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The world turned upside down: The three R’s of supply chain.

Having just spent a few days in Germany at the EDIFICE High Technology conference, I’ve concluded strange things are happening in the world of supply chain management. Indeed so profound are these changes that it’s turning established thought and practice upside down.

Reliable

For the last twenty or more years supply chain has been based upon three guiding principles. One is the concept of the trade-off. We trade€“off one cost against another and find the lowest total cost. We trade time against cost and service, we trade cheap sourcing against long lead time and we trade cost against flexibility and responsiveness. We just want the lowest total cost. Secondly, there was an underlying assumption that such were the advantages of cheap production in the Far East and cheap international transport that a flatter world was possible where geography and time zones were almost an irrelevance. Everything was possible. And thirdly, there was a belief that these world €“wide solutions were reliable. Products were made on time, planes left on time, ships docked on time, customs was cleared automatically, everything could be and should be, on time and in full.

But the world is neither flat nor a reliable place. First of all the recession caused a traumatic decline in demand which shattered the efficiency premise of many supply chains. This was followed by a series of catastrophic events that further exposed the fragility upon which the already shaky supply chains were based. Volcanic explosions, earthquakes, tsunamis, pirates, freezing weather, warehouse fires, factory fires and fuel issues have all contributed to destroying reliability in the supply chain. As a result, Corporate reporting is currently awash with organizations blaming their over exposed supply chains for a failure to meet financial targets.

Risky

Consequently the new €œr€ word is not reliability, it is €œrisk€.  Risk is supply chain’s middle name and indeed supply chain appears soon to be rebranded Supply Chain Risk Management.  But supply chain has yet to fully embrace risk. This is for two reasons. Firstly it’s never really done so.  Supply chain cost modelling, network modelling, all trade-off analysis rarely considers risk as a major input. This was because historically reliability was so good, and risk management was seen on an operational basis as a challenge, not a strategic imperative. For people, who for decades have traded off distance, service and inventory for cost without a worry, risk is almost an anathema. If it’s out of stock or late, just fly it in.

Resilient

This risk free efficient supply chain world created clusters of activity at strategic points. Let’s put our design in Japan, our production in China, our logistics in Holland and serve our markets through one carrier hub. The new risk aware world isn’t so sure. For €œstrategic points€ now read €œsingle points of failure€. The new risk driven world operates on €œjust in case€ not €œjust in time€.  The new risk driven world wants contingency, it wants the ability to switch production, port, carrier or supplier quickly, the new risk world wants on shore facilities and responsiveness, the new risk world wants duplicate stock holding and more than anything else the new risk driven world wants resilience.

And how does this impact B2B?   We are seeing evidence of customers seeking flexibility through the adoption of Global B2B providers rather than local suppliers. We are seeing customers seeking high availability managed services arrangements rather than in-house operations. Customers seek resilience though the global reach of managed services and let a third party with global data replication and high availability Data Centres across the Globe take the strain. Let Managed Services providers set up new trading partners more quickly. Let the B2B experts communicate with our trading partners in the event of a disaster. Fundamentally they seem to be doing this for three reasons. One, risk management is now so important I need my best people on it and some of my best people are my B2B people. So get someone else to operate my B2B.  Second B2B providers have solutions that are a better fit for purpose than out in-house ones. And finally these B2B providers often operate to a higher level of resilience than we can in-house. So in this new risk aware world let the managed service company provide the industrial resilience your B2B needs whilst concentrating on building out your operational resilience.

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