Part One of this series, published on January 6, 2022, stated “How individuals and companies deal with ongoing unpredictability will determine their mental, physical, and financial health in 2022 and beyond.” Little did we realize at the time how quickly and violently that uncertainty would ramp up this year, particularly with the onset of the Russo-Ukraine war and all its repercussions. The scenario planning advocated in Part One has rarely been more urgent than at the current time. In Part Two of this series, we examined key tools and techniques for dealing with uncertainty, including probability forecasting, structured contracts, real options as risk mitigation strategies, manufacturing flexibility, and hedging strategies. Here in the third and final segment, we look at mapping and monitoring, supply chain finance, and building adaptability into infrastructure, systems, processes, and people. The contents of this three-part series are organized as follows:
The Current Period of Ongoing Uncertainty and Volatility
Indicators of Continuous Elevated Volatility
The Pandemic’s Opaque Trajectory
Supply Chain Resilience in the Age of Uncertainty
A Framework for Mitigating Risk in High-Uncertainty Scenarios
Assessing the Pandemic’s Possible Trajectories and Potential Responses
Impact of Activity Restriction and Economic Constriction on Individual Industries and Businesses
Probability Forecasting
Capacity and Consumption Commitment Contracts
Real Options as Risk Mitigation Strategies
Hedging Strategies
An Example Approach to Hedging
Price Guarantees Should Be Vetted for Viability
Over-the-counter Derivatives
Currency Exchange Rate Hedging & Natural Hedging
Mapping and Monitoring
The Role of Supply Chain Finance in Supply Chain Resilience
Building Adaptability into Physical Infrastructure, Systems, Processes, and People
Physical Infrastructure Adaptability
Manufacturing Flexibility
Facility Ownership Strategies
Systems, Process, and People Adaptability
Data And Inter-System Integration
System Evolvability
Business Process Flexibility
Workforce Adaptability
Bringing it All Together with Situation-specific Expertise
Mapping and Monitoring
The 2011 Japanese tsunami and Thailand floods were a wake-up call for some companies, as they struggled to understand their own multi-tier supply chains, the impact on production and revenue, and the actions needed to mitigate the effects. Since then, natural disasters, pandemics, and wars have all raised the stakes for companies to know their supply chain better. Many lack up-to-date information on critical components, exactly where they are really being made, the status of those plants, up-to-date contact information, and so forth. Some companies have been mapping out their multi-tier supply chains so that they can understand the impact of events around the world and quickly respond. The process of mapping a supply chain can be a very labor-intensive undertaking, and to be useful the information must be kept up-to-date and accurate. Hence, companies will focus first on mapping the most critical components for their most critical products.
Mapping to the plant/location level may include identifying the most critical parts (based on risks to revenue, profit, brand, etc.), mapping multi-tier supply chains for critical parts back to individual production sites, and maintaining part/site-specific information (contact info, continuity plans, recovery times, alternates, etc.). A supply chain map is a living entity that needs to be continually updated. Using transactional data (such as purchase orders and bills of lading) can ensure that actual part numbers, ship from and ship to locations, and other changing master data are kept up-to-date and accurate as the underlying supply chain evolves. Using that technique, buyers may be surprised to learn where their stuff is actually being made.
Once an accurate and up-to-date map is created and is being accurately maintained and updated in a timely manner, it can be used to determine which events around the world will impact their supply chain. There are platforms that not only gather near real-time data about events from many sources, but more importantly, sift through all of those events (whether a fire at a manufacturing plant, a big labor strike, pandemic shutdowns, or political unrest) and determine which events are potentially impactful to a company’s own multi-tier supply chain. The software can analyze the impact of these events in terms of the potential impact on revenue, profit, key customer orders, etc. The same systems can be used to trigger mitigation actions, provide war room planning, allow multiple parties to collaborate on solving issues, and monitor progress in risk mitigation actions. They can also be used to play what if/impact analysis for different potential actions.
While many companies may not be ready for a full multi-tier mapping and monitoring, almost all companies with supply chains (manufacturers, distributors, retailers) can benefit from some level of mapping out their supply chains and monitoring relevant events. In the current age of uncertainty and volatility, it can make all the difference in the survival of a company.
The Role of Supply Chain Finance in Supply Chain Resilience
Supply chain finance is likely to play an increasingly important role in the coming years. We know interest rates will rise substantially in 2022 and possibly beyond. Competition for capital is also likely to rise as people invest in new capacity, near-shoring production, and reduce their carbon footprint to meet corporate and government-mandated targets. The Economist is predicting that capital will become scarcer in the 2020s. This will impact companies and their suppliers. It would be wise to build out supply chain finance capabilities and programs. In the coming years, these can help marginal suppliers to remain viable by providing access to affordable capital. For a deeper dive into innovations in supply chain finance, see our series Reinventing Supply Chain Finance.
