Home » Supply Chain » Top Supply Chain Opportunities and Challenges in 2011

Top Supply Chain Opportunities and Challenges in 2011

December 28, 2010


As supply chain management analysts look forward to the New Year, two of them have offered their views on what lies ahead. Jim Tompkins, CEO & Founder, Tompkins Associates, discusses The Top 11 Positive Supply Chain Value Creation Opportunities for 2011 [SupplyChainBrain, 19 November 2010], whereas Chris Chiappinelli, Editor of ManagingAutomation.com, discusses The Top 3 Supply Chain Management Worries in 2011 [ManagingAutomation.com, 22 November 2010]. Let’s begin with Tompkins’ opportunities. He writes:

“The increased complexity of today’s supply chains highlights the impacts that these operations can have on shareholder value — positive or negative. So, I present my ‘Top 11 Positive Supply Chain Value Creation Opportunities for 2011.’ It would be easier to write a book than 11 brief summaries on these topics, but I feel that just the key points will be of more value to you.”

I’m just guessing, but I suspect that Tompkins selected 11 rather than 10 opportunities because we are about to welcome the year 2011. His list begins with growth. He writes:

1) Profitable Growth: Not all growth is profitable, and therefore, not all growth is good. View the supply chain not just as an opportunity to impact the bottom line by reducing cost, but also as a way to increase the top line by capturing new markets, new customers, providing new services and/or increasing market share.”

Tompkins is correct that not all growth is profitable. In recent years, numerous conglomerates have stopped acquiring and have started shedding subsidiaries that don’t complement what they consider to be their primary business focus. For example, “Fortune Brands, Inc., the maker of Jim Beam bourbon, Moen faucets and Titleist golf balls,” recently announced “plans to split the company into as many as three separate businesses.” [“Fortune Brands Plans to Split Up,” by David Kesmodel, Wall Street Journal, 8 December 2010] According to Kesmodel, “The company intends to spin off its home and security unit to shareholders in a tax-free transaction, and to either sell or spin off its golf division, these people said. Separately, Fortune Brands would remain an independent, publicly traded company focused on liquor brands that include Maker’s Mark bourbon and Sauza tequila.” Tompkins is also wise to point out that as the supply chain becomes a more integral part of integrated, collaborative businesses, it should be seen as a way of capturing new business not just reducing costs. Supply chain analysts like Bob Ferrari have long lamented that most business leaders only look at supply chain management when they want to cut costs. Tompkins continues:

2) Procurement: Procurement in many firms is really little more than purchasing. Procurement needs to accept a much broader responsibility beginning with strategic sourcing, to include all supply chain mega-processes (Plan-Buy-Make-Move-Store-Sell), and encompassing responsibility of supplier relationship management.”

Both manufacturers and retailers are going to find themselves more often in the crosshairs of activists, environmentalists, and regulators with regards to the sustainability of their supply chains. Traceability is going loom larger as a challenge and it will be supply chain personnel who have to deal with this challenge. Tompkins lists procurement as an opportunity to create value because companies that do it well are likely to differentiate themselves from their competition (for more on traceability read my posts entitled Drug Safety and the Supply Chain and “Conflict Minerals” and the Supply Chain). Tompkins continues:

3) Outsourcing: Focus on tasks that are your core competency. All other tasks should be outsourced, as we all need to enhance our performance or our core competencies.”

My only caution here is that increased scrutiny is being placed on companies that outsource activities overseas. Make sure you consider all potential ramifications of your outsourcing decisions. An interesting side note on outsourcing is that the Philippines has recently overtaken India as the main go-to country for outsourced call centers [“Philippine Call Centers Overtake India,” by Mehul Srivastava, Bloomberg BusinessWeek, 2 December 2010]. Tompkins continues:

4) Inventory: Increase inventory turns and fill rates simultaneously. Advanced Sales Inventory and Operations Planning (SIOP) must be put in place to unleash working capital and drive customer service.”

Since Enterra Solutions® entered the supply chain management field, we have focused a lot on helping companies achieve better fill rates and reduce retailer chargebacks. The bottom line for businesses is not just to reduce penalties but to improve customer service. Customers hate bad surprises — like bare store shelves because deliveries failed to be made. Tompkins moves on to number 5 on his Top 11 list:

5) Transportation: Put forth efforts to develop core carrier programs, implement TMS, decouple inbound freight, and enhance shipment planning and execution opportunities.”

