Supply Chain Design Takes Center Stage at the 2019 Logistic Summit in Mexico
I just returned from the Logistics Summit & Expo 2019, the largest supply chain event in Mexico with over 2000 attendees and hundreds of more exhibitors. It was an action-packed event with a number of industry verticals and companies across US, Mexico, Central & South America, representatives from academia, industry consortia, and media in attendance. I was pleasantly surprised to find more conversations around Supply Chain Design in a variety of contexts and presentations. While planning and execution get talked about quite a lot in the context of SCM, Design as a discipline has been raising in prominence recently. The conversations at the event served as yet another proof point for this. Here are some takeaways from the event.
- Design for effects rather than events: In a highly provocative keynote, Dr.Chris Caplice of MIT spoke about how supply chains tend to overemphasize designing for events rather than effects. In a telling example, he related to the 2010 volcanic eruption in Iceland and how it completely disrupted transatlantic supply chains. Come 2011, several companies had an explicit risk mitigation plans around “volcanic eruption” which did not materialize. However, Chris provoked the audience to reframe this thinking on effects instead of events. He referred to sources of uncertainty beyond any organization’s control as shifts in STEEP, i.e., Social, Technology, Economic, Environmental, and Political. He gave the example of how consumer tastes shifted in the yogurt category from regular yogurt to Greek yogurt, and how even big brand companies were caught flatfooted by this major shift. Such changes are massive and perhaps far bigger than a volcanic eruption. Hence, the speaker’s emphasis on focusing on effects rather than events. However, he acknowledged that humans are bad at predicting the future. Hence he emphasized the need for scenario planning so organizations are prepared for a range of possibilities. Ian Hobkirk of Commonwealth Supply Chain followed this keynote with his own where he emphasized the need for supply chain design to be revisited far more frequently than making it a one and done exercise. I concur with the above views. In a world that is rapidly changing, design has a shorter shelf life and needs to be kept fresh. Emerging cloud-based technologies are bringing design closer to planning and execution, enabling unprecedented supply chain agility.
- Design is a differentiator as the global trade flows undergo significant shifts: I had the opportunity to present to a packed audience, wherein I shared my views on how nearshoring is becoming a way of the future owing to the following trends:
- Changing consumer expectations: With the rise of same day, 2-day delivery models, rapidly changing consumer tastes, and hyper-personalization of products, companies need to be far more responsive to consumers or risk losing customers while increasing inventory obsolescence risks and reduced responsiveness. Nearshoring enables faster responsiveness.
- Rising wages in China: As the average wages in China rose to more than twice compared to 10 years ago, China’s advantage as a manufacturing hub is fast eroding taking the offshoring incentive away.
- Escalating shipping costs: Driver shortage, port congestions, and consolidation of ocean shippers are all resulting in increased capacity constraints, introducing more risks and uncertainty with offshoring.
- Rise in automation: Manufacturing, transportation, and storage are all undergoing massive shifts due to automation. Robots level the playing field by reducing the wage disparity paid to human labor.
- Increased cyber-physical convergence: As products get embedded with technology, the risks of hacking go up. Governments are getting more skeptical of products embedded with technology from countries that they do not view favorably. On the positive side, technologies such as 3-D printing are collapsing the distance between the nodes of production and consumption.
- Focus on sustainability: Due to increased availability of information to consumers, brand owners are exposed to more risks associated with negligence of environmental sustainability and ethical sourcing practices. This is prompting organizations to source from geographies where they can exert more control and reach.
In light of the above factors, I made an optimistic case of how Mexico has the opportunity to be a near-shore source for North American market. Given this anticipated opportunity, I advised the audience to build Design as a core competency of the organizations. Performing Total Landed Cost and Cost to Serve decisions on a periodic basis is a must have for organizations. As the pace of change picks up, I also shared examples of companies that are applying external causal factors and machine learning models to drive forecasts as opposed to solely relying on the past 2 to 3 years of history as an indicator of the future. This message was received with great enthusiasm.
- Uncertainty in Mexico raises the need for Design as a competency: While I struck an optimistic note, in my conversations with Mexican retailers and manufacturers, they expressed significant concern around what the future holds with the 2018 presidential election resulting in a change of guard. This is causing concerns around strikes, disruption, uncertainty associated with regulatory changes, and influence of government in private enterprise. Time will tell where this lands. But this reiterates the view that only certainty for supply chain professionals is uncertainty! In my conversations, I reinforced the view that being prepared for a range of possibilities and ensure the design is robust enough to absorb the shocks to the system is a must-have capability.
- How Dell and FedEx reinvented their buyer-supplier relationship: In a highly engaging presentation, Kate Vitasek of University of Tennessee Knoxville walked the audience through a journey of Dell and FedEx on how they transformed their relationship from a transactional buyer-supplier relationship to a highly collaborative win-win partnership. The full and a very detailed case study can be downloaded from here. But I will summarize the key takeaways from the presentation. The companies adopted the following 5 rules to transform their relationship:
- A shift to an outcome-based business model from transaction-based business model: The relationship prior to this strategic realignment was all about getting paid for activity. The teams quickly aligned that the focus should be shifting to value.
- Focus on the what and not the how: Here the focus is to make sure the supplier is not constrained by pre-constrained mandates. They decided to change the outsourcing paradox of “hiring the expert and then telling them how to do the work”. Instead, they decided to collaborate on innovative ideas.
- Clearly defined and measurable defined outcomes: The teams simplified the agreements to include 20 KPIs tied to 6 business outcomes (as compared to 100 SLA’s in the previous transaction agreements).
- Pricing model with incentives that optimize the business: Instead of a transactional shipment based pricing model (per shipment cost, pallet storage, etc), the companies switched to a more dynamic pricing model tied to the profitability of the business based on the mutually defined desired outcomes.
- Insight vs Oversight governance structure: Clear connections were established between the top executives to the frontline associates across both companies with a cadence of communication and continuous improvement effort establishing much deeper relationships.
Above all, both companies have aligned to a relationship based on honesty and trust, achieving win-win outcomes. A fascinating story overall.
There were many more high-quality presentations, which I can’t do justice to in a summary blog. Beyond all the provocative presentations and discussions, it was a great opportunity for me to meet with our customers and partners who are instrumental in our success. I also did interviews with the Mexican press focused on the retail and manufacturing industries. I very much enjoyed those interactions. Over the years, I did quite a lot of supply chain consulting in the region. It is always a pleasure coming back to Mexico and enjoying the country’s hospitality, its wonderful culture and an amazing variety of food.
Last but not the least I had the opportunity to get to know our highly energetic, fun-loving, smart fellow LLamas from our Latin Americas, who are instrumental to the tremendous growth we are seeing in the region. Besides some highly charged and intellectual debates around supply chain and technology, we shared our personal stories and many laughs. They truly made this trip a memorable one for me. I will be back!