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Since 2008 unpredictable changes in the global economy arise and many of the strong companies get under pressure because of bad bottom-line results. Reason for this is the global economic downturn, which results out of the world economic crisis triggered by the banking and financial crisis. Many companies suffer from falling interest rates, crude prices and customer demand. Reductions in requirements influence the GDP growth and have an impact on job creation, public expenditure, developments and infrastructure upgrades. Financial stimulus packages by the states give some relief, but the situation and the overall condition are still tough and remain uncertain for several businesses (Boateng, 2009).
Especially the automotive industry is strongly affected by the economic downturn. Although the automobile manufacturers are much differentiated from each other they experienced similar difficulties. Many of them needed support by the governments and there was the need for an organisational reform (Saunders, 2009).
According to Smyrlis (2009) effective supply chain deals effectively with the uncertainty. Supply chain practices can have a high impact on the company's financial performance through its customer value and cost saving potential. According to Blanchard (2008: p.57) "an efficient and flexible, demand-driven supply chain can be a powerful driver of profitable business performance". Therefore managers of companies need to manage the uncertainty and have to develop flexible and efficient supply chain strategies and re-engineering techniques in order to increase the supply chain surplus. The supply chain surplus can be increased through fostering customer value or through reducing costs. The surplus can be reinvested in the business and help to find out of the crisis.
In the following report strategies will be identified and critically analysed that help to improve the supply chain surplus in economic downturn and reduces uncertainty.
2 Supply Chain Management in economic downturn
In the opinion of Chopra and Meindl (2010: p.23) an "effective supply chain management involves the management of supply chain assets and product, information, and fund flows to maximize total supply chain surplus". An efficient and flexible supply chain is very important in economic up- and downturn. During economic growth companies focus more on marketing and product development whereas in economic downturn there is a stronger concentration on potential savings, which shall result in a higher supply chain surplus. These savings are possible through increased operational efficiency in the supply chain (leaner supply chains), for instance through better information systems or reduced logistic costs. Many companies are mostly not aware of their value potential that is still available in their supply chain, which represents opportunities (e.g. under-utilised resources) to improve business processes and to reduce costs. However, this value can increase the overall supply chain profit.
Supply chain strategies have to be developed by managers for the whole supply chain (from the procurement of raw materials through to delivery to the end-customer) in order to use the available opportunities to stay competitive in times of recession. In case of efficiency it is important to review the whole supply chain, because the lowest cost of a specific stage in the chain is not necessarily the lowest cost for the overall supply chain (Saunders, 2009).
3 Supply chain strategies
In order to survive in the economic downturn eight potential strategies could be identified and critically evaluated.
3.1 Focus on core competencies
The identification and development of core competencies is very important for a company, because they help to provide a special benefit for the customer, provides access to a variety of markets and are hard to imitate by competitors (Ayers, 2001). The core competencies are specific resources and capabilities (set of activities, skills and/or advantages) that differentiate a company from its competitors and lead (because of uniqueness) to competitive advantage, strategic competitiveness and ability to earn superior returns, when available. When core competencies are identified the company should have its main focus on these activities and skills and should think about outsourcing less valued activities in order to reduce cost (Simchi-Levi et al., 2008).
3.2 Make-or-buy decisions
Make-or-buy decisions are directly linked to the core competences of a company. For non-critical activities a company should consider to outsource these activities to external partners, who have their competence in the given area. It is important to outsource only the low value-added activities with low risk, but with scope for large supply chain surplus, because of the adherent risks of outsourcing (e.g. increasing power and unique expertise of supplier, danger of information sharing of supplier with competitor or loss of own knowledge to perform a special activity internally). In the opinion of Chopra and Meindl (2010) it is meaningful to outsource activities to a third party if the third party can raise the supply chain surplus more than the company can by its own.