A lot of changes have taken place over the past couple of years in the transportation industry. Some of the changes resulted from the recession and others from companies wanting to have more control over their supply chains. Looking ahead, I agree with Tompkins that transportation may be an area where opportunities emerge. To learn more about changes ahead in the trucking sector, read my post entitled Truck Transportation Safety and the Supply Chain. Tompkins continues:

6) Network: The uncertain economy, globalization of business, M&A, and the evolution of your marketplace all demand an annual review of your network. Evaluate the number of and justification for your locations, along with the operation strategies, in order to establish the lowest cost/highest customer service network for current requirements.”

I’ve written a number of posts about the benefits of collaboration and information sharing across the entire spectrum of the supply chain. I believe that collaboration implies something deeper than simply establishing and maintaining networks. Supply chain analyst Lora Cecere continually pushes companies to start moving towards demand driven supply chains. Getting your networks right is a foundational step on that journey.

7) Service Supply Chain: View this as a profit center. Reverse logistics and end-of-life product opportunities need to be assessed with an eye toward enhancing profitable growth.”

Those activities are also going to play increasingly important roles as companies begin contemplating product cradle-to-cradle sustainability. For more on that topic, read my post entitled Going Green: Cradle to Cradle Supply Chain. Tompkins continues:

8) Speed, Agility and Productivity: Shareholder value will often be determined by how quickly the supply chain can bring product to market and fill orders. It will also be determined by the agility of the supply chain to respond to changing market conditions and by the eliminator of waste to enhance productivity. Successful organizations will be innovative in boosting speed, agility and productivity across the processes of Plan-Buy-Make-Move-Store-Sell-Return.”

I couldn’t agree more. Agility and flexibility are two of the key words that one hears whenever better supply chains are discussed.

9) Tax-Effective Supply Chain: Include the Effective Tax Rate (ETR) in supply chain decisions and perform the analysis ‘pre-tax’ to avoid making bad decisions. Since the ETR for multinational corporations is often in the 25-percent range, supply chain managers need to understand the ETR and tax managers need to understand the supply chain. ETR and the supply chain is a big deal, and it is often overlooked.”

With a new Congress about to be seated, U.S. companies are likely to hear a lot about taxes over the coming two years. It is clear that Democrats and Republicans have decided that taxes are the battlefield on which they want the next election to be fought. Internationally it will be interesting to see whether those who recommend corporate tax cuts to promote economic growth win the day or whether politicians will seek higher taxes to build infrastructure, provide social services, and, in some cases, address mounting deficits.

10) Cash-to-Cash Cycle (C2C) Management: Consider the C2C cycle in all supply chain improvements. At a basic level, the C2C cycle is the length of time a company’s cash is tied up in working capital before it is returned in the form of collections of receivables. Like all assets, cash is useful when it is available and conversely not useful when it is not available, so you can see how it has a major impact on the supply chain.”

This past year has been an interesting period when many small and medium sized businesses have been cash strapped and some large corporations have been sitting on piles of cash because they were unsure how to invest it. Neither situation is ideal. Tompkins’ final opportunity deals with technology.

11) Technology: Move forward with technology upgrades that have a strong business case. As much as I would like to skip this topic on my Top 11, it would be irresponsible not to discuss ERP, best-in-breed, SaaS, the Cloud, the obsolete systems, expensive upgrades, etc. I say this because I have experienced dissatisfaction with ROI on many technology applications of the last five years. At the same time, the business case for supply chain technology applications is compelling and helps achieve supply chain excellence.”

I believe Tompkins has touched on a sore point with many companies. One of things that we have tried to do at Enterra Solutions is ensure that our offerings complement legacy IT systems rather than replace them. The best advice I can give you is to your homework.


If those are the opportunities that lie ahead, what are the challenges? Chris Chiappinelli believes he has identified the three greatest challenges that are going to be faced in the New Year. He writes:

“The number of supply chain management factors that confront global manufacturers remains relatively stable from year to year. But the way those factors mingle and collide makes each year a new challenge, and 2011 will hold a particularly tricky mix that will make supply chain management a tenuous balancing act. IDC Manufacturing’s Simon Ellis recently reported that an IDC survey of U.S.-based manufacturers showed that their top three criteria for sourcing decisions will be manufacturing cost, logistics and/or fulfillment costs, and supply lead time. No great surprises there. These fundamentals have been the bedrock of supply chain management for a long time. Year in and year out, manufacturers must balance a matrix of supply chain considerations, including production and distribution costs, inventory carrying costs, product quality, supply chain speed, intellectual property protection, and competitive market trends. But 2011 may change the mix more than usual, and that will impact manufacturers’ supply chains, including global sourcing of raw materials and outsourced manufacturing services for which they contract. Among a host of other supply chain factors, there are three that I think we should all watch closely. Not surprisingly, they have a decided China bent.”

