Executive Briefings

Stop Me If You've Heard This One

In 2010, companies are going to optimize their supply chains, embrace formal sales and operations planning, and build better links with suppliers at one end, and customers at the other.

No, really. We mean it this time.

Sound familiar? It should, to anyone who has spent more than a couple of years in this business. Because industry analysts and gurus have been calling for essentially the same set of reforms for decades. As the great Bob Dylan once said: Any day now.

But let's not allow cynicism to cloud our vision. Progress is being made. The cratering of the global economy gave business a good, hard lesson on the need for efficiency and responsiveness in supply chains. Companies that modernized their processes several years back appear to have done a better job of weathering the recession than those that didn't. So says Simon Ellis, supply chain strategies practice director with IDC Manufacturing Insights (http://www.idc-mi.com). The evidence might be "a bit anecdotal," he says, but the adoption of advanced planning systems and cross-functional S&OP processes seems to have given companies a leg up in adapting to sudden changes in the economy. No one escaped the pain, but these far-seeing businesses were better able to preserve "core profitability."

Ellis believes the experience of the last couple of years will drive more companies to do what they've been talking about for much longer than that. Number one on Manufacturing Insights' Top 10 predictions for global supply chains in 2010 (http://www.idc-mi.com/getdoc.jsp?containerId=prUS22104709&sessionId=AA7F6CA3553395FBB0FA662F275B5A5E) is the emergence of "dynamic optimization." No, that's not a new body-building technique; it's an attempt to drive out waste and boost productivity. Nothing new, you say? Ellis would agree, but he insists that companies will be taking a hard look at their inventory-management strategies, with an eye toward controlling costs and enhancing service performance. S&OP will help them to synch up supply and demand, and collaboration with supply-chain partners will allow everyone "to better take advantage of narrow profit opportunities." Ellis has a phrase for it: "intelligent value chains."

He admits to a touch of cynicism itself - "there's no such thing as a new idea" - but he still thinks that real change is coming in 2010. One reason that S&OP might have failed to catch on before is a basic misunderstanding of what it entails. Software vendors have been aggressively pushing their wares in that space, he says, "but it's more of a business process than an application." The idea is to come up with a single planning number that can be shared by sales, finance and operations. And that takes more than a piece of software.

Real S&OP extends beyond the organization to embrace key supply-chain partners. That capability becomes even more essential as manufacturers increase their reliance on outsourcing - another prediction on Manufacturing Insights' Top 10 for 2010. The goal is to craft supply chains driven by variable instead of fixed costs (at least for the manufacturer). Collaboration has to take place throughout a product's lifecycle, including the research and development stage. These days, says Ellis, the internal manufacturing portion of an S&OP process might cover 40 percent or less of a company's total capacity.

Also on the prediction menu for 2010 is a shift in where product gets made. China still rules, but alternatives are springing up, some of them much closer to the intended consumer. Ellis talks of "profitable proximity sourcing" - a fancy way of saying that some production intended for the U.S. market will return to the western hemisphere, as suppliers and retailers focus more on customer satisfaction. As the saying goes: Out of Stock, Out of Mind. "We think that in a lot of categories, companies are going to recognize that the ability to hold on to important customers was one of the things that helped them out of the recession," he says. Mexico and other parts of Latin America stand to benefit the most; but even the U.S. could see a return of some manufacturing jobs, if Ellis is correct.

The wild card, as always, is the timing for an end to this punishing recession. Ellis sees some positive signs. Between October 2008 and November 2009, he notes, the Purchasing Managers Index of the Institute for Supply Management (http://www.ism.ws/ismreport/mfgrob.cfm) rose from 38.9 to 56.7. The number represents the percentage of managers who report improved business conditions over the prior month. In that same period, the University of Michigan's Consumer Sentiment Index (http://www.sca.isr.umich.edu/) rose from 57.6 to 70.6.

So are we out of the woods? Hardly. There are several factors to keep in mind, says Ellis. One is the possibility that recent big reductions in inventories and corporate capital spending were too severe, and that signs of recovery "are simply a minor rebound to bring us back to a steady state." Another is the suspicion that government stimulus money created "false activity" that will disappear when the funds dry up.

Other worries include the sleeping inflation monster, which could awaken when rising government debt takes its toll on the value of the dollar, and the continuing loss of jobs in the U.S. The latest government figures suggest we are in a jobless recovery, which is no recovery at all. "It's a funny world where the loss of 11,000 jobs in a month is good news because you thought it was going to be 200,000," says Ellis. "Economic recovery can only go so far without job creation."

A recovery that peters out and a recession that won't release its death grip on the economy? Who knows - maybe there's something new under the sun after all.

