Magellan Logistics explores the key challenges facing Australian supply chains.
As illustrated in our recent article The Coming Crisis of Confidence for Australian Supply Chains, the smooth running of supply chain and logistics has clearly never been more problematic. Unfortunately, it has also never been more difficult to optimise that chain than it is now. Nor has it been more important, because only through optimisation and continuous improvement can the chain be de-risked.
Logistics and supply chain risk is all around us – quite literally in the air! The financial risks alone can be enormous and their consequences catastrophic. Inventory costs associated with obsolescence, markdowns and stock-outs can quickly and easily cripple businesses. Some examples? High tech devices such as mobile phones and tablets can lose one percent of their value in one week. As many readers will know, fashion stocks can lose all their value overnight if trends turn against them. Some segments in the fashion industry can churn out 52 “micro-seasons” each year; with new trends coming out every week, and last week’s trends expiring just as quickly. In the US earlier this year, in a period of three consecutive months, retail markdowns constituted nearly 20% of total retail volume.
Ever-increasing volatility and uncertainty in supply and demand, further globalisation of markets, the compression of product and technology life cycles, and the increased reliance on outsourced manufacturing, distribution and logistics partners – all of these contribute to an incredibly complex and labyrinthine international supply network. The risks associated have never been higher, nor have so many organisations been as exposed to them. Ask anyone affected by the recent financial collapse of Hanjin.
The inherent risks of the supply chain are already high enough: worrying about whether your stock will arrive to you or your clients in time. This creates scope for further error resulting from the mismanagement of logistic and supply chains.
However, it can and does get worse when practical issues are complicated by irrational responses. The inherent complexity and uncertainty related to the supply chain almost naturally increases these type of risks, that result from over-reactions, second-guessing, gut instinct and mistrust, all of which can lead to unnecessary interventions based on information that is distorted or just plain wrong.
The “bullwhip” effect so well known to CFOs is an example of the resulting chaos. Dr. W. Edwards Deming, the doyen of business process measurement and improvement referred to this as “nervousness”. Such elevated “nervousness drives higher costs and inefficiencies when managers over-order and “squirrel away” inventory.
As if that weren’t enough, let’s add to this chaos theory or the “butterfly effect”, as named by Edward Lorenz, that describes the behaviour complex systems that are highly sensitive to slight changes in conditions, so that small alterations can give rise to strikingly great consequences. It sounds outlandish, but it is an apt way to describe the unexpected disruptions to one sector that that on a course that is completely unpredictable.
Beyond the most recent man-made catastrophe courtesy of Hanjin, history is replete with examples of events that paralysed supply chain flows without warning:
- The closure of US airspace after September 11
- The sudden collapse of Target in Canada earlier this year
- The Chinese milk melamine contamination in 2008 whose knock-on effects through the supply chain almost crippled KFC in the US, Heinz in France, and egg supplies in Hong Kong due to contaminated feedstock etc.
As unpredictable as these events might be, their impacts can be nonetheless disastrous, adding an entire extra layer of inherent and largely unavoidable risk to the whole equation of supply chain and logistics.
The inexorable growth of more uncertainty and volatility in our supply chains makes it increasingly difficult to make optimal decisions to move goods from A to B. The increase in decision risk - of simply getting it wrong, is a natural consequence.
Added to this are the market risks – the potential cost of missing a market opportunity that might exist now but gone in six months’ time. Supply chains do not exist in isolation. You can’t have a responsive supply chain if not all the links in it can respond quickly enough to changing market trends and customer preferences. A supply chain can’t successfully support the launch of a new product if supply and / or production can’t adapt to meet new demand, or are incapable of responding to compressing customer lead times.
All of this points to the myriad ways an organisation’s supply chain and logistics capabilities can play and central role in determining whether a business survives and succeeds.
Magellan Logistics, established in 1997, specialises in global supply chain services for fashion and retail.