There has obviously been a tremendous amount of disruption to supply chains in recent weeks. The Russia-Ukraine war is just the latest example. The two countries account for a significant portion of the global production of corn, fertilizers, and semiconductor raw materials. Before that, it was the onset of the pandemic and the furious recovery. Before COVID-19, there were trade tensions between the U.S. and China. Before that, there was the chip shortage. One could go back further if necessary and name a supply chain “crisis” in at least every other year for the past several decades. Given the global complexity of our supply chains, this is likely to continue. Firms do have some control of minimizing their exposure to global issues, but systemic supply chain changes like onshoring or near shoring are painfully slow. However, there are some things that can be done quickly to prepare and react to the next crisis better. This article summarizes three straightforward recommendations leaders can do today to prepare for the next crisis. As the never-ending crises continue, the ability to function or potentially thrive during a crisis will be a competitive advantage for those companies that can do it.
1. Perform supply reviews and demand reviews that incorporate corrective actions.
The best supply chains ask some basic questions when things go wrong. When did we first know? Is there something we could have done sooner? What could we have done to anticipate it sooner? What can we do next time to lessen the impacts? What change can we make in our operation to prevent it from being so bad in the future? As part of their demand and supply review process, these questions are an important exercise to document the causes and corrective actions. Maybe a forecast could have been adjusted sooner, an inventory policy increased or decreased, a product routing changed, or an alternative supplier identified. These corrective actions are then executed and archived for future evaluation. These historical corrective actions should be held in some reverence in the supply chain planning function because every crisis provides a huge learning opportunity. The ability to validate or modify the corrective action during the next crisis must be an agenda for the recurring planning process. Companies that survive crises have learned from experience.
2. Right-size inventory through segmentation.
Not all inventory deserves the same inventory policy. In recent years, there has been such focus on reducing inventory and working capital, and we have seen evidence of these efforts being applied in a way that does not end up benefiting the company in the long run. When product delivery is reliable, sales are relatively predictable, and lead times are shorter, the products are prime candidates for carrying much less inventory. However, when products have high delivery variation, long lead times, and low forecast accuracy, inventory stocks should be increased. And for these products, that inventory is an excellent investment that will pay off in terms of service-level improvements and out-of-stock reductions. Companies should consider a segmentation exercise to map out their products and to develop an inventory strategy for each segment. To start, consider a simple nine-box grid that segments all products based on forecast performance (high to low) and lead times (high to low). Even if forecast accuracy is not known, stakeholders should have an understanding of the product’s sales predictability, and that will suffice. This segmentation should be refreshed at least yearly, and it need not conform with ABC codes that are already established in the organization.
3. Reevaluate your planning platforms to help ensure foundational capabilities are there.
Your planning systems should at the very least be (a) producing a time-phased forecast over at least a year; (b) providing order or production recommendations based on inventory levels, incoming supply, lead times, and other intelligence; and (c) providing supply projections at least a year out. If you don’t have these foundational capabilities, you will not be able to operate an efficient supply chain. So much attention is on machine learning, artificial intelligence digital twins, and many other edge technologies, which are certainly great in their own right and offer benefits. However, it is the basic demand and supply planning foundational capabilities that are so often lacking in our experience. Basic system capabilities provide more than enough functionality to provide visibility and facilitate planning decisions. Firms should focus on these foundational capabilities first before more ambitious steps on the technology roadmap.
KPMG helps distributors and manufacturers adopt planning leading practices and build foundational demand and supply planning capabilities. In all cases, there is at least some gap to the three themes summarized above. Many of the recommendations are not capital intensive, except for the technology piece. That technology piece is indeed critical, and we can help you navigate through that decision and the available options, but it is stressed to start with the foundational components of demand and supply planning, which means you may be able to leverage what you have. Please contact us if this approach resonates with you.