.
Depending on the industry and nature of the business, manufacturing either stopped or slowed dramatically, and the same occurred in the shipping sector. Retail stores and restaurants closed or operated at dramatically reduced capacity. Consumers also shifted their preferences and demands as well as the channels through which they fulfilled them. E-commerce skyrocketed along with demand for key goods, placing extreme pressure on manufacturers as they watched the backlog grow larger and larger. Consumers shifted from purchasing services to goods, and as inflation roars, appear to recently be shifting back to services.
As the world navigated the pandemic and these rapid, large-scale shifts in demand and consumer preference, other lesser black swan events arose. These include the well-known raw material shortages that stopped manufacturers in chemicals, chips, and others, which in turn led to manufacturers stopping or slowing the production of downstream goods. And of course, almost simultaneously, the Great Resignation and labor shortage further impacted the ability of manufacturers to maintain what production they could. These black swans then led to overloaded ports, creating further delays and shortages that continued to compound the challenges for manufacturers and their customers.
Previous best practices definitions will never be the same
The impact of these interconnected black swan events has changed the world for years to come, if not forever. The methods and data points by which organizations and supply chain professionals defined previous best practices no longer support the flexibility needed today. For example, near-term historical sales were often relied upon as the best predictor of future demand. But as the black swans have revealed, this data is far too variable to be utilized in this way, and data from before the pandemic is — for many firms — ancient history.
Organizations that had achieved lean inventory levels no longer have a buffer against future disruption due to ongoing uncertainty. If demand were to spike, they could find themselves in situations similar to last year. Sole-sourced, imported manufacturing with extensive lead times won’t be able to support the rapidly shifting consumer preferences. Such practices would put the organization at risk of excess inventory or not enough — creating a reactionary environment that undermines demand planning entirely. And the methods by which products flow from suppliers through distribution channels to retailers and then on to consumers must become more reliable — and cost-effective.
It’s time to embrace the new variable normal
Organizations looking to regain some semblance of “best practices” today must be willing to embrace greater variation while also expanding the boundaries of the supply chain function. Whereas optimizing an existing supply chain was a greater focus before the black swans, risk management and scenario planning will enable greater long-term flexibility and resilience.
Demand planning must also become more collaborative. Historically, demand planning focused on statistical forecasting using the previous one to three years and stayed within the four walls of the organization, without considering outside variables such as suppliers, complementary business partners, and customers themselves. Communication between the organization and these external influencers will provide greater insight into and understanding of the factors that stand to impact the organization.
Strategic and split sourcing, with a distinct focus on agility and resilience, will help organizations choose the right suppliers and partners while procuring materials and goods in a way that best supports demand. For example, it may be advantageous for an organization to pay more now for a faster, shorter-term solution that allows them to meet current demand. But conversely, being able to flexibly shift to a longer-term, lower-cost alternative when needed will be essential.
Business segmentation should also be considered to best align efforts with what will produce the most value. Before our black swans, organizations may have kept certain products or materials in inventory that weren’t significant revenue drivers or weren’t high in demand. Today, these products may no longer move the needle. Sales, procurement, operations, and other teams may need to focus their efforts and priorities on products that are more in the organization’s wheelhouse or where they can best meet customer demand to keep moving forward.
SIOP (sales, inventory, and operations planning) must also become more agile, factoring in all of the above to make the best, most informed decisions possible. In the past, teams often went on sales forecasts, but as the black swans have made painfully clear, the sales data of the past couple of years should no longer inform this strategic planning process.
The pace of world change has been increasing each decade. That appears to be now into ever shorter cycles of change and in a state of large and unpredictable events. Supply chain resilience and agility in the face of adversity is now becoming more of the watch word than general tactical responses to one-off surprises.