How can businesses deal with the uncertainties we face for 2012? We explore a broad array of very concrete strategies and practices for creating adaptable enterprises that can cope with extreme potential ups and downs and unknowns.
Full Article Below -
In Part One of this article, we looked at the sometimes overwhelming array of uncertainties facing us for 2012 and the challenges they create for businesses. Here in Part Two, we examine what to do about it. Because this is such a broad topic, the approach here is to provide a high level description or examples and then to reference some of the highly relevant research studies we’ve done in recent times. You are encouraged to click through to those studies in any of the areas where you want to learn more.
Prospering in Uncertainty
As we begin 2012 with these huge unknowns staring us in the face, we should keep in mind that uncertainty can also mean opportunity for those companies that are best prepared for any eventuality. Of course supply chain excellence has always been about adaptability and readiness, but beyond mere platitudes, what does that mean? Readiness does not mean that you’ve anticipated every possible outcome (see Black Swan? Revolutions and Tsunamis Come and Go!). Rather, there are concrete strategies and practices that make a firm more adaptable and ready for any eventuality.
Rather than building their own infrastructure, a firm can chose to be a tenant/user and negotiate flexibility into the relationship and contract terms with their infrastructure provider. In Lean and Flexible Logistics for the Global Outsourced Economy, we described how Menlo Logistics provides space and value-add services that can quickly expand and contract, based on current needs. This provides a lot more flexibility than building your own warehouse, outfitting it with a materials handling system, and hiring staff. Another example is leveraging cloud computing infrastructure instead of building your own data center to meet expansion needs.
When a firm outsources infrastructure needs, there is still a significant range of possible differences in flexibility. For example, a seven year lease with onerous early termination penalties is quite different than a contract that allows you to expand and contract your space on a monthly basis. In general, you will pay a premium for flexibility. In the long run, it may be less expensive to ‘own your own’ or agree to longer term commitments. However, in times of uncertainty, paying for flexibility in infrastructure contracts and relationships is often well worth the modest premium.
Supply / Sourcing Adaptability
Structured contracts with range forecasts provide a way to communicate to suppliers the level of uncertainty in the forecast being provided and for the buyer and supplier to agree on a price for upside and downside flexibility. These contracts are a valuable tool when forecast accuracies are highly uncertain.
In Sourcing in Times of Uncertainty, we enumerate eight ideas on how to ensure supply in unpredictable times. For example, acquiring deeper commodity market knowledge helps a company deal with commodity price volatility. Third party sources of commodity-related information help, but sometimes critical pieces of information can only be found ‘over a beer’ with suppliers. Supplier-specific information needs to be combined with relevant macro-economic data, demand, competitive, and political information, and analyzed skillfully, in order to draw the right conclusions and make smarter sourcing decisions.
Managing Supply Risk is a four-part article that covers techniques for quantifying and predicting supplier risk, supplier disaster recovery and business continuity, and approaches to hedging. The use of cross-functional teams to create and manage hedges is a smart approach. This leverages a complementary mix of knowledge and skills from across the organization such as the commodity manager, treasury, engineering, product management, and economist.
Our 2010 Supply Chain Priorities research found that the #1 and #2 improvement priorities (out of a list of 24) were ‘Demand Forecasting’ and ‘Sales & Operations Planning’ respectively. The five-part series, Demanding Times, describes many best practices, some particularly suited to providing more adaptability and flexibility. For example, a firm’s market assumptions need to rapidly adapt to changes. Some companies successfully anticipate and lead the changes by cultivating an environment of exploration, intelligent risk-taking, and action—increasing the velocity of decision-making. They use war games with scenarios encompassing a wide range of potential eventualities, and they develop and track ‘Scenario Early Warning Indicators’—indicators that specific scenarios are indeed occurring. They also mine the web and social media to keep their pulse on customer attitudes and trends.
There are two angles to the challenge here. One is dealing with the rapidly growing shortage in critical skilled personnel, such as engineers and scientists, technicians, skilled tradespeople, and top sales people. The second is how to staff for growth without overcommitting. Regarding this first challenge, the percent of employers having difficulty finding talent is back on the rise (Figure 1).
In order to grow their workforce without over-hiring, companies are increasingly relying on a contingent workforce, which may include 1099 independent contractors, temps, expert networks, as well as partnerships with other firms that have complimentary skill sets. Contingent labor is becoming a higher and higher percentage of the workforce. This creates challenges in workforce cohesion and retaining institutional knowledge. The ability to manage contingent labor and virtual teams of individuals that come together on a project basis, or for periods of time, has become critical in the new economy.
A Call to Action
We should not be daunted by the uncertainties we face in 2012. Rather, they are a call to action to create the kind of enterprise that can weather any storm and come out stronger. The strategies and practices that create a resilient adaptable company are great for competitiveness and can turn trying times into exciting times.
To view other articles from this issue of the brief, click here.