Economic Volatility Pushes Companies to Remove Risks from Supply Chains

The global recession has refocused supply chain managers on the tradeoff between cost and resilience, according to "Resilient Supply Chains in a Time of Uncertainty," a new research paper from the Economist Intelligence Unit sponsored by Oracle. Based on interviews with supply chain executives from Lenovo, USG, Fedex, Coca-Cola, Unipart, Whirlpool and other companies, the paper highlights supply chain problems in the aftermath of the extraordinary swings in demand over the past two years.

 

“Volatile demand and credit availability can easily break a traditional supply chain,” says Dan Armstrong, the Economist Intelligence Unit senior editor who managed the study. “Customers are unlikely to have much patience with companies that can’t supply products when needed, even if those companies have always been low-cost providers.”

 

Rather than take a short-term approach to managing their supply chains, a number of the executives have turned their attention to more long-term, strategic goals.

 

These objectives include strengthening relationships with partners. The paper says many companies have developed stronger ties to suppliers – in some cases taking ownership stakes in them – while continuing to police them closely for signs of financial distress and making any necessary contingency plans. For instance, last year PepsiCo announced plans to acquire its two major bottlers, and Coca-Cola purchased the North American operations of Coca-Cola Enterprises in the first quarter of 2010.

 

Another strategic goal is improving forecasts and planning. Companies are striving to improve the accuracy of demand forecasting in order to manage inventories more precisely and to better respond to customer demands. For instance, USG Corp, a US-based maker of construction materials, exploited its advanced forecasting capabilities to cut capacity when the bottom dropped out of the housing market. “Now we are looking at long-term forecasts and running models five to 10 years into the future to help us determine when and what we will need to bring back online first,” says Timothy McVittie, senior director of logistics for USG Building Systems.

 

The third approach is finding ways to increase both efficiency and resilience. These two objectives do not always represent a tradeoff, finds the paper. It may be possible to increase both. For instance, Whirlpool was able to boost both efficiency and resilience by consolidating its brands and increasing the use of standardized components.

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