As companies struggle to cope with the uncertain global economy in 2010, finding ways to increase efficiency and resilience have represented a trade-off for many supply chain managers, according to a recent report. However, it may be possible to increase both.

In addition to tighter credit and falling demand — which caused manufacturers to cut costs — supply chains have shrunk at the margins and the network has become denser. Perhaps most important, however, is that many companies are forced to choose between having supply chains that are simple and compact, or those that are complex, redundant and dispersed.

This balance between efficiency and resilience is the key trade-off faced by supply chain managers, according to a recent research paper from the Economist Intelligence Unit (EIU), the business-to-business arm of analyst firm The Economist Group. Based on interviews with supply chain executives from Whirlpool Corp., Coca-Cola Co., Home Depot, Inc. and other companies, the paper highlights supply chain problems in the aftermath of the extraordinary swings in demand over the past two years.

A more efficient supply chain enhances two drivers of value: operating margin and asset efficiency. “Efficiency also has the beneficial side effect of shrinking the carbon footprint,” according to EIU. “But none of this matters if costs are cut to the point where the supply chain breaks.”

However, it may be possible to increase both efficiency and resilience.

For example, Whirlpool has sought to become more nimble so the company can react quickly to fluctuations in consumer demand. By consolidating its brands into warehouses located within a day’s drive of one another, the appliance maker reduced logistics costs in North America by 12 percent while cutting delivery time to customers by more than five days.

Whirlpool is also simplifying supply chains by using standardized components in more products. “In the old days, 20 washers could have 20 different controls,” Brian Hancock, vice president of supply chain at Whirlpool, says. “Now you might have only four different controls for 20 models.”

Coca-Cola has also prioritized consolidation and simplification. Due to the recession, the beverage maker began questioning why trucks, after delivering soft-drink shipments to retailers, couldn’t pick up a load of cans to bring back from a nearby supplier.

The company also sees opportunities in better planning and forecasting tools to manage the flow of products and help drive out waste, ultimately ending up with fewer information technology (IT) systems, “so that a single integrated system can tell our customers exactly where their order is, where the truck is,” according to Irial Finan, executive VP of Coca-Cola and president of bottling investments and supply chain.

Meanwhile, Home Depot is driving both efficiency and simplicity by shifting from a direct-to-store model to central distribution. Instead of delivering home-improvement products to individual Home Depot stores, suppliers will send a bulk order for about 100 stores to the company’s new Rapid Deployment Centers. Merchandise will be sorted for specific stores based on the latest sales data and delivered daily, minimizing inventory and freeing cash flow and working capital, according to Mark Holifield, Home Depot’s senior VP of supply chain.

Central distribution will also eliminate vendor minimums, Holifield says, meaning that Home Depot store managers will no longer have to gamble on being either stuck with excess inventory or out of stock on specific products.

According to a major IBM survey this summer, more than half of global business leaders believe their enterprises are not adequately prepared to handle a highly volatile, increasingly complex business environment. Based on a survey of 1,500 chief executives from 60 countries and 33 industries worldwide, IBM found that while eight in 10 CEOs expect the global business environment to grow significantly more complex, only 49 percent believe their organizations are equipped to deal with it successfully — the largest leadership challenge identified in IBM’s eight years of research.

“Even if the recovery proceeds more slowly than expected, companies cannot afford to sacrifice resilience — the ability to recover quickly from disruptions — for the sake of efficiency,” EIU says in the executive summary of its report.

“[N]ow is the time for companies to reassess supply chain processes to ensure that progress towards efficiency does not boost the potential for failure in the face of economic, operational or environmental disruptions,” EIU concludes.

Resources

Resilient Supply Chains in a Time of Uncertainty
The Economist Intelligence Unit, May 2010

2010 Global CEO Study: Creativity Selected as Most Crucial Factor for Future Success
IBM, May 18, 2010