Chiappinelli’s three challenges include: “The appreciation of China’s currency; the price of oil as the world economy continues to recover; and China’s policy on exporting rare earth metals used in electronics and related products.” He begins with China’s currency:

China’s currency: China has become a manufacturing powerhouse, in no small part because it has kept its currency, the yuan (officially, the renminbi), cheap compared to the U.S. dollar. That helps Chinese manufacturers sell their goods inexpensively to U.S. consumers. It also gives U.S.-based manufacturers cost incentive to set up outsourced manufacturing operations there. But lately the international pressure on China to let its currency grow against the dollar has intensified, and China has allowed some appreciation. The pressure for more parity is not likely to abate, especially from the U.S. As a result, 2011 may be a year in which costs in China rise significantly. That would change the supply chain management equation markedly for many U.S. manufacturers with operations in China.”

Over the past couple of years I’ve noted that the so-called “China price” of products has been steadily climbing (meaning that the benefits of manufacturing there rather than domestically are beginning to shrink). As companies such as Foxconn (which employs over 800,000 workers) are forced to raise employee wages dramatically, the advantages of manufacturing in China will decrease even more. Chiappinelli next discusses the price of oil:

The price of oil: In a recent article that weighed the possibility of $100-per-barrel oil, BusinessWeek quoted Sarah A. Emerson, managing director of Energy Security Analysis, as saying, ‘This is a well-supplied market, and that won’t be changing anytime soon. … At the end of the day, fundamentals matter.’ I’d say this view is dangerously ignorant of recent history. The run-up toward $150-per-barrel oil in 2008 owed much to an inflated commodity futures market, where speculative traders placed big bets on oil on the assumption that we were near or past peak production and that oil would soon be as precious as gold. The price may have come down, but those worries have not gone away. Couple that lingering concern with an increase in global demand for oil as economies worldwide start gaining traction, and the result could be a repeat of just a few years ago. Remember that oil prices right now, during a relative lull in economic growth, stand at more than $80, and have flirted with $90 recently. Some observers are talking again about oil reaching $150 per barrel. Don’t bury your head in the oil sands and hope the price will fall in 2011.”

I have to agree with Chiappinelli on this point. Most analysts seem to believe that we are quickly headed back to oil prices exceeding $100/barrel [“Crude oil tipped to bubble over $100 a barrel,” by Javier Blas, Financial Times, 7 December 2010]. Since rising oil prices can significantly increase transportation costs, they can have a dramatic effect on the supply chain. In several past posts, I have noted that the rising China price coupled with increased transportation costs could realign manufacturing and supply chains around the world. Finally, Chiappinelli discusses rare earth minerals:

Rare earth metals: China controls the overwhelming majority of the world’s supply of rare earth metals, such as scandium, yttrium, and the lanthanides, which are used in products as diverse as mobile phones, glass, cars, wind turbines, and missiles. Over the course of many months this year, China refused to export any rare earth materials, forcing manufacturers in Japan and elsewhere to draw down their inventories and scramble for alternatives. China has since opened the supply lines for rare earths, but has expressed a desire to curb production to protect the environment. The cutbacks could recur in 2011.”

I have a small nit to pick with Chiappinelli on the matter of rare earths. China overwhelmingly controls the current production of rare earth minerals but it does not possess the vast majority of rare earth reserves. For more on this topic, read my post entitled China and the Rare Earths Conundrum. Chiappinelli concludes: “Supply chain management success has always favored managers with prescience. In a game where fluctuation is the norm, it helps to know where the signs are pointing.” His three challenges and Tompkins’ 11 opportunities provide good fodder for some “what if” exercises that should be taking place in corporate conference rooms (look for a future post entitled Examining the “What Ifs” in Life). There you have two analysts’ views as they look ahead to 2011. You should ask yourself, “As I look ahead, what do I see?”

Related Posts: