New Risks, Betting On Supply Chain Circles
McKinsey has recently written on an interesting notion termed “The Supply Chain Circle”. The concept is based on a proposed methodology that focuses on commodity cost hedging by re-using as many products, components and materials to decrease the purchases of raw materials and changing a company’s business model from a product-purchase to a product-lease model. While this solution can provide relief from commodity price fluctuations, it introduces an entirely new cost structure and risk profile with which many businesses are completely unfamiliar.
Increased Reliance On Supply Chain Partners & Consumers
When re-using assets that venture outside of a business’ direct control, reliance on the partners to abide by the terms of usage introduces a significant amount of risk. Most users of the re-usable asset will typically utilize those assets in the manner that best suits their needs which may or may not agree with their terms of usage. The inevitable result is a significant amount of damage and loss which can be controlled with strict process monitoring and governance and stiff penalties for out of compliance usage. However, this puts a manufacturer in the unenviable position of enforcing penalties against their customers, an action which invites competitive entrants.
Increased Inventory & Production Planning Complexity
Supply Chain partners receiving the assets will return them in a time that best fits their schedule and minimizes their costs. This introduces a certain amount of uncertainty to the product planning process due to the variability of the quantity and timing of the re-usable assets that are returned. Commodity purchases are scheduled based on the needs of the manufacturer and fluctuate by the performance of the vendor, which is something that can be controlled by the manufacturer, as opposed to the exact return time of re-usable assets. To hedge against this type of risk, increased amounts of inventory, either in the form of re-usable assets or finished goods, are held or customer satisfaction declines based on fluctuating on time performance for product delivery times.
On a regional level, a significant amount of manufacturing occurs in the mid-west of the United States and products are consumed on the east and west coast. It comes as no surprise that any re-usable assets that travel with the finished goods are positioned after the product is sold to a retailer or utilized by the end consumer are not ideally located to re-enter the manufacturing process. This phenomenon is exacerbate on a global scale with the majority of manufacturing occurring in the Asia-Pacific region and the majority of consumption in the United States and Western Europe. This issue can be incorporated into an overall strategy, but costs must be closely monitored and managed to ensure a successful re-use program.
Increased Internal Support & Administration
Monitoring the usage of the product requires constant vigilance and a copious amount of resources for a process that most companies will deem to be non-critical or non-central to the greater functionality of the business. There are two products that are perfect examples: milk crates and pallets. Every college dorm room and garage has at least one milk crate holding books, tools, or some other item. Everyone has seen the slightly cantered pickup truck driving down the highway with a precariously perched stack of pallets that threatens to topple at any moment, or the large stacks of blue, red and brown pallets behind retail stores exposed to the elements. Both of these items represent assets that are required for a manufacturing and supply chain process and are owned by either the manufacturer or a third party company but are treated as disposable, valueless assets by multiple supply chain partners and by the end consumer.
This issue will grow exponentially based on the value of the returnable asset. Any assets that have a high recyclable value or can be sold for scrap will be at significant risk for loss or theft. In both examples, specific asset management programs have been created to stem the loss of those products. These include innovative asset tracking programs as well as financial rewards and penalties programs to try to encourage a desired behavior pattern.
Supply Chain Circle Success
Implementing a supply chain circle strategy can successfully hedge commodity costs; however, constant monitoring and an organizational understanding of the importance of giving the program the required attention and resources is required. If the management of this program is a secondary of tertiary responsibility of a single or group of individuals, the program will not obtain the achieved results. Additionally, if the program is not incorporated into the normal business processes of the company and has to be completed as a secondary or by exception process, the risk of failure increases exponentially.
An upcoming white paper will be published describing how to implement and manage a successful program.