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Encouraging signs of economic recovery are emerging, yet it is too early to be wildly optimistic that the times will become considerably easier very soon. Given conflicting forecasts, most senior executives are challenged to develop defensive plans as well as growth plans for the better times that lie ahead.
Envisioning the new normal on the horizon, we foresee a varied landscape altered by recent shocks and likely to bear the consequences even a few years from now. The free-spending mindset in some developed countries, for example, won't likely return soon because certain traits-such as frugality-aren't quickly shed, and populations are aging and saving more for retirement. Given that unemployment rates are expected to continue rising in some countries, consumer confidence will rebound more slowly than many of us would hope.
Recent volatility-like a seismic tremor-altered the playing field in undeniable ways and laid the groundwork for a new normal. The deeper integration of markets in the past typically brought sizable economic benefits. The recent financial shocks, in contrast, were transmitted across borders more swiftly and more extensively than ever before. Customers once flush with cash became cautious. Businesses that seemed invulnerable had difficulty securing credit to meet payroll.
While change can bring misfortune, it can also bring opportunity. It is possible, therefore, to capitalize on current circumstances and make significant gains on the road to high performance.
Partly because of the recent shocks, there is greater emphasis today on stability, corporate responsibility, risk management and ecological sustainability. Products perceived as having greater long-term value seem likely to gain favor with consumers. Car owners are keeping their vehicles longer, for example, rather than trading them in for new models. Consequently, service and support are more highly valued. Ostentatious fashion is losing some cachet among affluent consumers in some nations, but that doesn't mean that all luxury goods are in decline. There will always be a market for innovative products, as well as high-quality goods and services. In addition, many consumers have a keen interest in new, environmentally friendly products and packaging.
It would be a mistake to over-generalize, particularly across geographies. Customers in different markets have distinctive tastes and preferences, as well as varying expectations for service and support. Thus, success in this emerging landscape, or the new normal, calls for embracing a consumer-centric view. While a broad global perspective will be essential for large manufacturers and retailers, responding flexibly and rapidly to local shifts in demand within customer segments will be critical for economic sustainability and long-term growth.
New normal for supply chain managers
In formulating consumer-centric strategies, retailers and manufacturers should consider the following:
• Capitalize on the changing landscape: Many companies struggle to survive through economic turmoil, and their exposed weaknesses provide opportunities for more resilient competitors to expand in less penetrated areas and sell through new channels. Manufacturers should comb through competitors' balance sheets, look for windows of opportunity and leverage the strengths of their own brands and financial health. Companies that have been challenged most by the economic downturn should consider quick incentives to their largest customers to avoid erosion in market share.
• Change your product mix/assortment: Value-based products have become a top priority for consumers with fewer dollars to spend. Retailers and manufacturers should assess current trends-product by product and market by market-to identify winners and losers. Adjustments then can be made to the product mix to grab market share of the newly identified preferred products that cost-conscious consumers are buying. Supply chain plans need to rapidly respond to the changes, starting with demand and forecast adjustments, then extending to revised plans for distribution, production and raw-materials procurement. The revised plans inevitably translate into an altered mix of materials required to support a changed product mix. To drive higher margins, manufacturers can renegotiate more favorable terms and contracts with suppliers.
• Seize the opportunity for innovative and cost-effective packaging: Product innovation is usually associated with an increase in overall costs rather than with cost reduction. However, as consumers hunt for value, they become more receptive to packaging changes that demonstrate waste reduction. Manufacturers can respond to consumer frugality by providing packaging that reduces total product cost without tarnishing brand quality. Now is the time to make such changes, aligning with value and heightened social responsibility.
• Adjust inventory policies: Manufacturers and retailers must be able to rapidly realign inventory policies with changing consumer preferences. Safety-stock levels can be adjusted to invest more in upward-trending items and less in goods being passed over. Accurate, informed allocation and replenishment decision making is critical for companies seeking margin protection. In an uncertain economy, organizations need to strive for an immediate improvement in working capital.
• Re-evaluate transportation and logistics: Transportation volumes have changed dramatically in the past six to 12 months, thereby providing an ideal opportunity to re-assess capacity requirements. Companies should consider negotiating lower rates from major carriers in exchange for committing to some portion of total capacity required in shipment plans. Cost reductions could result in significant margin improvements.
• Establish a more responsive supply chain: Organizations must remove unnecessary delays between multiple planning functions within their supply chains. A single view of demand calls for all planning processes to be brought together. While this suggestion might sound like a lofty and an unattainable goal, it is certainly achievable. Many leading companies have already invested in driving all aspects of their plans-encompassing distribution, production, sourcing and transportation-from a single and responsive view of demand. This advanced approach allows the leaders to drive significant costs out of the supply chain while keeping service levels high and quickly changing product mixes to capitalize on buying trends.
Ultimately, the executive team needs to drive decisions on how to spend resources and invest in products lines, which calls for a comprehensive sales and operations planning process. Companies that wait for an economic upturn to strengthen their supply chains will not have the competitive advantage required to increase market share once the economy begins to improve.
Driving superior performance to realize larger gains
While many supply chain managers see incremental gains in efficiency as their principal mission, the potential exists for larger gains. In the new normal landscape, excellent supply chain strategies have the potential to drive-not merely influence-superior performance.
Consumer-centric supply chains bind business partners together with a unified vision to improve performance. Now is the time for organizations to assess supply chain processes and create an integrated, enterprise-wide information platform. Retailers and manufacturers stand to benefit from advanced information technology and best practices for business process automation and integration, real-time information flow, and improved collaboration among internal and external partners.
The right mix of strategies can help position retail and manufacturing organizations for margin improvements, market-share gains and significant progress on the journey to high performance.
David Johnston is Sr. VP Supply Chain at JDA Software. Amit Gupta is a Partner at Accenture Supply Chain Management.
Source: JDA Software & Accenture
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