It is time to get nervous, but guide the supply chain with a steady hand. Hold tight. It will be a jerky rudder. Expect turbulent times. Why? The most money is made through the successful navigation of the supply chain in a market recovery. However, it will be a rough recovery.
Today, demand is rising, commodity speculation is increasing, and markets are responding at VERY different rates (stronger demand in emerging economies and growing hopes in modern trade markets). History is NOT a good predictor of demand and two major commodities –oil and corn– are on the rise. (Oil is up 20% and the price of a bushel of corn is up 24% since September 2009.)
Price volatility abounds. As we plan, supply chain volatility is growing in importance. Are the bulls right? Or, will the bears will the day? Why should you care? It is important to navigate the odds. Let’s take oil. The bears say that the rising dollar, and weaker economic growth will call oil prices to fall. The bulls say that the stronger global economic growth–especially from China–will lead to higher demand. Remember that the surge in China for oil was one of the factors that drove oil to $147 a barrel, and the economy derailed when consumer spending on oil was greater than 6%. It is now 5.4%. Now is the time to plan for both. One thing is certain: in 2010, volatility and uncertainty will abound.http://bit.ly/7pCTSI
If you vote with the bulls are you ready for the impact of $150/barrel oil? How about $300/barrel? Based on recent CSCMP studies, only 53% of companies have evaluated the scenarios and impacts of oil. Even fewer (43%) have evaluated the impacts of metals or corn.
Prepare. Get ready. Focus on these five things:
- Build demand-orchestration processes. These are horizontal processes that tie go-to-market and commodity buying strategies. Work through both bull and bear scenarios routinely as part of Sales and Operations (S&OP) planning. Understand the pinch points and develop scenario plans that can embrace both a bull and a bear.
- Embrace your demand plan. This is not business as usual. In the downturn, only two out of seven turned the ship based on market conditions. The majority of companeis responded based on historic demand. While many focus on supply risk, to manage risk, start with demand. Understand the scenarios, put accountability into management over-rides, and actively model the demand signal from the market-back. This is a time where historic signals are relatively useless.
- Get good at price management. Less than 5% of companies integrate demand shaping strategies of price, advertisement, new product launch, sales incentives, and marketing programs together. Price decisions largely operate in silos and price compliance is everyone’s opportunity. Align incentives cross-functionally on revenue management with a focus on margin. Price management and price compliance will define winners and losers in 2010.
- Actively design networks. Use the advanced programs from LogicTools (now IBM), i2 Technologies (now JDA) or Llamasoft to design the network for the full range of scenarios. If you lack the ability to do the modeling, use services from Chainalytics or Forte.
- Build supplier development capabilities. Actively sense supplier risk and build active supplier development capabilities to build sustaining relationships. Connected networks will best survive the wave of commodity uncertainty that is going hit. Evaluate supplier sensing capabilities from Open Ratings (now D&B) and Triple Point to manage risk hedging scenarios.
Please share ideas.
Let me know how I can help. You can reach me at firstname.lastname@example.org. Until then, I will be scouring the market looking for how disruptive technologies can help you power new capabilities in supply chain excellence.