How to Deal with Uncertainty in the Supply Chain

Although the U.S. manufacturing sector has been steadily recovering from the economic downturn, supply chain leaders still struggle to cope with the uncertain global economy in 2011.



Supply chain leaders are more uncertain now than they were a year or two ago — and overwhelmingly so — according to a recent Tompkins Supply Chain Consortium survey of logistics executives from a variety of industries. The events of the past two years and the precariousness of the near future are challenging forecasting, budgeting, business planning and other processes that are dependent on historical information.

According to the consortium’s findings, the greatest uncertainty is in supply chain functions like planning, sourcing, sales, customer service and transportation.

“The planning and sales areas are highly dependent on historical data and forecasts. With the last two years being uniquely difficult and impossible to predict, it is not surprising that planning and sales are high on the list,” the benchmarking and best practices report, titled Uncertainty is Certain: Perceptions of Future Risk on the Rise, says. “Sourcing and working with suppliers is also simple to understand, as the economy has made supplier relationships very difficult to maintain and a significant number of companies have gone out of business.”

Based on responses to the consortium’s survey, uncertainty is primarily affecting the supply chain in four ways:

  1. Adding cost;
  2. Increasing inventory levels;
  3. Increasing lead-times; and
  4. Reducing speed to market.

“Not understanding the past and present, which reduces the ability to predict the future for supply chain practices, clearly adds steps and time to the process, as well as equating to higher costs,” according to the report. “Inventory levels and lead-times are increased to cover for the uncertainty of demand. Speed to market is impacted by increased inventory and the ability to make quick decisions about what products to put where in order to optimize efficiency and customer requirements.”

This uncertainty among industrial firms should come as little surprise, considering what the global downturn wrought on manufacturers and how economic pressures have highlighted the importance of the supply chain. For the fifth consecutive quarter, more than one-third of North American manufacturers responding to MFG.com’s latest MFGWatch Survey said they’ve experienced a significant supply chain disruption in the past three months.

However, the magnitude of the impact is “very interesting,” according to the consortium, with more than 37 percent saying that uncertainty is highly likely to add cost and 45 percent rating the impact as medium. In general, 60 percent to 80 percent of companies indicated a “high” to “medium” impact from a cost and time standpoint due to uncertainty.

Tompkins Supply Chain Consortium’s survey respondents have many ways of dealing with uncertainty and are employing a variety of specific solutions. Logistics leaders most often selected initiatives involving government regulations and mandates, forecasting, technology application and inventories.

Among the other ways that companies are dealing with uncertainty:

  • Having focused, small teams of the right people to drive closure and minimize risk;
  • Being proactive and agile by improving planning systems and reducing cycle times;
  • Balancing network design, customer demand volatility and customer satisfaction;
  • Increasing focus on planning, operational excellence, technology implementation and collaboration;
  • Improving the recognition of risk profiles and building contingency planning capabilities;
  • Developing and implementing a risk-management strategy, and monitoring the supply chain regularly;
  • Working on backup suppliers and freight companies to reduce supply risk/uncertainty;
  • Focusing on supplier development, a near-shoring strategy, lean and partnering; and
  • Proactively driving out waste in supply chain areas where the firm has control.

Overall, a majority of companies said they are considering uncertainty in their strategic planning process in some way.

“[I]t is clear that uncertainty is certain for the majority of participants who took this survey,” Tompkins Supply Chain Consortium concludes. “The magnitude of their concern for the future of their supply chains and uncertainty’s impact on important measures of success is a red flag for everyone in the supply chain field.”

What strategies have you put in place to deal with uncertainty in 2011? How are you assessing risks in your supply chain?

Related

Downturn Highlights Supply Chain’s Importance

Supply Chain Leaders Balance Efficiency and Resilience

Supply Chains in Survival Mode

Resources

Uncertainty is Certain: Perceptions of Future Risk on the Rise (free registration required)
Tompkins Supply Chain Consortium, Dec. 17, 2010

MFGWatch Quarterly Survey of North American Manufacturers (Q3 2010)
MFG.com, December 2010

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Comments:
  • January 11, 2011

    The weather this year has really tossed a monkey wrench in planning. Right now, the south is having a major storm and cold spell, meaning that pressure washer sales are down. Big time.

    But a sister company that sells heaters is doing well in those states.

    So, extra inventory on pressure washers. No inventory on heaters. All because of one event in the Southern US. There is no good way of dealing with that in the coming year. How can we predict that?


  • January 11, 2011

    A very good article. I have have always believed in good tracking and multiple suppliers when possible. Lacking backup suppliers, know at any given moment who in that industry is most likely to have inventory available.


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