Building Adaptability into Physical Infrastructure, Systems, Processes, and People
The pandemic forced some companies to pivot their business model and processes dramatically and rapidly. For example, retailers whose store traffic disappeared overnight had to rapidly ramp up e-commerce and curbside pickup. This requires flexible physical infrastructure, IT systems, processes, and people.
Physical Infrastructure Adaptability
Manufacturing Flexibility
Flexibility reduces risk. Manufacturing flexibility comes from 1) Component and Platform/Architecture Standardization, and 2) Manufacturing Capacity/Mix Flexibility
Component standardization involves using common parts and assembly sequences. Leading manufacturers are highly disciplined about component standardization, and the reuse of common parts and designs across models. This enables the pooling of component inventory, which reduces parts demand variability and parts obsolescence when moving from one generation to the next, or when demand for different models is higher or lower than expected. These require discipline early in the product definition and design cycle to create common, flexible platforms. This involves cultural change, because most engineers would rather invent something new than reuse designs. Engineers must be measured and compensated on parts and design re-use as well as design-for-assembly — common assembly sequences and equipment to enable quicker changeovers in the plant.
Manufacturing capacity flexibility can be developed along many dimensions, such as:
- Mix flexibility — The ability to for a single plant to build many different types and lines of product, instead only being able to build one or two products, is important. This provides a lot more flexibility in turning on and off production capacity for any specific product. Cellular manufacturing enables modified or new product designs to be introduced more rapidly than traditional manufacturing lines.
- Volume flexibility — The value of being able to expand and contract production to handle large swings in volume was highlighted by the pandemic. This is not easy to accomplish. Dual- or multi-sourcing, along with the ability to effectively use contingent labor and outsourced manufacturing capacity, can help when the shortage is not industry-wide. For industry-wide shortages, capacity and consumption commitment contracts and hedging strategies can help mitigate the impacts, as described in Part Two of this series.
- Evolution flexibility — The ability to migrate plants and production lines to next-generation products is important. Cellular manufacturing techniques, modular and adaptable manufacturing, material handling equipment, and flexible assembly lines (interchangeable process and test modules) are examples of strategies to achieve plant evolution flexibility.
Moving to common product platforms, architectures, processes, and equipment, as well as flexible assembly processes such as cellular manufacturing, allowing tooling to be changed at a tooling station with inserts, or using the same tool with a robotically controlled system, all contribute to manufacturing flexibility.1 Using a probability curve of forecasted volume, net present value (NPV) can be modeled to find optimum capacity investments vs. expected sales. As described in part two, real options can help calculate whether investments in flexibility are worth the cost. This flexibility analysis should be extended to your internal and external supply network, making sure you have multiple upstream sources that can build each component required for your downstream plants.
Companies should seek to design flexibility into the layout and equipment in the facilities they own or lease. The same applies to warehouses, such as the use of mobile material handling equipment, modular, rapidly reconfigurable conveyor systems, mobile robotics, and rapidly reconfigurable racking systems.
Facility Ownership Strategies
Firms also need to balance their portfolio of owned vs. leased facilities, not unlike the need to balance employees vs. contractors. Owned property has the advantage of assured availability, but is at the risk of underutilization if planned growth doesn’t materialize. Leveraging 3PLs facilities is an avenue to flexibility, the ability to surge up and down as market conditions change. 3PLs have the advantage of providing expertise and labor, not just the facilities.
Even if a firm outsources infrastructure, there is a significant range of possible flexibility vs. certainty. For example, a seven-year lease with onerous early termination penalties is quite different than a contract that allows you to expand and contract your space on a monthly basis. More recently, on-demand warehousing has been introduced by companies such as Flexe, Flowspace, Stord, and Ware2Go. They provide a network that connects companies in need of warehouse space to warehouse owners who have excess space and would like to generate some income from that space. These tend to be shorter-term needs on both sides of the equation. The upside is the flexibility. The downside is the uncertainty of what kind of space and facility you will get.
The current shortage of distribution space has tested the limits of all of these strategies. These solutions don’t solve market-wide shortages, as we are experiencing now. In general, you will pay a premium for flexibility. In the long run, it may be less expensive and provide more certainty to ‘own your own’ or agree to longer-term commitments, but at the risk of paying for underutilized space when things slow down. This is another area where real options analysis can be used to compare the relative value of different potential options, such as ownership vs. leasing.
The same concepts and tradeoffs apply to owning fleets of vehicles. Some larger firms are chartering (or even buying)2 their own container ships, an option only available to those with sufficient volumes and capital.
Systems, Process, and People Adaptability
The agility and adaptability of systems, processes, and people are intertwined. Some areas to consider include data and inter-system integration, system evolvability, business process flexibility, and workforce adaptability.
Data And Inter-System Integration
No matter how powerful supply chain planning, optimization, and execution systems are, the results are only as good as the data feeding those engines. The vast majority of the data consumed by planning and optimization systems is external to each planning system; mostly in the firm’s ERP systems, but also in various other execution systems such as WMS, TMS, procurement systems, as well as other supply chain planning systems. Increasingly, data is coming as well from Internet-of-Things (IoT) and sources outside of the enterprise, such as supplier/”trading partners’ systems, weather, traffic, market data, social media, and other information. All of these sources are constantly changing. Agile, rapid integration tools are critical to being able to pivot and continually adapt to a constantly evolving data and system landscape. Approaches to achieving this kind of adaptability are described further in Agile Integration.
