Category Archives: Sourcing Future

Supply Management in the Decade Ahead IV: Impacts to Business Models & Strategies

In Part I of our review of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, we overviewed the various external forces that will impact a company’s supply chain. In Parts II and III we took deep dives into the eight major forces that were identified specifically by supply managers who took part in the survey. In this post, we will address the impacts that these forces, and others, are going to have on business models and strategies in the decade ahead.

According to the report, the following five strategies, designed to improve the financial performance of companies and impact both their income statement and their balance sheet, will be the most salient in the decade ahead.

  • Focusing on Cost Competitiveness
    Due to the constant increase in available products from developing economies with low labor costs and the need to offer products and services at lower prices in developing markets, companies will need to take an extreme cost management focus. This means that supply management will have to achieve year-on-year cost reduction targets while developing supply strategies to offset or dampen the effects of unfavorable commodity price swings.
  • Aggressively Managing Resources
    The prediction is that many companies will be focused on increasing the return on their asset base and will choose assets that can be managed in such a way as to maximize productivity. Simultaneously, they will choose to reduce their asset base by outsourcing manufacturing and business processes or reducing working capital such as inventories and receivables. They may also invest in businesses with higher returns while exiting business with marginal or low returns on assets. Supply will have to find sources of capital equipment that is flexible, has high uptime, and that can be competitively leased rather than purchased. It will be increasingly involved in VMI (Vendor Managed Inventory), consignment inventory, and pay-on-use or pay-on-shipment inventory plans.
  • Pursuing New Revenue Sources
    Businesses will pursue revenue growth over the next decade through a combination of incremental and radical changes to their business models. A major challenge will be the need to enter emerging markets and compete against low-priced domestic markets to increase, if not maintain, market share. Supply will be tasked to find suppliers that can support growth strategies such as innovation and global expansion.
  • Targeting Specific Customer & Market Segments
    Same old, same old and supply will need to find suppliers that can support shrinking product life-cycles and constant innovation as well as suppliers with market-specific knowledge and the capabilities to manage the upstream supply chain to insure it adheres to sustainability and regulatory requirements.
  • Improving the Level and Speed of Innovation
    First to market will continue to be an important, and profitable, business strategy. Supply management will need to identify suppliers that can support shrinking product life-cycles and constant innovation while bringing knowledge of changing consumer tastes.

There’s no surprises here … and very little change from the state of affairs today. Companies have been focussed on cost-competitiveness for quite some time, have already begun to aggressively manage their resources to maintain that cost competitiveness, have always pursued new revenue sources, and have been targeting specific customer and market segments aggressively for at least the past 50 years! The only noticeable change is that innovation will have to continue to be sped up on a regular basis to allow a company to compete at the same level it is competing at today.

What I would have liked to see is some more aggressive predictions on the strategies that are likely to emerge over the decade ahead. For example, I predict the following trends will begin or continue through the next decade and that some early adopters who get it right will gain massive advantages over their competition, at least in the short term:

  • Vertical movements towards Keiretsu
    A keiretsu is a set of companies with interlocking business relationships and shareholdings. As private equity firms continue to take public companies private at an aggressive pace, they are going to look for ways to to maximize the value of their continually expanding portfolios. Some will pursue vertically oriented strategies and encourage their companies to form synergistic business relationships that will start to mirror the traditional Japanese keiretsu system.
    In addition, as certain verticals continue to come under intense competition from new entrants, public companies within those verticals will start to band together in an effort to more effectively compete as a group than as a set of completely independent entities. Although this will not be a widespread strategy, it is likely to emerge in the near future.
  • Increased Niche Specialization Around Talent Pools
    With talent harder and harder to come by in developed economies, some companies will choose to focus only on one or two business functions (for which they have an unusually large talent pool compared to industry norms) and literally outsource every other aspect of their business. Just like some major brands today outsource almost everything to contract manufacturers and do not own much more than their brand, the offices their employees work in, and the equipment they use, more and more companies, including non-brand name ones, will adopt this model. Some will specialize on design. Some will specialize on integration. Some will specialize on the manufacture of a single, common, component. You’ll also see this model in consulting as well – some of the bigger players struggling to survive in the more aggressive global marketplace will spin out or sell off divisions until they are focussed not only on one or two offerings, but often niche plays within those offering. For example, it won’t be just engineering design, or even automotive engineering design, but automotive frame engineering design.

