Recession will drive radical changes in supply chains

LCP Consulting, a leading specialist in customer-driven supply chain management says that as economic conditions get harder, firms will need to have fitter, leaner and more agile supply chains to plug the gap left by lack of growth and erosion of cash. The consultancy says that the conditions will give companies a unique opportunity to drive radical changes in their supply chains.

More pressure than ever on supply chains

LCP Consulting recently contributed to a Management Consultancies Association (MCA) report[1], which highlighted how the rise in globalisation since the last recession has produced ever more complex supply chains. As a result, during this recession, LCP believes that companies (and their suppliers) will be left in a more vulnerable position. For instance, companies are more likely to fall foul of invisible hazards, such as an unexpected supplier bankruptcy, capacity withdrawal, changes in service terms and regulatory change.

Alan Braithwaite, Chairman of LCP Consulting comments:

The greater pressure on supply chains is as a result of companies being forced to demand faster delivery in smaller lots with extended credit terms, with the aim of  reducing inventory and paying later to release cash. At the same time they are trying to protect margins by avoiding obsolescence and write offs.

In order to manage supply chain risk, whilst still being left in a position to release cash, LCP recommends that companies focus on five supply chain maxims to ride the downturn and prosper in the recovery.

With speed being of the essence today, the priority areas for any business can be diagnosed quickly so that the benefits can start to flow now and in the future.

The following five supply chain maxims will deliver a range of immediate benefits including more free cash, better trading margins and lower operating costs:

1. Reduce unprofitable complexity

It is crucial to truly understand how both customers and products erode margin. LCPs experience shows that 15% of either or both customers and products erode more than 50% of the profit potential. Designing this group out or designing their profitability back in is a key step to connect the supply chain to the companys performance.

2. Build in customer service excellence

Service excellence is often discussed as a marketing imperative, but seldom connected to the true cost of non-performance both in sales and recovery costs. Outstanding performance protects the customer base that you want to keep and avoids the costs to replace them when they leave, as well as making good your mistakes. Operational excellence led by supply chain design and planning is a critical capability.

3. Design, plan and execute for agility

In the current climate, demand will be unpredictable and volatile; companies must be able to respond without lots of inventory and huge capacity and asset surpluses to cope with change. Agility is about fast flexible processes to meet real customer demand and put in place only inventory that will not be a risk to the business. Speed is the key; fast and accurate processes have been shown to improve customer service and reduce inventories and manufacturing assets.

4. Synchronise and integrate to eliminate waste

Lean management methods can cut waste and cost along the supply chain, streamlining flows and making operational performance a central focus. Most companies have considerable scope to reduce waste. Even those that have applied this generally admit that there is still much more to play for.

5. Collaborate to leverage performance

Companies cannot survive without their key suppliers and customers as well as their service providers. In the downturn there will be further aspects of their operations that they can no longer afford to try to control directly. Building and nurturing key relationships along the supply chain will help them give you more for less; whereas if you just negotiate on price you will miss out on benefits and they will leave you high and dry when times get tough.  For many this will be a new skill and mindset. The future will be about co-operating and competing through shared supply, manufacturing capacity, and distribution and logistics; service providers will need to create blocks of scale and give a level of cost and service transparency that has been lacking.

LCP contributed two papers to the MCA Report, The Weakest Link? To receive a copy of either of these papers, please contact Marie Woodcock on 01442 872298 or email marie.woodcock@lcpconsulting.com.

Alternatively, for a copy of the MCA Report, The Weakest Link? contact Hilary Downes on 0207 321 4810 or email hilary.downes@mca.org.uk.