To give an example, when a company has its core competences in manufacturing consumer goods in a cost-effective way it should not run its own warehouse or distribution network, when it is not a special core competence of this company. These activities can be outsourced to partners that have developed core competences in this sector. This would increase the operational efficiency of the supply chain and the supply chain surplus (through reduced costs and increased customer value) and lead to complementary core competencies of supply chain partners.
3.3 Strategic partnerships
The purposes to create a strategic partnership are "to achieve objectives that otherwise could not be realized and to reduce the overall risk of a project while increasing the return on investment" (Gattorna and Walters, 1996: p.189). For Ayers (2001: p.135) "the path to success will lie in developing partnerships". For him companies have to develop partnerships when they want to survive, especially in economic downturn. Working in partnerships can drive efficiency in the whole supply chain and reduces costs (Simchi-Levi et al., 2008). By developing partnerships Saunders (2009) advises the need to understand the processes of all partners, identify potential problems that can occur by the way each partner transact and find ways to eliminate these problems through changing or adapting processes. Furthermore he recommends nurturing long-term agreements and common objectives for working together as partners.
According to Simchi-Levi (2008) partnerships can have several advantages: adding value to products, improving market access, strengthening operations, adding technological strength, enhancing strategic growth, enhancing organisational skills and building financial strengths. Especially to increase supply chain surplus in economic downturn the issue of strengthening operations and building financial strength play a major role.
Strategic alliances can help to use resources and facilities more efficiently and effectively and improves operations by lowering cycle times and system costs. For example, companies that sell seasonal products to different times can effectively share warehouses or trucks in order lower their costs. Furthermore it helps to increase financial strength, because administrative costs can be shared or reduced through transfer of responsibility to one partner (because of higher expertise). Additionally income will be enlarged and investment exposure and risk can be shared equally (Simchi-Levi et al., 2008).
If there are good partnerships to customers and suppliers in the supply chain, which share benefits and risks in equal measure they are more willing to forthcoming with new ideas of improvement. Saunders (2009: p.37) has the opinion that "yesterday's high-cost, high-quality producer may well turn out to be tomorrow's low-cost, high-quality producer by embracing continual improvements." Therefore approaches like Kaizen are very helpful for developing continuous improvements.
Besides the many benefits that strategic alliances can have also the dangers should be evaluated. When managers start to work in relationships with new partners there is often an inhibition to relinquish or share control, but because of a fast changing environment (due to an economic downturn) the companies have to change and adapt very fast by realising strategic alliances (Ohmae, 1989, Gattorna and Walters, 1996). A common danger in partnerships is continuing competition and confrontation; instead of working together as a team (Long, 2003). A further danger can happen when core capabilities of a company weaken by a partnership. This is possible if technological or strategic strengths of a company counteract a successful partnership (Simchi-Levi et al., 2008).
3.4 Information sharing and flow
Within a strategic partnership there is an emphasis on cooperation and partnership which constitutes the basis to work with each other. Competition and conflicts should be avoided through long-term agreements and common objectives. This approach accentuate the development of trust, which comprises a need for common interest and sharing of information (Gattorna and Walters, 1996).
When supply chain partners are committed to share information the manufacturer can, for instance, use the actual point-of-sale information of the retailer to better predict the future demand (demand transparency). This reduces the lead times of orders, satisfies the customer and helps to control the volatility in supply chains (known as the bullwhip effect) (Simchi-Levi et al., 2008). Therefore excessive levels of inventory and stock-out can be avoided, which normally would raise costs.
Information sharing alone is not enough; an efficiently managed flow of information has to be warranted (Christopher, 1986). According to Sweeney (2007: p.55) "the flow or movement of materials or money is usually triggered by an associated information movement", therefore the management of information flow is the most critical of the different flows available in an organisation. Information systems like electronic data interchange (EDI) support the information flow within the supply chain and should be used in order to keep the involved parties up-to-date of routine inter-company transactions such as new orders, order status, inventory, etc. Information systems are lowering transaction costs and reduce transaction response time and are therefore extremely useful in times of economic downturn (Gattorna and Walters, 1996).
