October 27, 2002

Getting the supply chain right is the safest way to survival

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Apart from the past couple of days, the weather has been marvellous. September and most of October were the driest and the warmest for over thirty years and only recently has the autumnal chill set in.

Let’s hope November remains clement and with the bookies pricing 250 to 1 for a white Christmas, a warmish Irish December offering sludge and nothing more looks on the cards.

The surprisingly warm spell in September and October has not been welcomed by all. For Irish retailers, particularly those involved in the women’s fashion game, it has been a disaster. Retailers are now stuck with all the winter wear they should have shifted in early September when the first chill on the hemline traditionally signals a dash into town for boots and coats. Good news for warehouse owners though.

Insiders tell me that the M50 is full of warehouses stuffed with winter gear that will not shift before the “spring” season is upon us just after Christmas. If women don’t buy their winter clobber in late August, they won’t buy it at all.

Believe me, I’ve suffered the wrath of one such buyer complaining that you can never get a decent coat in December because they are all sold out. (When you’re slouched over yet another clothes rail in Brown Thomas on a Saturday afternoon, the fact that there are no effing coats left comes as an effing godsend frankly.)

Well this year it will be different — December will be full of coats but the problem then will be, “What’s the point when the ‘printemps’ look is only around the corner?”. Enough.

For a company, being caught on the wrong side of a buyers’ slump is a nightmare. It can discount all it wants, but nothing puts a company out of business as quickly as too much inventory. Creditors need to get paid today, cash is tight and for sellers of winter threads, every bright day in October spells bankruptcy.

When the economy is booming, this problem never arises. When people are flathúil, the problem is how to get enough stuff onto the shelves. However, when the economy turns, the demands on business become totally different. One of the major questions for businesses now is how buyers, managers and owners schooled in the go-go days of the consumer boom should react to getting caught with too much stuff in warehouses. Old heads smirk and warn that these bull-market babies will be no match for the business cycle.

Old timers will contend that unless you’ve traded in the dark days of the 1980s, you won’t survive the next few quarters. This may be excessively harsh but unfortunately, if the financial markets are anything to go by, the ability of bull-market fund managers to manage our pensions in a bear-market does not inspire confidence for the economy in general.

The fault-line for many thousands of Irish businesses now is management of their suppliers. In the boom time, it was possible to place orders for delivery in fifteen weeks. The likelihood was that in fifteen weeks, the demand would be even stronger and the customer would just have to wait or alternatively, the retailer could push prices up if he wanted to weed out the very needy from the plain acquisitive lingerie buyer.

Thus it was up to the punter to manage her expectations. Now what happens if demand is so erratic that the business does not know whether demand will be there at all in fifteen weeks’ time?

This business is in serious hot water. If it tries to squeeze its suppliers now, when times are more difficult, it will be told where to go. All suppliers can see problems throughout the entire supply chain and it may now be too late to change the bad habits of the boom. The companies that used the boom to adopt a “just in time” approach to their supply chains will prosper in the downturn; those with a sloppy, demand-led attitude to purchasing are in for a bath.

In the early 1990s when the threat of Japan was taken seriously, commentators eulogised about the way in which Japanese manufacturers had perfected the “just-in-time” formula. There was no waste in Japanese production.

Producers could react instantly to changes in demand unlike their European counterparts. For example, Toyota had its inventory cycle down to days not months, being able to turn on and off production with ease. Interestingly, despite the domestic recession in Japan these past few years, Japan’s market share in world exports has actually risen.

Thus the Japanese methods ensure that it is still a world beater when it comes to manufacturing, no matter what happens to its banks, stock or property market. Irish companies should be aiming to emulate this, not only in production but throughout their supply chain.

A good example of “just-in-time” management is the fruit and veg game. Everyone has to sell all they have in a matter of days before it goes off. So the supply chain is the key. If you still have a crate of apples to shift at five o’clock on Saturday afternoon, you are in trouble.

Equally, you can’t put up your prices, as there are too many other players in the game. To be successful, a fruit and veg seller has to generate massive turnover on minuscule margins. One screwup on managing his supplies and he is out. As we go into a much slower period, many businesses could do with a quick trip down to Moore Street to see how to play the game.

Obviously some of today’s most successful players have already cut their supply chain time during the boom. I was not surprised to hear that Dell computers had its supply time down to five days.

As such, Dell is almost impervious to changes in demand because it only plans five days ahead. You won’t find Dell with unsold inventory because it hardly has any. Accordingly, although not unscathed, Dell has weathered the downturn in the tech sector better than most.

The key with cutting lead times for many companies is power. If you are Superquinn, I’m sure you can squeeze your suppliers because you have market share and power but what about smaller outfits?

Here is the rub. The only manager that can say to his supplier, “Ten weeks is not enough, I want a five day reaction time” is the biggest player in town because he is putting all the pressure on the supplier. Indeed, the supplier is not only supplying but also warehousing for the big guy.

For small and medium size firms this is the biggest challenge in the downturn and unfortunately with every downturn comes consolidation in every industry. Expect those companies that aren’t cutting costs in their supply chain to be taken out over the coming years.

As Tony Soprano observed when surveying the economy: “Only two industries are impervious to recessions: certain parts of the entertainment industry, and our thing”. For the rest of us, to paraphrase the insatiable John Major, it is “back to basics”.