By Pamela Wiseman, TFI Senior Operations / Supply Chain Consultant

Now that the economy is reportedly on the upswing, manufacturers are readying to boost production in anticipation of seeing business pick up. But operations executives are experiencing a chicken-and-egg situation concerning their fragile supply chains.

They ask, “How and when do we dip our toe in the water and expand capacity, labor, and inventory?” We know that whoever acts first may have an edge, but those acting too fast will suffer from anemic cash flow. And whoever acts last will miss the window and lose critical advantage. So, how does one “read the tea leaves” with confidence about an upswing in orders, and boost operations accordingly?

Crossed signals about when orders will pick up
Operations executives wonder, will the industry build and ship product “like we used to” or are today’s off-balance supply-and-demand conditions creating a lasting tug-of-war? It’s understandable why they are perplexed. Last week I read a difficult-to- believe study suggesting that 1 in 4 manufacturers felt no impact of the recession (I don’t know any of these manufacturers; do you?). The next article I read noted that unemployment rose in December in 43 USA states. I am an optimist, but even I am still compelled to be neutral at best about the pace of the recovery.

Lengthened lead times
One major risk lies with lengthening lead times. If no one is holding inventory, are we really working in an environment of cold starts–starting from scratch? Suppliers, OEMs, distributors…none is holding inventory that isn’t supported by a commitment, if they can help it. And what about the service parts on which customers depend — 24-hour turn-around promised with stocking levels based on past consumption? How do we walk this tightrope when consumption has been at an all-time low and could turn on a dime any minute now? I wrestle with these decisions every day.

Over the past year, sales-and-operations planning (S&OP) processes have been battered. What is a demand forecast anyway, when there is little certainty behind potential bookings figures? Pull systems, build-to-order, vendor-managed inventory – how do our lean-materials management systems work when no one will carry inventory and the demand is so uncertain? Ultimately, clients ask this key question: “Should we switch manufacturing strategies to buy-and-build-to-order instead of driving material to an S&OP build plan? If we buy-to-order to conserve our cash for actual customer orders, will our lead times grow and cause us to lose these same potential orders to a more aggressive or cash-rich competitor?”

The Best Counsel for Now
In my 20 years of operations management experience, I haven’t experienced such a “perfect storm” as we have now. But it actually creates a window of opportunity to gain insight enabling more certain decisions.

I see only one real answer: customers, OEMs and suppliers all need to work together as a united supply chain, sharing information to reduce risk more than ever to get through this transition period and prepare to take maximum advantage of an increase in business. And the “perfect storm” actually gives us greater opportunity than ever to gain inter-supply-chain-partner cooperation. We’ve found that right now in the business cycle, the best externally focused tool is plain and simple – increasing the level of direct communication with customers and suppliers and listening carefully for the clues.

We start internally — by helping our clients discern: Do they have significant numbers of customers and suppliers both on credit hold? Are they rationing cash? Is it possible that they, our client companies, may be on credit hold with some suppliers? And we immediately assemble a senior-executive-driven, cross-functional (comprising Sales, Operations (Manufacturing, Supply Chain), and Marketing) internal forum to drive S&OP process, balance risk, and make optimal choices right now. Then, talk more openly than ever with customers and suppliers, who themselves are needing insight just as much or more than your company does.

How is your company coping with supply-chain uncertainty? Would you be more willing than usual to engage in frank, cross-company discussions to strengthen supply-chain predictability?

Posted by Pamela J. Gordon, January 29th, 2010

Filed to Lean Practices, Outsourcing, Supply chain management

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