VUCA – A Wake-up Call for Supply Chain

The world has become a global village where demands and supplies are continuously changing and sourced from multiple locations. Such a dynamic situation can be termed as VUCA. It stands for Volatility, Uncertainty, Complexity and Ambiguity. This word has been coined by military post-cold war and used by them to describe the conditions in the world which are VUCA. Later on, this word has been adopted by industries and supply chain professionals as well.

The VUCA term became increasingly interesting to the leaders who seek to operate their businesses efficiently and effectively. It also relates to the geopolitical landscape evolving on an international scale, while as Brexit unfolds in the UK and EU, it’s hard to gauge what’s going to happen in either the near or long-term future.  The 4th industrial revolution is taking hold, transforming the nature and pace of our working environment and processes.  We are seeing an increasing number of disruptor businesses that are changing traditional supply chain models and relationships.

You can very much relate the same as the world is passing through one such critical VUCA phase in the form of COVID-19 outbreak wherein all conventional rules of industry, economy, globalization, inventory management, supply chain management and almost everything have been changed or stands irrelevant.

Supply chain operations are already complex in nature and quite interdependent. Further, VUCA has added new challenges in the same and that’s why VUCA is a new wake-up call for Supply Chain fraternity.

Supply Chain

Conventional organization charts were initially having departments like Planning, Procurement or Purchase, Inventory Management, Stores, Warehousing, and Logistics on the board but there was no “Supply Chain” phrase there. The phrase ‘Supply Chain Management’ was originally coined by Keith Oliver in 1982 and later it gained popularity as an umbrella term which encompasses the end-to-end aspects of Finance, Operations, Development, Sales, Manufacturing, Distribution, Customer Management, Supplier Management, Technology and IT departments.

In simple terms, supply chain management is an important tool for managing products or services from its raw state to finished state and managing after-sales services. It is principally concerned with the flow of products or services, funds and information between supply chain partners. Companies are thinking about how they cope with this volatility and uncertainty in the supply chain so that they can respond profitably. Doing so means not only product innovation, but supply chain innovation too; focusing on how new products are brought to market.

How the VUCA world affects Supply Chain?

  1. Challenges to Conventional approach: The industry’s conventional approach of predicting future demands by observing past trends by applying tools like statistical modelling and forecasting techniques are not as accurate as it used to be. At the same time, business and consumer expectations are changing; stakeholders across the wider production and distribution supply chain want things to happen more quickly and efficiently than ever before, and there is little room for failure.
  2. Demands Initiative and Innovation: The changed scenario means the indicators around how we operate are moving – and it’s putting supply chain function in the centre position. Initiative and innovation are now essential for businesses to meet these challenges and evolve their commercial strategies in line with the new operational landscape.
  3. The wise use of Social Media and Communication: In today’s digital era where social media allows opportunities and risks to be shared across regions and time zones.  Consumers and stakeholders can therefore see and react to changing circumstances within seconds.  As much as possible, we need to be ready to deal with their reactions, and make sure they are aware of the changing world. It’s about managing expectations. There should, of course, be a continual focus on developing new ways of working that allow you to maintain service levels and keep up with the pace of change. However, there should also be clear communication around how changing trends and seasonality are affecting the business, to help ease the pressure.
  4. Preparedness for consequences of unpredictability: It’s also important to encourage a sense of reason. It’s about accepting that even the most advanced new forecasting methods won’t provide the same level of accuracy as we could give in a more stable context. Instead, businesses should adjust their strategy – focusing less on the relative importance we place on forecasting as a skill and more on the tools you have within your business to help deal with the consequences of unpredictability.

VUCA demands insights on the possible room for opportunities and then undertaking respective measures to reduce, reorganize, rethink strategies on how to operate profitably in a dynamic environment. It is to insulate an organization’s processes to make them more reliable and produce desired results while it scales up in its operations.

Common Problem of Supply Chain Manager in VUCA World

Facilitating operations at the optimum level of inventories, reduction in the landed cost of materials/services and improve variable lead times through global outsourcing/multi-sourcing. The need of an hour is increased transparency and visibility into processes which are required to make informed decisions while integrating manufacturing and external trading partners like third-party delivery vendors, stockists, retailers etc.

Amongst all 4 components of VUCA, Volatility is the active ingredient whereas uncertainty, complexity, and ambiguity are largely effects of the same. Though complexity can add to the volatility, uncertainty, and ambiguity. Globalization is the driving force of demand volatility… which is in turn driving product complexity… which, coupled with outsourcing, is driving supply chain complexity.

Supply chain managers love predictability. Unfortunately, today’s global market is anything but—it’s VUCA (volatile, uncertain, complex, and ambiguous). Companies in all industries have to carefully strategize to be ready for changes in the market and keep everything moving forward.

What shall be a possible response from Supply Chain Expert to tackle VUCA?

Empower frontline SCM Managers for decision making: One of the ways to tackle this new world order would be to permit frontline managers to make fast-track decisions instead of waiting for approvals. Management shall ensure increased bandwidth and authority without the need to escalate through formal time-consuming channels. Real-time monitoring and alert-based decision making will be key to achieve the same.

Adoption of Innovative Technology: Technology has been one of the biggest disruptors in this sector which lends an important hand to a largely scattered and unorganized industry especially in India where players like Sendit, Rivigo, Blackbuck finding traction and have shown market value through a renewed focus on technology concerted decisions by infusing it in the supply ecosystem to develop proprietary solutions using data analytics, cloud chain computing for forecasting and tracking systems to revolutionize logistics which benefits the entire value chain by making the whole process leaner. According to research conducted by QY Research Reports the increased adoption of cloud technology by various enterprises is the prime factor for the significant growth of the market for supply chain analytics around the globe and implementing an emphasis on digital data-driven decision making.

Supply chain analytics: The key aspects of the supply chain would be impacted include machining, insights, visualization and security which will help in capturing and integrating supply chain data to obtain meaningful insights and provide business intelligence required to flourish and contribute to the economic growth of the organization and our country. This leads to a cascading effect which not only benefits the supply-chain but the clients associated with the value chain seeking similar services to invest in product diversification or open up new markets.

Restructuring Logistics to improve service levels: Logistics is going to pave the way for the future with customer delight heavily dependent on faster and safer deliveries, requiring unimaginable turnaround times coupled with real-time status updates and performance inputs since the last-mile deliveries are expensive, kills profits and make or breaks your customer experience through the brand interaction journey. To give a superior value for money for your partners, it is imperative to win the loyalties of the customer by ensuring optimum service levels by ensuring a renewed focus on value addition like cost reductions, just-in-time capabilities, getting products to store shelves faster, new methodologies, and automation.

Amazon is one of the stalwarts of the industry showing how it’s done to the rest of the world. Amazon has showcased time and again that they are the undisputed pioneers of this space by depicting unparalleled levels of innovation from warehousing to inventory management to delivery.

For example, a big part of the warehousing success arises from the strategic location near metros or population hubs. If the demand permits then even mini-warehouses are set up to cater to smaller areas. For delivery, the omnipresence of Amazon to leverage more traditional to high tech delivery mechanisms has ensured a plethora of options for customers to choose and create deep loyalty towards their subscription-based service Amazon Prime to drive repeat purchase behavior and offer convenience.

From Drones to Amazon-branded trucks to tie-ups with UPS/FedEx has allowed the Seattle based company to push out the product in lightning-fast times. Embracing technology by introducing robotics and automation to reduce stacking and storing times has made the process a lot cleaner and efficient freeing up funds, time and space with unprecedented speeds.

Apart from above-mentioned measures, one has to look forward to implementing latest technologies like Machine learning algorithms, Internet of Things (IoT), Big data analytics, Artificial Intelligence (AI) etc which may help to realize business value, significantly impact costing and increase efficiency. Improvements on the go and Agility will be the new fundamentals to drive growth and competitive advantage finding high priority on the list of long-term agendas for any organization to address the VUCA world.

Supply Chain Management in the VUCA world – Global Scenario

What sort of conditions is considered as VUCA in a global scenario?

Let’s recollect as Brexit, China’s impact on the world economy in the form of Belt and Road Initiative (BRI), China and USA Economic cold war of duties, Economic and political agitation, Right-wing politics in rise with the leaders like Donald Trump, Xi Jinping, Narendra Modi, Netanyahu, Putin and Theresa May which has induced a feeling of Nationalism in the country which works as avert force to Globalization.

Many of such leader’s policies and actions of USA, India, China and Britain, etc has increased Volatility, Uncertainty, Complexity and Ambiguity in global economics and ultimately impacts Supply Chain. Further, all countries’ economy is interlinked due to the latest trend of outsourcing of work at the countries where labor and other resources are cheaper. Due to this, the entire world economy has faced the issue when Vuhan of China hits by Covid-19 outbreak.

Further, USA’s Donald Trump has implemented the policy of “America First” which has put the world in the backward mechanism from globalization to regionalization. The same has been implemented in India by the “Make in India” concept. Due to such concepts, supply chains will have to adjust. Organizations with global supply chains are realizing that regionalization makes sense because costs and risks are reduced and speed to market is faster”

According to Terri Hiskey, President of Global Product Marketing for Manufacturing at Epicor Software, “having a solid supply chain strategy to navigate supply chain disruption is crucial — both to offset the impact of tariffs as well as handle the inevitable and seemingly myriad geopolitical disruptions, natural disasters, and transportation challenges.”

Organizations need to put in place new short- and long- supply chain strategies. Supply chains that have been designed to function in an age of globalization are now under tremendous pressure to be made more localized products to minimize trade conflicts. While many organizations have seen benefits in consolidating suppliers in recent years, many are now looking to establish multiple suppliers in different locations and with different delivery routes. While this may increase costs and operational complexity in the near-term, it can be advantageous to mitigate disruption in the long-run and support growth.

Following steps may help to adjust Supply Chain to today’s business environment:

  • Assess your supply chain state of affairs. Quantify exposure for the extended supply chain by material, country of origin, and financial impact.
  • Calculate key considerations. Evaluate inventory policy, sourcing modifications, and commercial terms. Consider where and when multiple sourcing options make sense.
  • Review as situations warrant. Ensure scenario planning is done periodically.

Strategic use of technology can empower organizations in the efforts outlined above. Using technology such as Enterprise Resource Planning (ERP) and Supply Chain Management (SCM) systems to support supply chain operations is a solid step to improve visibility and flexibility. … These systems are increasingly being augmented with Artificial Intelligence (AI) which can be especially beneficial in helping detect fast-moving trends and look for patterns from which to discern insights.

Amazing Examples of Supply Chain

1. Toyota – Supplier Symbiosis

Toyota has developed a very unique and discrete manufacturing supply chain with the help of key Keiretsu suppliers. Keiretsu is a Japanese word that indicates cross-holding of businesses and is not only a supply chain risk reduction strategy but also enhances supplier competitiveness in terms of cost, quality and delivery. It is a symbiotic relationship in which the Toyota(OEM) invests time and resources to develop the supplier capability to meet its requirements, whereas the supplier benefits by way of having “assured business” and hence can “never go wrong” (Reduced Volatility). It is this close collaboration that helps the supply chain to achieve reliability (on time in full), responsiveness (scheduled deliveries), agility (components development), Just in Time Inventory and an optimum ROCE (Return on Capital Employed). This mechanism has made Toyota able to reduce most of the component inventories to Zero as such components are delivered on the same date of demand only. Collaboration and communication are the underlying drivers behind such a robust supply chain.

2. Scotch Whisky – A continuous flow line process

The Scotch Whisky supply chain has a very long value chain and the key challenge is to forecast what would-be customers’ preferences will be 20 or 25 years later, particularly keeping in view that there are numerous SKUs and flavors. Sourcing professionals are tasked with not only getting the right ingredients (which is just 20% of the value they can add) but also have to ensure that they secure the right wood, ‘casking’, wood treatment and warehousing contracts (that add 80% value to the product).  Thus, the Oak selection (for the casks), the drying lead times, heating of wood (toasting or charring, etc) and warehousing techniques are all factors that influence the creation of the required flavor (developed internally, and not added) in the whisky. Due to the fairly long lead times, the elongated value creation timelines, and the uncertainties that affect the exact forecasting and response times to meet customer demands, some organizations have taken recourse to 3PL logistics providers to manage the value chain. This helps to increase forecasting accuracy, reduce inventory and provide greater agility. This example is a Continuous Flow Line process. However, collaboration (that helps to communicate effectively and anticipate risks faster) between supply chain players is the only way to reduce VUCA risks in both cases.

3. Telecom Network space – Managing Reverse Logistic Supply Chain

Telecom Network Space has created an amazing example of Reverse Logistics. The power of collaboration for managing risks took a central role in managing Plug-In-Cards (PICs). PIC is an electronic chip with surface mounted devices such as capacitors, transistors and resistors. The PICs value chain consists of Source, Return, Repair/Refurbish and Investment Recovery. The key pain point here was, apart from a highly fragmented spend and a high number of suppliers, the reverse supply chain was dogged with an extremely slow inventory movement, low visibility of the flow of PICs and a very low Investment Recovery of 10% (only 10% of the PICs selected for a reverse auction could get sold). Every element of V-U-C-A was playing its part.

In such a situation, Infosys has taken lead, and after detailed study implemented a few recommendations in short to medium term. It yielded few key transformative changes in the value chain, including a reduction in a number of suppliers (around 25%), increase in visibility (around 50%) and in inventory turns and also a tremendous enhancement of the Investment Recovery (at least doubled).

So, what Infosys has done right? Infosys has implemented a common communication platform for all players in the value chain to increase visibility throughout the chain. This concept is none other than CPFR (Collaborative Planning Forecasting and Replenishment) in Supply Chain Space to manage VUCA related risks.

Being at the forefront of the supply chain, sourcing and procurement professionals play a key part in managing VUCA related Supply Chain risks, be it developing SLAs for managing reliability, responsiveness and agility based metrics for supplier contracts, or delivering value by bringing about greater opportunities for collaboration and communication across the supply chain entities.

4. P&G’s strategy to tackle the VUCA challenge:

The consumer product giant “Procter & Gamble” has revised and restructured its supply chain to respond to the VUCA situations in the world. P&G has taken following 3 major initiatives in this regime.

  • In order to meet the needs of the 4 billion-plus consumers who buy P&G’s products, the company had set up plants across the strategic locations in the entire world. Further, P&G has switched its strategy from building up a factory for a single product to multiple products to have better control on supply chains by aggregating demands and reducing inbound and outbound freight costs.
  • P&G has started consolidating its production planning function to develop more in-depth subject mastery among its planners. P&G is also working on the adoption of a single, global set of standards for measuring performance across its entire supply chain organization. It helps to drive a common culture across the chain.
  • In addition to worldwide supply chain initiatives, P&G is implementing innovations in regional distribution operations. Company is exploring options for both rail and road networks in Europe and other continents based on the requirement.

5. Danone Nutricia – Empowering people to deal with VUCA

People are the vital assets at Danone. Supply chain teams are performing on frontlines and the crucial connectors between business strategy and objectives, and the outside world.  Empowering supply chain professionals to flex against the upcoming changes on the business horizons by changing business models in a timely manner.

Supply chain function is driving all the business’ key decision-making processes, with a direct line of communication to senior business leaders. This gives transparency, insight and access to truly understand business’ objectives and enables the organization to be more agile whenever we sense that the company’s direction of travel is off-target.

Conclusion

VUCA is a new norm in business and organizations have to make strategies to equip supply chain team to tackle such issues. VUCA is applicable whether your business is big or small, global or local. The pace at which external factors are changing ways of working is not going to slow down. While our processes and methods have to adapt in line with the context we’re operating in, it’s the people within your supply chain function who will make sure any changes are both business and mission-fit. Engaging your people and knowing how to empower them with the knowledge and tools needed to play their role effectively should be a top focus.