3.5 Accurate forecasts
It is very important for a company to have accurate and qualitative forecasts, which imply all possible outcomes including the probability that they occur in order to be best prepared for changes in the economy. In economic downturn, forecasts should be created or updated more frequently as in economic upturn, because of faster changes in the environment and in order to prevent high costs through excess inventory, stock-out or expensive last-minute deliveries (Long, 2003). Forecasts are expensive, but inefficiencies resulting from poor demand can lead to higher costs (Saunders, 2009).
There are many types of forecasts, but the most important one in economic downturn is the demand forecast (especially in economic downturn, because of the rapidly decreasing demand). Upon this forecast several organisational plans will be done, like sales-, production-/capacity-, people-, logistic-, material-plan, etc. If the demand forecast is inaccurate the different plans that base upon this forecast will be inaccurate as well, which results in high costs and losses for a company due to non-satisfying the demand of the customer (Chopra and Meindl, 2010).
The aggregated plan should be shared with the partners throughout the end-to-end supply chain, because the future demand is important information, which will affect each single party of the supply chain.
An information system that supports the demand planning (Gattorna, 1998) and helps to improve operational decisions by the management (because of the fast delivery of real-time information) is the enterprise resource planning (ERP). ERP systems increases the efficiency of the supply chain and keep track of the information and make it globally visible from within the company and across the whole supply chain (Chopra and Meindl, 2010).
3.6 Secure stability and reliability
Stability and reliability will always win when compared with costs of unreliability, which can include, for example, costs of excess inventories and stock-out (Saunders, 2009). For a company that chooses, for instance, a supplier it is better to choose one, who has higher prices therefore gives a guarantee to deliver the products on time the whole year as to choose a supplier, who has supply variability or disruptions, but products at lower prices.
To support the requirements of stability and reliability in supply during an economic downturn there are different contracts (long-term agreements) available that can be used to create a win-win situation for the whole supply chain. The contracts can coordinate supply chain costs, increase agent effort, induce performance improvements and support the buyer-supplier relationship. These contracts can increase the overall profit of the supply chain and shall avoid that each party follows its own course of action to optimise its profit without recognising the decisions of other parties (Simchi-Levi et al., 2008). These risk-sharing contracts can lead to an overall cost reduction in supply chain and can increase supply chain surplus.
Within the buy-back contract the seller accepts to buy back the unsold goods from the buyer to a specific agreed price that is below the purchase price, but higher than the salvage price. This increases the incentive for the buyer to order more units and decreases the risk of unsold units. The product availability increases and the buyer and seller can share higher profits. In fact, the supplier's risk rises, but through the higher order quantity of the buyer, and the reduced probability of buyer's stock-out the overall increasing profit compensates the supplier's risk (Simchi-Levi et al., 2008). This kind of contract is especially applicable for products with low variable costs and an effective reserve logistic system is necessary for implementation (Simchi-Levi et al., 2008). A danger can occur when increased inventory costs exceed additional profit.
According to Simchi-Levi et al. (2008) revenue-sharing contracts are very useful in economic downturn. Firms are often afraid to buy high amounts of products, because of fast changing demand and the high wholesale price of the supplier. If the buyer can convince the supplier to lower the price the buyer is able to buy and sell more products if demand slightly increases. In return the supplier takes a stake on buyer's profit and gets a certain amount for each unit sold. The missing wholesale price reduction narrows the supplier's profit in the beginning, but it will increase again when the buyer sells its products and share the profits with the retailer. There is still a risk for the supplier that the buyer is not able to sell the products, but the risks will be shared. This kind of contract requires a monitoring of buyer's revenue and can increase administrative cost. This has to be proved before implementation.