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In 2010, companies are going to optimize their supply chains, embrace formal sales and operations planning, and build better links with suppliers at one end, and customers at the other.

No, really. We mean it this time.

Sound familiar? It should, to anyone who has spent more than a couple of years in this business. Because industry analysts and gurus have been calling for essentially the same set of reforms for decades. As the great Bob Dylan once said: Any day now.

But let's not allow cynicism to cloud our vision. Progress is being made. The cratering of the global economy gave business a good, hard lesson on the need for efficiency and responsiveness in supply chains. Companies that modernized their processes several years back appear to have done a better job of weathering the recession than those that didn't. So says Simon Ellis, supply chain strategies practice director with IDC Manufacturing Insights (http://www.idc-mi.com). The evidence might be "a bit anecdotal," he says, but the adoption of advanced planning systems and cross-functional S&OP processes seems to have given companies a leg up in adapting to sudden changes in the economy. No one escaped the pain, but these far-seeing businesses were better able to preserve "core profitability."

Ellis believes the experience of the last couple of years will drive more companies to do what they've been talking about for much longer than that. Number one on Manufacturing Insights' Top 10 predictions for global supply chains in 2010 (http://www.idc-mi.com/getdoc.jsp?containerId=prUS22104709&sessionId=AA7F6CA3553395FBB0FA662F275B5A5E) is the emergence of "dynamic optimization." No, that's not a new body-building technique; it's an attempt to drive out waste and boost productivity. Nothing new, you say? Ellis would agree, but he insists that companies will be taking a hard look at their inventory-management strategies, with an eye toward controlling costs and enhancing service performance. S&OP will help them to synch up supply and demand, and collaboration with supply-chain partners will allow everyone "to better take advantage of narrow profit opportunities." Ellis has a phrase for it: "intelligent value chains."

He admits to a touch of cynicism itself - "there's no such thing as a new idea" - but he still thinks that real change is coming in 2010. One reason that S&OP might have failed to catch on before is a basic misunderstanding of what it entails. Software vendors have been aggressively pushing their wares in that space, he says, "but it's more of a business process than an application." The idea is to come up with a single planning number that can be shared by sales, finance and operations. And that takes more than a piece of software.

Real S&OP extends beyond the organization to embrace key supply-chain partners. That capability becomes even more essential as manufacturers increase their reliance on outsourcing - another prediction on Manufacturing Insights' Top 10 for 2010. The goal is to craft supply chains driven by variable instead of fixed costs (at least for the manufacturer). Collaboration has to take place throughout a product's lifecycle, including the research and development stage. These days, says Ellis, the internal manufacturing portion of an S&OP process might cover 40 percent or less of a company's total capacity.

Also on the prediction menu for 2010 is a shift in where product gets made. China still rules, but alternatives are springing up, some of them much closer to the intended consumer. Ellis talks of "profitable proximity sourcing" - a fancy way of saying that some production intended for the U.S. market will return to the western hemisphere, as suppliers and retailers focus more on customer satisfaction. As the saying goes: Out of Stock, Out of Mind. "We think that in a lot of categories, companies are going to recognize that the ability to hold on to important customers was one of the things that helped them out of the recession," he says. Mexico and other parts of Latin America stand to benefit the most; but even the U.S. could see a return of some manufacturing jobs, if Ellis is correct.

The wild card, as always, is the timing for an end to this punishing recession. Ellis sees some positive signs. Between October 2008 and November 2009, he notes, the Purchasing Managers Index of the Institute for Supply Management (http://www.ism.ws/ismreport/mfgrob.cfm) rose from 38.9 to 56.7. The number represents the percentage of managers who report improved business conditions over the prior month. In that same period, the University of Michigan's Consumer Sentiment Index (http://www.sca.isr.umich.edu/) rose from 57.6 to 70.6.

So are we out of the woods? Hardly. There are several factors to keep in mind, says Ellis. One is the possibility that recent big reductions in inventories and corporate capital spending were too severe, and that signs of recovery "are simply a minor rebound to bring us back to a steady state." Another is the suspicion that government stimulus money created "false activity" that will disappear when the funds dry up.

Other worries include the sleeping inflation monster, which could awaken when rising government debt takes its toll on the value of the dollar, and the continuing loss of jobs in the U.S. The latest government figures suggest we are in a jobless recovery, which is no recovery at all. "It's a funny world where the loss of 11,000 jobs in a month is good news because you thought it was going to be 200,000," says Ellis. "Economic recovery can only go so far without job creation."

A recovery that peters out and a recession that won't release its death grip on the economy? Who knows - maybe there's something new under the sun after all.

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