Off-shoring to the Far East is counter-productive in the demand economy. High demand variability coupled with short product life cycles requires ultra-short response time and point-of-demand capabilities. Today, major electronics retailers are forced to source all laptops, hand-helds and the like from Asia due to the demise of the U.S. production capability early in this century. High stock-out rates, high inventory, high air freight costs and low customer satisfaction are pervasive and strategically debilitating for the retailers. Care should be taken to curtail the length of the supply network. The more variable the demand, the shorter the network must be or inventory carrying costs will increase prohibitively, revenues will be truncated and cash flow restricted.
It is time for producer management vanguards to take notice — and mobilize. A move to a demand-based economy — a move from commodity to custom — is on the way. Maintaining the typical approach to supply chain management in an ever-more-customized environment will force up inventories, restrict cash flow and increase costs 20 to 40 percent. Unanticipated global supply chain expenses will erode expected product savings. Investors will demand sustainable free cash flow, but manipulation of it by driving up days' payables outstanding (DPO), forcing fast-moving inventory down and utilizing tricky accounting will no longer be tolerated.
Commodity products will increasingly be supplied solely by Far East providers or very focused, highly automated domestic providers. Custom producers that can meet customer value propositions will put old-line competitors out of business. The answer requires restructuring supply chains into networks, repositioning the customer value proposition, developing a collaborative organization structure, tightening up systems, improving supplier relationships and adjusting the physical network.
The benefits of making such improvements include:
- Enhanced market share
- Better service
- Reduced costs and increased margins
- Inventory reductions of 40 to 50 percent
- Liberated cash flows of 20 to 30 percent
- Continuity of the business
- Overhead reduction of 30 to 40 percent
Tackling these problems can largely be self-funding. In two to three months, a company can design what its supply network should look like. Substantial implementation progress can be recorded in 18 months. Higher profitability and growth will be the rewards.
About the Author: Robert P. Burrows founded the On-Point Group and is its managing principal. He is a leading-edge thinker and sought-after consultant in the areas of operations strategy, demand management, inventory management and collaborative procurement. He can be contacted at email@example.com .