Within quantity-flexibility contracts the supplier accepts to take back a certain amount of unsold products. The amount is defined in the contract. The buyer is not able to refund more items as specified in the contract. Compared to a buy-back contract, that offers partial refund for all returned products, a quantity-flexibility contract gives full refund for a certain quantity of products (Simchi-Levi et al., 2008).
Quantity discount contract are useful when supplier has high fix costs per lot, which would increase buyer's total costs when he orders products below the lot size. Therefore the supplier gives the buyer an incentive (a discount) to encourage him to order a larger quantity of products, which reduces the retailer's costs and the total supply chain costs and creates value for the customer (Simchi-Levi et al., 2008).
All four kinds of contracts need good information sharing to prevent distortion of information like demand and require an established partnership build on trust.
3.7 Eliminate non-value-adding activities
In even well-run organisations there are often several activities, which will be performed that do not add value to the end-product or never get reviewed. These activities cause unessential costs and waste important time. Elaborate reports often belong to such activities. Therefore a company should consider and reflect each activity at each stage of a process in order to determine the value that each activity adds to the final product. If there is no value the activity should be eliminated (Saunders, 2009). The same belongs to activities that are performed twice or overlap with other activities in the organisation as well as in the supply chain. This does not even add additional value to the end-product and should be avoided (Saunders, 2009). For example, a special template can be created for the whole supply chain. It is not always necessary and reasonable that each party in the supply chain create its own template.
3.8 Increase quality with Six Sigma
Six Sigma is an approach to improve business quality and operations and to increase the operation's profitability and competitiveness. It measures the quality of each product and strives to reduce the number of defects to a small frequency nearly zero (6 sigma equates standard deviation of 6 and results in 99.9997 percent reliability of no defects) in order to reach perfection in execution processes and to reduce cost to a minimum, which are caused by low quality (Ayers, 2001). Without defects and early-life failures as well as with on-time delivery and good service customers are more satisfied and complaints are reduced (Slack et al., 2010). Six Sigma bases on "traditional statistical process control" and in the meantime it has developed itself to a far broader "philosophy of improvement" that offers a general "approach to measuring, improving and managing quality and operations performance" (Slack et al., 2010: p.667). However, it is now a code word for "excellence in any process" (Ayers, 2001: p.22) and it is a management system "to achieve lasting business leadership and world-class performance" (Pande & Holpp, 2002: p.6).
In order to improve its business processes and operations there is the DMAIC Six Sigma improvement cycle, which demonstrates a "never ending process of repeatedly questioning and re-questioning the detailed working of a process or activity" (Slack et al., 2010: p.544). The DMAIC Six Sigma improvement cycle is shown in figure 1 with the actions that have to be performed at each single step.
Figure 1: DMAIC Six Sigma cycle (Source: Innovation 360 Institute, 2010)
Six Sigma is because of its continuous improvements very beneficial in economic downturn, because it reduces costs and improves customer service and value. The supply chain surplus will be enhanced and operations are more effective and efficient than before.
In the above text several strategies could be identified that can help organisations to find out of the world economic crisis through reducing cost and increase customer value and services. These strategies are often linked with each other and cannot be considered as a single entity. It is not easy to implement these strategies and sometimes they are not applicable for each organisation or industry, but when some of them can be successful implemented it will help the organisation to survive in an economic downturn.
For organisations it is often not possible to implement these strategies completely within a few days - it takes time. These strategies have to be implemented step by step and continuous improvements are necessary maybe through application of Kaizen. For example, a good partnership cannot be created within two or three days. It has to be developed over a longer timeframe with incremental improvements from time to time.
The named strategies are no essential strategies especially for economic downturn. They can also be used during an upturn or stagnation to reduce cost and increase customer value and service in order to increase supply chain surplus, competitiveness or to create competitive advantage (e.g. by concentrating on core competencies). During an economic downturn these strategies are exceptionally important, because they focus on indicators like cost and customer value that are essential for survival. Therefore adaptations are indispensable.