System Evolvability
The architecture of a system greatly impacts its ‘evolvability’; i.e., ability to change and evolve over time. Modern microservices architectures, if implemented correctly (such as the correct level of service granularity, design for reuse, etc.) enable a system to continually evolve, especially in its functional evolution and integration with other systems. Systems for multi-enterprise networks have special architectural requirements, including shared ‘single-version-of-the-truth’ data architecture, multi-enterprise master data management, multi-enterprise security architecture, multi-enterprise process flows, and other dimensions, as described in Agile Demand-Supply Alignment — Part 2C: Multi-Enterprise Network Architecture.
Agile development and DevOps are critical methodologies to enable continuous change and adaptability of enterprise systems. Bass, Weber, and Zhu,3 define DevOps as “a set of practices intended to reduce the time between committing a change to a system and the change being placed into normal production, while ensuring high quality”. CI/CD and DataOps are important components of DevOps. Per Wikipedia, “Modern-day DevOps practices involve continuous development, continuous testing, continuous integration, continuous deployment and continuous monitoring of software applications throughout its development life cycle. The CI/CD practice, or CI/CD pipeline, forms the backbone of modern-day DevOps operations”.
Business Process Flexibility
The ability to rapidly adapt business processes to changing circumstances is based on both IT systems and workforce flexibility. Systems with business process modeling tools that are usable by power users can enable the front-line workers who actually do the work to rapidly define changes to the process. These tools provide more rapid adaptability if changes to the process model are automatically implemented in the systems that drive those processes, as opposed to requiring an IT engineer to translate the business process model change into changes in the execution systems. Appropriate review, testing, and approval processes are needed to ensure that proposed business process changes are sound.
Workforce Adaptability
A big part of adaptability is workforce culture and training. In particular, cross-training allows people to move around to different jobs and tasks as needs change. This is often done in manufacturing plants, to enable adjustments when demand changes and/or the availability of the various shop floor workers changes (such as during a pandemic). Most people are also more engaged when they are not doing the same repetitive tasks every day.
More broadly, education programs and training can make a workforce more competent and adaptable. Our research found training needs to be practical and hands-on (less theoretical). An example of a more agile education program is by global mining giant Anglo American, who provides on-demand action-oriented learning; i.e. the learning is applied directly to a real challenge an employee faces at the time they are facing it. Employees learn just what they need when they need it.
In order to grow their workforce without over-hiring, companies are increasingly relying on a contingent workforce, which may include 1099 independent contractors, temps, expert networks, gig workers, as well as partnerships with other firms that have complimentary skill sets. Contingent labor is becoming a higher and higher percentage of the workforce. While this increases flexibility, it creates challenges in workforce cohesion and retaining institutional knowledge. The ability to successfully manage contingent labor and virtual teams of individuals that come together on a per-project basis, or for periods of time, has become critical in the new economy.
Bringing it All Together with Situation-specific Expertise
The Russo-Ukraine war has created a global shock to the world economy. Successful scenario planning will require geopolitical expertise to anticipate the various possible directions this could go in and figure out the potential impact on a specific industry and company. Over the course of the pandemic, expertise in epidemiology, government regulations, and public reactions all had to come together to understand potential outcomes. The impacts of the pandemic are still evolving, potentially dramatically. UK-based companies are still dealing with the evolving situation around Brexit. For others, specific regional conflicts or the impact of potential extreme weather events, or labor shortages, or the possibility of prolonged droughts may have profound implications.
Each of these requires situation-specific expertise to diagnose and plan various scenarios. Large companies often have an economist on staff and these days possibly even an epidemiologist (if you can find one that is not already overcommitted!). Companies of any size may leverage consultants with expertise. However, it is important for executives and key personnel to also develop their own knowledge, and to the extent possible do at least some of their own research, to be informed participants in scenario development, mitigation planning, and decision-making processes. Investments in knowledge, processes, and people to manage uncertainty are likely to pay off handsomely.
Get ready for 2022. One prediction we can make with confidence; it won’t be boring. Living with uncertainty does not have to be paralyzing or terrifying. Those that do their homework, do diligent scenario planning, and are adaptable can survive and thrive, knowing they’ve got options.
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1 For example, a traditional automotive body manufacturing plant has model-specific unique tooling, whereas a “flexible body shop” enables stamping out bodies for a number of models without tearing out the guts. A flexible paint shop would also be able to do multiple models. – Return to article text above
2 See A furniture company is shelling out $32 million to build its own cargo ship in an effort to sidestep the supply-chain crisis. – Return to article text above
3 In DevOps: A Software Architect’s Perspective. – Return to article text above
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