Sailing through the storm, paint by Franz Josef Frühbeck (1795-after 1830)

While in Switzerland last week, I met with executive managers of several Fortune 100 companies in the Fast Moving Consumer Goods (FMCG) and Healthcare industries. Contrary to the capital equipment and the automotive industries, the FMCG and Healthcare companies were typically well on track as regards their 2008 targets both from a top line and bottom line perspective. However, they did say their outlook for next year is conservative, especially with respect to high end, premium-related products. So the impact of the credit crunch and the likely recession differ by industry vertical and the liquidity position of each individual company, but the sense of urgency has touched us all. It is now time to act accordingly. Therefore, I recommend that you review five useful strategies to navigate through the storm.

Five strategies
The first strategy is to focus on the cash-to-cash cycle as over the next few months, and possibly even beyond, cash is king. Squeezing every euro out of the supply chain ought to be high on the agenda for all of us. Strategy number two is to focus on inventory reduction throughout the chain. Sustainable savings will most likely require fundamental improvements in sales and operations planning (S&OP), point of sales visibility in the chain, stock-keeping unit rationalization to shorten the long tail, production planning and lead time compression.

The third strategy is to restructure the network and increase the frequency with which the network is reviewed. Given the globalization wave and the major shift to low-cost country sourcing, significant costs are locked into the supply chain. In today’s volatile environment, the long lead times through sourcing in Asia will automatically lead to high working capital and exposure to risks (currency risk, market risk, fuel, quality assurance, et cetera). More and more companies should be reviewing the near-shoring and postponement alternatives in Central and Eastern Europe, including countries such as Romania, Bulgaria and the Ukraine. A few years ago, AMR Research revealed that 80 percent of supply chain lifecycle costs are locked in at the start. Making changes at an operational and/or tactical level will therefore have a limited effect. Given the uncertainty at hand, companies need to increase the frequency of assessing the effectiveness of the current network in order to realize step change and pro-actively plan for unforeseen risks and events (scenario planning to have a plan B readily available).

The fourth strategy is to align the Supply Chain Management function with that of Sales & Marketing. A recent survey amongst CEOs revealed that 93 percent of the respondents feel that Supply Chain Management is critical or very critical to the overall business strategy. Interestingly, however, the CEOs put growth (75%) before cost reduction (25%) and perceive supply chain initiatives as being focused predominantly on cost reduction (82%) rather than top line growth (18%). Good examples of companies that have mastered the alignment aspect besides being highly capable of executing the supply chain are typically found in the AMR Top 25 listing. These companies have demonstrated excellence in such things as customizing their supply chains per product-market-channel, demand shaping/sensing, service/lifecycle management and innovation/launching of new products.

Last but not least, the fifth strategy relates to transforming fixed costs into variable costs. In a volatile environment, swapping fixed costs for variable costs is generally a good idea. This includes selling and leasing back assets, contract manufacturing, third-party warehousing, etc.

There is an old saying that strong currents and gusty winds favour the competent sailor. I trust these strategies will help you sail through the challenging storm ahead.

Patrick Haex is Managing Partner Supply Chain Management at Buck Consultants International.
patrick.haex@bciglobal.com