In Part V, we will address the new and expanded missions, goals, and performance expectations for supply management as identified by the report.

Supply Management in the Decade Ahead III: The Eight Major Forces – Part II

In Part I of our review of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, we overviewed the various external forces that will impact a company’s supply chain as identified by CAPs, AT Kearney, and the survey respondents. We then concluded with the eight major forces that were identified specifically by supply managers who took part in the study. In Part II, we dove into the details of the first four of the eight major forces. Today, we dive into the last four of the eight major forces and explain not only why they are important, but what can be done about them.

Customer & Channel Dynamics

The downstream supply chain will change rapidly due to economics and government policies in some industries. In other industries, supply chain dynamics will be influenced by the poor financial condition of major trading partners in the chain. The impact of private equity firms will also be significant, who will continue to take public companies private, slash costs, raise prices, and change business relationships.

In other words, the only difference between conducting business today and conducting business in the next ten years with respect to channel dynamics is that these changes will continue to come at an accelerating pace and you will have to adapt faster than you do today. This means that the winners will be those companies that have good visibility into their supply chains – the ones that can identify when an impending regulation or buy out will affect them before it happens and have a contingency plan ready to go the instant it happens.

Increased Product Variety & Shorter Life Cycles

Variety will continue to mean more models, brands, and products tailored to different geographies and price points. Consumer tastes in emerging economies will be new and different from traditional markets. Traditional lines of competition will blur as companies try new products and markets.

True, but eventually someone will realize that you don’t want to browse the web on the screen the size of a credit card, you don’t want your fridge to tell your local grocery store that you consumed six litres of rocky road this week, and that you don’t want the ability to cut yourself seven times in a jagged fashion simultaneously while shaving. Amongst the big winners will be the companies that realize sometimes you just want a phone, a fridge, and a straight razor – and not all the garbage hallucinators are trying to shove into these products today. And, oh yeah, there comes a point where it doesn’t matter how many fractions of an ounce less it is than the previous product, how many extra cubic inches you squeezed into the door, or how fast it vibrates (at least in the case of the razor).

Social Responsibilities

Companies in developed economies will continue to be held to high standards wherever they do business in the world. Companies will have to monitor working conditions in their supply chains all the way back to basic extractive and farming practices. Supply management will have to ensure that the supply base meets environment standards. Commitments to a diversified supply-base will become more important in developed economies.

This is true, but it misses the point that it won’t be Green Peace and PETA that you worry about in the years to come – it will be your customers, who, greater informed about your supply chain practices than ever before, will start to boycott your products even before Green Peace and PETA gets their campaigns against you off the ground. Industry self-regulation will require you to exceed government standards, or be barred from cooperative partnerships and organizations that could help you survive in the dynamically changing marketplace to come. And, oh yeah, today’s “social networks” will have nothing to do with the solutions.

Environmental Responsibilities

Continuing the social responsibility theme, customers, consumers, shareholders, non-govermental organizations, and governmental bodies will all increase their scrutiny of corporate environmental practices in all regions of the world and demand that companies take environmentally friendly actions. Companies will be forced to meet the environmental expectations of the general populace. Environmental issues will become brand-related issues and influence how companies are viewed in the marketplace. To meet environmental commitments, companies will put together cross-functional teams with executive leadership to monitor environmental concerns in the extended supply base.

