Operations, even for smaller companies, are much more complex today. International expansion, global manufacturing footprint, open innovation, and low-cost country sourcing are a few examples of the drivers of complexity. More specifically, we see companies struggle in these complexity topics:
- Product Portfolio Complexity with product portfolio proliferation (increased number of SKU’s, parts, options) and shorter product lifecycles
- Supplier Base Complexity with multiple tiers of suppliers, global sourcing, and an increased number of suppliers
- Customer Base Complexity with fragmented customers, global reach, regional regulations, increased demand volatility, and cultural differences
- Manufacturing Complexity with global manufacturing footprint, outsourced manufacturing, product platform approach, etc.
- Distribution Complexity with increased numbers of ship-to and shipped-from locations, multi-channel sales, and increased number of shipments and delivery notes
- IT System Complexity with multiple platforms, support for multiple countries and languages, integration of specialty solutions, etc.
While complexity impacts all corporate functions, recent studies have shown that supply chain related risks and complexities have become a top priority for executives:
- Executives rate supply chain risk as greatest profit risk (FM Global Study, 2006)
- 73% of firms faced supply chain disruptions in last five years (Accenture supply chain study, 2007)
- Stock price volatility increases by more than 20% after a supply chain disruption (Georgia Tech Research Project, 2007)
More specifically, a study by Georgia tech in 2005 of over 800 publicly reported disruptions showed some stunning results as to the impact disruptions had (1):
- Operating Income decreased by 107%
- Return on Sales decreased by 114%
- Return on Assets decreased by 93%
- Sales Growth decreased by 7%
- Costs increased by 11%
- Inventories increased by 14%
Many companies now recognize that the missing link is “situational awareness” (SA) which is the perception of environmental elements within a volume of time and space (See), the comprehension of their meaning (Understand), and the projection of their status in the near future to generate actionable knowledge (ACT). For a company, situational awareness translates into the ability to comprehend the priority of evolving business problems and to take full advantage of the company’s human intelligence in resolving the priority problems in real-time. Best-practice detection and resolution of supply chain problems will likely be the key competitive differentiator.
The key to identifying supply chain issues before they become major disruptions is to reduce latency – the amount of time that elapses after a root cause for a possible disruption can be detected until effective corrective action is taken to resolve all the associated issues. Typical sources of this latency include:
- Lack of visibility: possible disruption triggers are currently not measured
- Data latency: measures are not captured real-time but only once a day or less often
- Insight latency: possible business impact of measures is not or not immediately understood
- Decision latency: routing of insight to appropriate decision maker and making the decision
- Action latency: routing back to appropriate employee to execute the decision made
Relying on traditional performance reporting can cause aggregate latency of weeks when the situation required days of reaction. Best in class companies detect and resolve adverse performance trends quicker and better – they are able to reduce risks and increase flexibility.
(1) Kevin B. Hendricks, Vinod R. Singhal (2005), Association Between Supply Chain Glitches and Operating Performance, in: Management Science, Vol. 51, No. 5, May 2005, pp. 695-711. The results are based on a sample of 885 glitches announced by publicly traded firms from 1989 to 2000.