Covering all bases

The economic downturn brought many companies, both large and small, to their knees and only the hardiest of supply chains managed not to fall victim to the turbulent conditions that beset the global economy. As markets collapsed, sales fell and profits went into freefall, supply chain managers found themselves in a very difficult position, faced with the need to cut costs at a time when operating costs were naturally increasing due to lower demand and lower throughputs.

The recession certainly forced supply chain managers to revaluate. "Probably the biggest impact was the fact that many of the players in the supply base have introduced a great deal of risk into the supply chain because many of them have gone under or have themselves been quite vulnerable," says Kent.

Those who were perhaps sourcing from smaller companies would have certainly felt the effects as those smaller companies were often worse hit. Many then found themselves having to look for new suppliers, which has increased the supply base risk element within the supply chain and brought with it a great deal of vulnerability.

However, as we now head out of recession, Kent believes that there is a lot we can learn from this experience and he has quite a few suggestions as to how companies can protect themselves from these vulnerabilities in the post-recession business climate.

Firstly, he believes that companies need to gain a better understanding of the vulnerabilities that are present in their supply base. "They need to really look deeper in order to understand the financials associated with their suppliers. If they find that a particular supplier is quite vulnerable then they may need to introduce a second source," says Kent.

Another way in which Kent believes that companies can best place themselves to foresee any changes in the unpredictable business landscape is to build diversity into business structures and supply chains. "They really need to understand the cost of risk that's being introduced. The measure is called value-added risk, or VAR, and really what you're looking at there is the potential for a disaster occurring."

Kent suggests that companies need to assess the probability of such a disaster against its potential impact and they need to get better at making those sort of trade-offs. Therefore, the introduction of risk and risk mitigation becomes incredibly important, according to Kent.

Aside from examining the financial situation of suppliers, companies would do well to work on improving their planning and their understanding of demand variabilities. Better Sales and Operational Planning (S&OP) and understanding which customers and products have a higher forecast accuracy is one way to ensure that the supply chain is more robust, says Kent.

When times are good it is very easy for companies to lose track of the importance of making efficiencies within the supply chain, particularly when the need is not so pressing. However, when the economy takes a nosedive, efficiencies tend to shoot right up the supply chain manager's agenda and one way of achieving these efficiencies is through supply chain network design.

"What I mean by this," says Kent, "is that they've got to be constantly looking at the best ways to manufacture and deliver products to their customer base." This requires companies to realise that products do not necessarily have to follow a certain supply chain configuration throughout their entire lifecycle and it is worthwhile to shift manufacturing or logistics in order to meet economic requirements.

However, redesigning the supply chain to improve efficiencies can mean that certain other sacrifices may need to be made. So the important thing is to ensure a balance and this necessitates a good understanding of the requirements and the realisation that not all supply chain requirements need to be treated the same.

"We shouldn't try to paint the customer base with the same brush and say every customer requires 99 percent on-time delivery and off-site flexibility of 20 percent or 30 percent over their forecasted amount. We need to look at each one of those configurations differently and then make those choices," says Kent. "And that's where a lot of companies have failed. The reality is that we need to treat customers fairly, but not necessarily equally."

This is a challenge for most companies, according to Kent, and he says that many sales people have a hard time understanding this concept. "If we take on-time delivery as the major service metric, a two percent increase in on-time delivery from 90 percent to 92 percent has a different cost than moving from 96 to 98 percent. The closer you get to perfect, every percentage increase in service is much more costly. A lot of salespeople who are making commitments to their end customers don't understand that there's a cost differential there, and that's where the supply chain needs to educate," explains Kent.

When talking about improving efficiencies in the supply chain Six Sigma and Lean cannot be ignored and Kent points out that many companies are now starting to realise that combining the two adds far more value. However, he also explains that Lean needs to be extended throughout the whole supply chain if the maximum benefits are to be had.

"If you become incredibly efficient in manufacturing but you're not lean at all in the planning and sourcing areas, then that lean initiative in manufacturing will have a limited effect. So it's about extending Lean and Six Sigma outside of manufacturing and leaning the whole of the supply chain," explains Kent.

