How to win the Tour de France?
This year, 2020, the importance of the Tour de France as being the event of the year in cycle racing was again emphasized when all the fuss around rescheduling the cycling calendar started. For the sports illiterates amongst us, the ultimate goal of every cycler in this race is to end it achieving the yellow jersey in Paris. To achieve this, cyclists must take and survive some significant risks throughout all daily tours. One or more days with bad luck (such as a crash, physical setbacks, material breakage, etc.) can jeopardize the long-term performance of the cyclists and compromise their chances of ending high on the final leader board.
What does this have to do with supply chain networks?
The multiple crises of the last decennia (i.e. dot com bubble, 9/11 crash, banking crisis, Covid-19, etc.) have taught us that if performance is measured on the long term, it’s not necessarily the short-term winners that survive but rather those that are best able to absorb big disruptions. Warren Buffett for example is beaten very often in annual revenue but has been the best business performer over a period of 40 years. However, when considering how we currently manage our supply chain networks, we see that often instant short-term success, or day stage victories in cycling terms, are opted. This often gives the best result as long as the preconditions can be reliably estimated. This does ensure that optimal solutions are pursued for determining the network concept and governance, while assuming uncertain preconditions (e.g. lead times, capacity availability, weather conditions, distances, etc.). The focus is then very strongly on the ‘profit’ potential of the concept, whereby the preconditions adhere to the expected values, but one often forgets to estimate the risk of how deep one can fall if expected certainties are suddenly no longer so certain. appear to be.
Because in business operations the pressure often comes to lie strongly on short-term results, the preferred supply chain concept is therefore often chosen on the basis of business models and optimization, whereby one relies too much on certainty to calculate the potential in ideal circumstances and there is too much little account is taken of risk analysis. This leads to often complex concepts with nice results as long the ‘certainty’ holds, but which are completely destroyed if a setback occurs. We have all seen in 2020 the consequences of long distances within the network, insufficient knowledge of tier-2 suppliers, closing of borders, unreliable delivery times, etc … This leads to very negative results that seriously hamper long-term performance. The slightly better performance over 9 years is obliterated by one knock of the hammer in the tenth year.
In most companies, making a good risk analysis is often forgotten. Managers are too often judged for their performance in relatively short terms, compared to direct competitors. The fact that in order to achieve these short-term victories people often set up complex networks based on certainty, is often forgotten and the poor results of the crisis year are often explicitly attributed solely to the crisis element itself and not to the concept used, because the crisis was’ not foreseeable anyway ‘. Risk averse solutions are therefore often not sufficiently valued.
What can we learn from crises?
What we want to emphasize here is that crises force us to face the facts that the world can be confronted with great uncertainties, which we often have not considered when making decisions. Does that mean that we should do a full risk analysis every time we need to take a decision? No, but we strongly advice to impose a thorough long-term risk analysis to the supply chain concept on a regular basis. Ideally this is part of the important roles and responsibilities of a supply chain manager, a CEO and certainly also the board of directors. This analysis must ensure that the consequences of possible calamities are known in advance and that the analysis must provide insight into the probability and impact. In a strategic evaluation, the emphasis should mainly be on circumstances where the impact could jeopardize the full continuity of business operations and the company. It is then up to those responsible to estimate on the basis of the probability whether we are willing to run this risk. The result of this analysis should provide guidelines for the boundaries within which medium and short term decisions can be made by those with operational responsibility. This way of thinking is often forgotten in our operational short-term supply chain world, but if we ever want to be in the yellow jersey in Paris again, it might be the best guarantee of success!
In practice: companies with long-term invest in this.
That some supply chain managers are already aware of this is evidenced by a few recent projects that we as Möbius have carried out together with our customers and which were already started before covid-19 times. Three great examples here are the implementation of an integrated model for a large retailer in which the impact of internal and external factors (delivery windows, customers, delivery times, demand variability, …) on the total performance of the supply chain is demonstrated, the set up of a long-term joint collection concept (cost evolutions, transition from cost to revenue streams, certainty vs. risk, etc.), and a strategic what-if investment model for a chemical group.
Has the recent crisis posed unexpected issues for You and do You have the ambition to one day be in the yellow jersey in Paris, do not hesitate to contact us to draw up a plan for this!