All this is great, but I believe that sometime in the next decade, carbon offsets will start to peak out in the developed nations as consumers smarten up and realize that some of the larger companies with the deepest pockets are using them as an out to avoid every doing anything to decrease their environmental footprint. When their only other options are to make the hard choice of investing hundreds of millions, if not billions, to upgrade your factories or re-invent yourself around less harmful products, most executives are just going to take the easy out and buy the carbon credits. These are the same companies that today are content with buying innovation whenever they need it, as they are pseudo-monopolies due to the high cost of market entrance and / or the time it takes to build up the sizable customer base they’ve acquired. Fortunately, when the impending commoditization is combined with consumer revolt, there’s a good chance that their currently unchallenged position at the top will not remain unchallenged for much longer.

Supply Management in the Decade Ahead II: The Eight Major Forces – Part I

In Part I of our review of Succeeding in a Dynamic World: Supply Management in the Decade Ahead, we overviewed the various external forces that will impact a company’s supply chain as identified by CAPS, AT Kearney, and the survey respondents. We then concluded with the eight major forces that were identified specifically by supply managers who took part in the study. Today, we will dive into the first four of these eight major forces and explain not only why they are important, but what can be done about them.

Global Competition

The report notes that the impact of China on the world economy will continue to be enormous over the next ten years and that, to prosper, companies will have to embrace China as both a market as well as a source of supply for their goods and services. As China continues to modernize and urbanize, China will consume an increasing share of the world’s raw materials, driving up prices and / or creating shortages. The growth of China as a supply and demand market will create opportunities for all and those that embrace the China opportunities will have profound advantages over those that do not. Furthermore, enormous intellectual capital exists in China that can be tapped for invention, innovation, and new technology.

The report also notes that other developing countries will continue to emerge as attractive supply sources and bases of growth and identifies Russia, Mexico, and India. Personally, I think India will emerge as the next great shaper of the global economy and challenge China for supremacy. See my predictions on the winner of the talent war and the loser of the innovation challenge.

Merger, Acquisition, & Supply Market Consolidation

To meet the onslaught of new competition, companies headquartered in developed economies will need to increase in size with improved economies of scale and market power to survive. This will thus force many companies to merge and consolidate. As the M&A game plays out, supply management will be tasked with assessing the impact on the supply chain, including costs, risks, and opportunities. Supply management will need to understand the new supply base, how it can be used to gain advantage, and how to find the forecasted cost savings. In addition, when oligopolies are created by supplier consolidation, power will shift in the marketplace and diminish customer bargaining power while creating a major threat for buying companies.

This is one recommendation that I disagree with. To meet the onslaught of new competition, companies headquartered in in developed economies will need to do something to maintain their place in the market, but increasing in size and market power through consolidation isn’t the only option. They could survive by finding a niche and being the best player in the niche, or they could survive by generating greatly improved economies of scale through the application of innovative processes and methodologies. Now, I know that the approach most big companies take to innovation is to buy it, but it doesn’t have to be this way. Look at Apple.

Increased Government Regulation

Government legislation and regulation of business will only continue to increase, requiring companies to dedicate sufficient resources to ensure compliance, especially in the U.S. and EU. This will lengthen contract negotiations which will have to discuss government regulations and privacy legislation to make sure all parties will be able to remain in compliance. In addition, government actions to support or restrict economic development, such as tax incentives and trade restrictions, will have a large impact on supply strategies.

Government legislation and regulations will continue to multiply, but I believe that China and India could pose just as many issues in the next decade as the US and EU do now. China is already pursuing its own version of RoHS due to the extreme amount of e-Waste that companies are trying to dump there. India is trying to become the next great knowledge and service economy and will eventually enact regulations necessary to satisfy the requirements of dependent nations in terms of privacy and IP. Furthermore, there’s more than one way to deal with the legislation onslaught. The first is to add resources, as the report suggests, but a company could choose to implement systems to manage the data gathering and reporting requirements without increasing resources. These systems are rare today, relative to other supply management solutions, but will become more common as niche providers will rise up to address a problem that companies, who are currently paying millions of dollars just to generate compliance reports, will pay handsomely for.

