Executive Briefings

An Action Plan for Tough Times

I've written in recent posts about the curious failure of many companies to respond vigorously to changing conditions in the early weeks of the Great Recession. They seemed unable to cope with a sudden collapse of demand, other than to enact wholesale layoffs or draconian cost-cutting measures. Where were those visionary CEOs who can turn a crisis into an opportunity for innovation and rebirth?

Let's be fair. There isn't a whole lot else you can do when your immediate survival depends on slashing overhead. In the consumer products business, deep cuts prevented companies from investing in systems and processes that might have improved their chances for longer-term profitability. So we got four-day work weeks, plant shutdowns and demands for greater productivity from those who managed to survive multiple rounds of layoffs. As Glen Goldbach, director of advisory services with PricewaterhouseCoopers (www.pwc.com) puts it: "Organizations are pretty exhausted, and there's been no individual return for [employees], other than they have a job. Senior-most people are aware of this and are concerned, but they just don't have the resources to do traditional investments."

So what to do now? Inactivity isn't an option. Sooner or later, companies are going to have to revamp their supply chains to reflect the new realities of consumer behavior. Those that opt for "sooner" are the ones that will still be standing, and ready to cope with a resurgence of demand, when things finally turn around.

One answer lies in a company's approach to its service providers, especially for transportation. It's easy to get complacent about the current surfeit of capacity and drivers in the trucking sector, for example. But that won't last forever - or even much longer. Changes in the financial arena have made it tougher for operators to get financing. Equipment is exiting the market in droves, and variables such as the rising price of steel scrap are making that option even more attractive. Says Goldbach: "There's a whole layer of capacity that's now missing, that we won't feel until the economy gets better." When it does, get ready for higher rates and degraded service.

Certain specialized areas of the market could be in even greater peril. Goldbach declares himself "deeply concerned" about the flatbed business, which supports the construction industry. When that ailing sector finally comes around, there might not be enough transportation capacity to meet its needs. And you can pretty much be assured that there won't be sufficient drivers, for all types of equipment. "It won't take us long to get back to 2005 numbers, when we were 20,000 longhaul drivers short," Goldbach says.

Rail is a good option, you say? Perhaps. But Goldbach wonders about the implications of the rise in steel scrap values, driven by a worldwide surge of mini-mills. It costs a lot of money to overhaul equipment. What if the railroads decide to generate ready cash by turning some of their idle capacity into scrap? Goldbach hasn't actually witnessed any carriers taking this drastic step, or even contemplating it. On the other hand, "if a few years ago you had asked me if trucks could end up in Eastern Europe, I would have said no way." Funny how things can change in an economic winter.

Red flags are unfurling on the ocean side as well. Carriers' obsession with building ever-larger containerships promises to have a serious impact on service. The biggest vessels can call only a handful of ports around the world, making necessary a network of feeder services that will result in longer end-to-end transit times. (Never mind the additional impact of slow-steaming, a practice being adopted by carriers in the major trades to cut back on fuel consumption.) The lines save on operating expense, but shippers end up with fewer service options and higher supply-chain costs.

Time, then, to get a grip on your supplier base. Outside partners represent the biggest risk to a supply chain, Goldbach says. Your company might be strong enough to weather a prolonged recession, but the same doesn't necessarily hold true for the army of vendors that keeps you in business. Some might be turning out critical pieces of equipment that can't be easily shifted to another source. Others might serve key routes with little viable competition. So ask yourself: are those suppliers in a position to ramp up production in line with renewed demand? (Some companies are already discovering that the answer is no. See Jean Murphy's post about Cisco Systems, http://www.supplychainbrain.com/content/blogs/think-tank/blog/article/font-size2cisco-riding-demand-wave-but-suppliers-unable-to-keep-upfont/.) Are the necessary transportation links going to be there when you need them? Companies need to carry out detailed supplier risk assessments, to uncover warning signs such as litigation against the company in question, a reduced access to cash or the abrupt firing of an auditor. Standard indicators such as Dun & Bradstreet reports "are pretty trailing," says Goldbach. "You can still get shocked."

With the proper intelligence in hand, get together with those suppliers and walk them through their ability to meet service commitments. Depending on how much you know, "it could be a unique opportunity to gain tremendous market share," says Goldbach. "It could also be an opportunity to lose market share."