He also says that leaning your own is only the beginning and to get the full impact of this you really need to ensure that your customers and suppliers follow your lead. Citing Toyota, which he admits may not be the best example today, Kent says that the car manufacturer did not see the results of their Lean initiative until they extended it to their supply base.

One of the other consequences of the recession is that companies have started to see benefits to the issue of sustainability far and above the environmental aspects. Sustainability can also offer cost savings in the supply chain and Kent believes that most companies are now focusing on three key aspects - ecological, economic and service.

"Every decision taken in the supply chain should be measured against those three standards: is it ecologically viable, are we being responsible to our environment; is it an economically viable solution?" asks Kent. Companies must be careful, he says, that in becoming more green they are not pricing themselves out of the market and they are not failing to deliver the service requirements to the customer.

"In the food supply chain this is of paramount importance, because the service requirements are probably the strongest in the industry because retailers demand a very high level of service," says Kent.

Some companies are even starting to reassess their supply chains and are re-examining where they are sourcing their products from. For example, many companies that decided to source from abroad for economic reasons have since compared the cost saving with the cost of transportation and the environmental cost and have realised that the saving may not be worth it after all.

"There has been some movement in the industry to suggest a rethinking of global sourcing and to some degree a movement back to regionally-based sourcing because the economic advantage is not what it was initially thought to be," says Kent.

Transportation in particular has been under close scrutiny as pressure increases from the retailers. Rail transport continues to be more ecologically responsible than road transport for example and many retailers, particularly in the UK are putting pressure on manufacturers to display the so-called 'food miles' on their packaging and this is something that manufacturers will have to respond to.

However, pressure will also come directly from the customers, who, given the choice, are shown to choose products that are least harmful to the environment, as long as the price is not vastly higher. "It's really a matter of how sensitive the customer is relative to the trade off between ecological and economic," says Kent. "But I still think that the pressure is more likely to come from the retailer than directly from the consumer."

Another aspect of sustainability that has been seen to affect the supply chain is the need for transparency, which was illustrated last month as Nestlé came under fire from consumer activists and non-governmental groups on Facebook and Twitter for it's sourcing of palm oil. Consumers are demanding more visibility regarding the sourcing of the food ingredients and as a result companies need to ensure that they get this information from their supply base in order to prevent such backlashes.

However, there is also a very practical element to enhancing this transparency. "There is going to be a constraint in supply coming up, as companies have already seen with things like cocoa for example, and there will be an increase in prices and lead times. Where transparency fails is not necessarily between the manufacturer, the retailer and the consumer, but between the supplier of the ingredient and the manufacturer. And sometimes we just don't have the level of transparency that is necessary," says Kent.

A similar scenario can be seen in relation to traceability in the food chain in order to ensure food safety. Recent problems with food contamination and recalls in the USA have only highlighted the need for greater traceability. "If a supply chain disaster, such as Salmonella poisoning, happens then it is expected that a manufacturer can trace back all the way to the source of supply to find where it initiated. Neither the general public nor the government are willing to accept that you can't trace that back," says Kent.

"A lot of companies can do it, but it takes a great deal of effort to trace it back. And when this situation occurs there's not a lot of time to respond. In most cases it's a matter of data management, so they have to be able to do lot tracking throughout the entire supply chain. They have to know which lots coming from, which suppliers might have been introduced within the supply chain that are affected," says Kent.

Health and safety standards are obviously of paramount importance in the food industry and the majority of companies focus on employee training as a way of ensuring safety. During recessionary times, many companies tend to cut their training budgets but Kent says that what is really required is for companies to stick to their guns in making sure that employees are well trained and that sufficient monitoring programmes are in place enabling any trending on safety related issues to be spotted in advance so that the information can be shared across the supply chain and across the different business units.

Training on its own however, is not enough and technology has an important role to play. "Certainly, IT information systems are important, but in many cases companies are also introducing technologies like barcoding or RFID to provide the traceability aspect," explains Kent.

And luckily innovations like RFID tracking are now becoming far more accessible as the price comes down. As with most new technologies, the expense made it prohibitive for many of the smaller companies in the industry, but as the volume has increased, the price has correspondingly decreased opening up the market and offering a safer future.