Technology Advances

Technology breakthroughs will continue to cause major changes to how products and services are provided. These changes will ultimately lower the customer’s total cost of ownership. Core technologies of many industries will become commoditized, forcing geographic consolidation and concentration of the supply base. Shortages of key raw materials will lead to technology changes and the use of alternative raw materials.

I have to agree wholeheartedly here, but point out that the early winners will be those that latch onto new technologies early, lowering their cost and ushering in the era of commoditization. In the software industry, on-demand and SaaS providers will be the big winners next decade, as will providers who can deliver enterprise systems based on low-cost open source technologies and make their money off of services.

Supply Management in the Decade Ahead I: An Introduction

Back in May, I overviewed seven critical supply strategies for succeeding in a dynamic world, as summarized in the article “Succeeding in a Dynamic World” that was jointly written by the ISM, CAPS Research, and A.T. Kearney after an initial foray into the data returned by a survey undertaken by the parties in an effort to provide an update to The Future of Purchasing and Supply: A Five and Ten Year Forecast, a report that was published back in 1998.

Since then, on October 3, the full report “Succeeding in a Dynamic World: Supply Management in the Decade Ahead” was released. In addition to deep dives into each of the critical supply strategies that were identified in the initial article published through the ISM, it also covered the major forces driving change, the impacts on business models and strategies, and the new and expanded missions, goals, and performance it found for supply management. There were a lot of great insights in this 140-page publication, and this series of posts is going to cover some of the more important ones.

The report starts off by noting that a lot has happened in the last ten years. When the previous study was released, there were no iPods. The Euro had not been introduced. Business process outsourcing to India was still in its infancy. The dot-com boom and bust had not yet occurred. Terrorism was but a remote possibility in most of the developed world.

Since them we’ve had extensive e-system implementation, outsourcing, globalization and low-cost country sourcing, movement to center-led supply organizations and cross-functional teaming, formal category strategies, enhanced understanding of supplier and supply chain costs, and efforts to better integrate supply chains applying lean principles and Six Sigma.

The report identified six external forces that will impact companies and their strategies in the coming decade. The external forces are:

  • Globalization of the World Economy
  • Demographics
  • Changing Consumer Demand
  • Natural Resources and Environmental Pressures
  • Regulation and Activism
  • Technology

It then identified seven “wild-card” forces that, if they occur in such a way as to affect an organization’s supply chain, would also require a company to adjust their strategy:

  • Global Epidemic
  • Military Conflict
  • Country Disintegration
  • New Protectionism
  • Terrorist Resurgence
  • Hacker Hell
  • Quantum Leap

It also asked survey respondents to rate the impact of twenty-five specific external functions on business on a scale of 1 to 7, and the following were the top 13 forces identified with a impact rating of 4 or more:

  • Rising Energy / Raw Material Prices
  • Regulatory Changes
  • Increased Competition from Established Competitors
  • Spot Shortages of Key Raw Materials
  • Changing Customer Requirements / Buying Habits
  • Increased Emphasis on Supply Chain Security
  • Increased Environmental Regulations
  • Industry Consolidation
  • Emergence of New Technology
  • Terrorist-Inspired Instability
  • Major Change in the Value of the US Dollar
  • Increasing Competition from New Entrants
  • Rising Interest Rates

However, when the respondents were allowed to add their input, the following forces were determined to be the most important overall:

  • Global Competition
  • Merger, Acquisition, and Supply Market Consolidation
  • Increased Governmental Regulation
  • Technology Advances
  • Customer and Channel Dynamics
  • Increased Product Variety and Shorter Life Cycles
  • Social Responsibilities
  • Environmental Responsibilities

The reality is that a lot of external forces impact, and will continue to impact, the supply chain, and, more importantly, these forces will continue to interact in complex ways that are hard to predict and that, when combined in certain ways, will have a much more dramatic effect than any single force could have on its own. The only certainty is that the speed, variety, scope, and rate of change will increase over the next decade.

In Part II, we will address the eight forces that supply managers rated the most important overall.