Each issue, Kennedy
& Advisory (KCRA)
offers a take on the
current state of the
Nathan Simon is the Lead
for Strategy & Operations
for Kennedy Consulting
Research & Advisory (KCRA).
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Breaking the Cycle of Volatility and
Supply Chain Performance Deterioration
The great moderation that lasted from
the mid-1980s through 2007 was characterized by low volatility and strong
gains in business performance that combined in the fashion of a virtuous cycle.
The supply chain was a significant beneficiary and source of these gains, resulting
from the lower levels of volatility that needed to be managed and the application of new
techniques and tools such as lean methods,
including the shift to a pull-based operating
model and just-in-time inventory management, and substantial investments in technology-enabled planning systems.
In the United States, for example, the ratio
of inventories to sales in the manufacturing
sector decreased at a compound annual rate
of 2. 7 percent between 1995 and 2005, while
total factor productivity (the change in output per unit of combined capital and labor inputs) increased at a compound annual rate of
1. 6 percent during the same period.
The new normal that followed in the
wake of the global financial crisis shared
one of those characteristics. After spiking,
volatility, indeed, returned to the level that
prevailed during the great moderation. But
the supply chain transformed from a driver
of to a drag on performance improvement.
The ratio of inventories to sales for U.S.
manufacturers actually increased at a compound annual rate of 1. 6 percent during the
decade that followed the mid-2000s, while
the compound rate of annual total factor productivity growth decreased to 0.5 percent,
one-third of the rate that prevailed during the
preceding decade. At the same time, supplier delivery times lengthened across both advanced and emerging major manufacturing
economies throughout the period.
Part of the reason for this performance
deterioration is that the low macro-level
volatility is hiding increasing micro-level
volatility as customer tastes and preferences and supply availability and reliability are
changing more quickly and substantially
than during the great moderation.
But companies are also partly to blame
for making their supply chains more complex: lengthening and broadening them
through outsourcing and offshoring, expanding the product and service portfolio
they need to deliver, and subjecting them to
increasing promotional activity. At the same
time, companies are transforming their singular supply chains into networks with multiple nodes configured around distinctive
segments with differentiated supply modes.
The rub is that most companies develop
supply chain strategies on a one-off basis
that is out-of-step with the pace of change,
and the IT automation and S&OP processes
they have adopted to discipline their planning frequently fail to accommodate this
complexity, resulting in a vicious rather
than a virtuous cycle.
When companies seek to enlist consultants to break this cycle, they tend to focus
on fixing the immediate sources of poor performance: the right configuration of supply
chain segments, better inventory targets, or
more accurate demand forecasts.
But they neglect to put in place the underlying capabilities to consistently manage multiple segments, coordinate across functions to
deliver against good targets and forecasts, and
dynamically adapt their configurations and
targets to changing conditions. Consultants
consequently need to help their clients to take
a step back to improve their foundational capabilities before fixing inaccuracies.