Comment on This Article

I've written in recent posts about the curious failure of many companies to respond vigorously to changing conditions in the early weeks of the Great Recession. They seemed unable to cope with a sudden collapse of demand, other than to enact wholesale layoffs or draconian cost-cutting measures. Where were those visionary CEOs who can turn a crisis into an opportunity for innovation and rebirth?

Let's be fair. There isn't a whole lot else you can do when your immediate survival depends on slashing overhead. In the consumer products business, deep cuts prevented companies from investing in systems and processes that might have improved their chances for longer-term profitability. So we got four-day work weeks, plant shutdowns and demands for greater productivity from those who managed to survive multiple rounds of layoffs. As Glen Goldbach, director of advisory services with PricewaterhouseCoopers (www.pwc.com) puts it: "Organizations are pretty exhausted, and there's been no individual return for [employees], other than they have a job. Senior-most people are aware of this and are concerned, but they just don't have the resources to do traditional investments."

So what to do now? Inactivity isn't an option. Sooner or later, companies are going to have to revamp their supply chains to reflect the new realities of consumer behavior. Those that opt for "sooner" are the ones that will still be standing, and ready to cope with a resurgence of demand, when things finally turn around.

One answer lies in a company's approach to its service providers, especially for transportation. It's easy to get complacent about the current surfeit of capacity and drivers in the trucking sector, for example. But that won't last forever - or even much longer. Changes in the financial arena have made it tougher for operators to get financing. Equipment is exiting the market in droves, and variables such as the rising price of steel scrap are making that option even more attractive. Says Goldbach: "There's a whole layer of capacity that's now missing, that we won't feel until the economy gets better." When it does, get ready for higher rates and degraded service.

Certain specialized areas of the market could be in even greater peril. Goldbach declares himself "deeply concerned" about the flatbed business, which supports the construction industry. When that ailing sector finally comes around, there might not be enough transportation capacity to meet its needs. And you can pretty much be assured that there won't be sufficient drivers, for all types of equipment. "It won't take us long to get back to 2005 numbers, when we were 20,000 longhaul drivers short," Goldbach says.

Rail is a good option, you say? Perhaps. But Goldbach wonders about the implications of the rise in steel scrap values, driven by a worldwide surge of mini-mills. It costs a lot of money to overhaul equipment. What if the railroads decide to generate ready cash by turning some of their idle capacity into scrap? Goldbach hasn't actually witnessed any carriers taking this drastic step, or even contemplating it. On the other hand, "if a few years ago you had asked me if trucks could end up in Eastern Europe, I would have said no way." Funny how things can change in an economic winter.

Red flags are unfurling on the ocean side as well. Carriers' obsession with building ever-larger containerships promises to have a serious impact on service. The biggest vessels can call only a handful of ports around the world, making necessary a network of feeder services that will result in longer end-to-end transit times. (Never mind the additional impact of slow-steaming, a practice being adopted by carriers in the major trades to cut back on fuel consumption.) The lines save on operating expense, but shippers end up with fewer service options and higher supply-chain costs.

Time, then, to get a grip on your supplier base. Outside partners represent the biggest risk to a supply chain, Goldbach says. Your company might be strong enough to weather a prolonged recession, but the same doesn't necessarily hold true for the army of vendors that keeps you in business. Some might be turning out critical pieces of equipment that can't be easily shifted to another source. Others might serve key routes with little viable competition. So ask yourself: are those suppliers in a position to ramp up production in line with renewed demand? (Some companies are already discovering that the answer is no. See Jean Murphy's post about Cisco Systems, http://www.supplychainbrain.com/content/blogs/think-tank/blog/article/font-size2cisco-riding-demand-wave-but-suppliers-unable-to-keep-upfont/.) Are the necessary transportation links going to be there when you need them? Companies need to carry out detailed supplier risk assessments, to uncover warning signs such as litigation against the company in question, a reduced access to cash or the abrupt firing of an auditor. Standard indicators such as Dun & Bradstreet reports "are pretty trailing," says Goldbach. "You can still get shocked."

With the proper intelligence in hand, get together with those suppliers and walk them through their ability to meet service commitments. Depending on how much you know, "it could be a unique opportunity to gain tremendous market share," says Goldbach. "It could also be an opportunity to lose market share."

Comment on This Article