Ford’s tsunami: Why it’s time for ‘dynamic operations’

As the 15-metre tsunami engulfed the Fukushima nuclear reactor on March 1 last year, how many supply chain managers simply sat watching the events unfold on television, asks Mark Pearson, global managing director of operational consulting for Accenture.

Such an unresponsive approach is one example of an old-world attitude to supply chain management, Pearson explains to LeadingCompany.

“How many people were still sitting in front of the television as opposed to mobilising themselves into SWOT teams, identifying which direct suppliers were affected by the disaster, which second-, third- or fourth-tier suppliers were affected, and how do I redesign my product to mitigate the impact, and how do I communication with my customers?” Pearson says.

Too late for just-in-time

The 1800 workers stood down by Ford for the next few days might wish their leaders were more up to date on supply chain management. The Ford plant has ground to a halt because a supplier of their car parts – CMI Industrial – went into receivership, leaving them without essential components.

Ford’s just-in-time approach to supply chain management is no longer the world’s best practice; the world is no longer the stable place in which such a strategy can dominate. “Volatility has always been with us, but the speed with which it is hitting us is new,” Pearson says. “Just-in-time and single-sourcing removed all the flexibility from the supply chain. It is very efficient and has driven down working capital and cost of goods sold, but suddenly supply chain managers are getting a whole set of impacts from different places.”

The unpredictable – Fukushima, volcanic ash clouds over Europe, the Queensland and Victorian floods and fires – have combined with the more familiar wildcards, such as terrorist attacks, currency and commodity volatility, to bring unprecedented chaos to the job of supply chain management. And then, of course, there is the internet.

The cost of getting it wrong

Lack of flexibility comes at a big cost to shareholders, an Accenture study found.

“We looked at 68 listed companies in 2011 that suffered a production failure, from a power shortage to a quality problem,” Pearson says. “The impact on total shareholder return [share price and dividends] was a 7% reduction in value.”

Although the sample size was small, Accenture wanted to draw a correlation between mismanagement of supply chain and shareholder value. There were further correlations between the type of failures and the types of impact. “But we were just trying to prove that when you have these failures, it is significant,” Pearson says.

Australia is vulnerable

The shift to Asian outsourcing has made Australian companies particularly vulnerable, Accenture’s Australian managing director for operational consulting, Olaf Schatteman, tells LeadingCompany. “We have very long supply chains to Australia,” he says. “Look at shipping costs in and out of Australia. Nothing I can think of changes as much as the container rates, which is about global demand for shipping lanes. This can have a huge impact on the business case around manufacturing offshore, versus locally.”

Local retailers felt the impact recently when consumer demand slumped in the two-month period between them placing orders with Asian suppliers and receiving the goods. “There is not much that needs to go wrong for the whole equation to go south,” Schatteman says.

The risks are not restricted to manufacturing sectors, however, the experts say. Sectors as wide as banking, healthcare, media and defence are all grappling with chaotic change.

Today’s model is dynamic

The built-in flexibility essential to today’s supply chain has been dubbed “Dynamic Operations” by the consulting group.

Early movers on the issue are building in flexibility in three ways:

1. Building in redundancy into the supply chain, such as incremental capacity (overtime, added shifts) or increasing working capital, which has a direct impact on cost.
2. Becoming much more responsive: building a company that responds far more quickly to issues. When disaster strikes, the team is instantly up, analysing the impact and responding in creative ways.
3. Buying insurance to protect supply chain risk.

An in-depth look at becoming more responsive

Although change is under way in many companies, Pearson says few have developed responsive capabilities in four key areas he defines below:

1. Establishing a centralised view of the supply chain to assess risks by analysing accurate data from all suppliers. “Most of our supply chains are global now, so problems with a supplier in Australia may impact a manufacturer in Germany,” he says.
2. Creating adaptable structures for assets, people, systems and processes. “Supply chain managers have to think very hard about how asset intensive they should be,” Pearson says. For example, companies might outsource a lot of their manufacturing capability, but keep certain parts of it – their core manufacturing capability – by building contracts with the flexibility to ‘pop up and pop down’ their capacity. “Too many people are caught out with large fixed costs when the market turns down,” he says.
3. Adapting quickly to market trends linking supply chain to research and development. “Take mobile phones; the core bit is the motherboard. These can all be made in one place with a limit of five designs. Then you ship to your markets – Hungary, Mexico or Sydney – and have very flexible customisation sites, when a customer orders a pink one with specific software loaded.”
4. The final element is the human end of flexibility. This involves training to some extent, and creating a culture within companies where staff and executives are accustomed to rapid change. Pearson says: “This is about cross skilling and people who can do more than one task. At the more complex level, it is about a culture within a company that recognises what you do today may be different in six months’ time.

“The single biggest difficulty companies find is their people – getting people to realise that being adaptable is surviving.”