By Nathan Simon
The great moderation that lasted from the mid-1980s through 2007 was characterized by low volatility and strong gains in business performance that combined in the fashion of a virtuous cycle.
The supply chain was a significant beneficiary and source of these gains, resulting from the lower levels of volatility that needed to be managed and the application of new techniques and tools such as lean methods, including the shift to a pull-based operating model and just-in-time inventory management, and substantial investments in technology-enabled planning systems.
In the United States, for example, the ratio of inventories to sales in the manufacturing sector decreased at a compound annual rate of 2.7 percent between 1995 and 2005, while total factor productivity (the change in output per unit of combined capital and labor inputs) increased at a compound annual rate of 1.6 percent during the same period.
The new normal that followed in the wake of the global financial crisis shared one of those characteristics. After spiking, volatility, indeed, returned to the level that prevailed during the great moderation. But the supply chain transformed from a driver of to a drag on performance improvement.
The ratio of inventories to sales for U.S. manufacturers actually increased at a compound annual rate of 1.6 percent during the decade that followed the mid-2000s, while the compound rate of annual total factor productivity growth decreased to 0.5 percent, one-third of the rate that prevailed during the preceding decade. At the same time, supplier delivery times lengthened across both advanced and emerging major manufacturing economies throughout the period.
Part of the reason for this performance deterioration is that the low macro-level volatility is hiding increasing micro-level volatility as customer tastes and preferences and supply availability and reliability are changing more quickly and substantially than during the great moderation.
But companies are also partly to blame for making their supply chains more complex: lengthening and broadening them through outsourcing and offshoring, expanding the product and service portfolio they need to deliver, and subjecting them to increasing promotional activity. At the same time, companies are transforming their singular supply chains into networks with multiple nodes configured around distinctive segments with differentiated supply modes.
The rub is that most companies develop supply chain strategies on a one-off basis that is out-of-step with the pace of change, and the IT automation and S&OP processes they have adopted to discipline their planning frequently fail to accommodate this complexity, resulting in a vicious rather than a virtuous cycle.
When companies seek to enlist consultants to break this cycle, they tend to focus on fixing the immediate sources of poor performance: the right configuration of supply chain segments, better inventory targets, or more accurate demand forecasts.
But they neglect to put in place the underlying capabilities to consistently manage multiple segments, coordinate across functions to deliver against good targets and forecasts, and dynamically adapt their configurations and targets to changing conditions. Consultants consequently need to help their clients to take a step back to improve their foundational capabilities before fixing inaccuracies.
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