2024 Supply Chain Key Issues Research – Transcript

March 19, 2024
Season 5, Episode 18

Josh Nelson:

During the pandemic, inventory shortages were rampant. So companies really reacted with, “Well, we’re going to build up inventories.” Fast forward a year or two, people had big stockpiles of certain materials, but they were basically mismatched. Really, the last couple of years have been spent how do we rebalance the inventory? Now, in the era of high interest rates, there’s really a lot of pressure from the finance teams onto supply chain about how do you take inventory out? How do you become more lean? That’s a big area of focus for supply chain professionals is how do you take out inventory without sacrificing customer service?

Gary Baker:

Welcome to The Hackett Group’s “Business Excelleration Podcast.” Week after week, you’ll hear from top experts on how to avoid obstacles, manage detours and celebrate milestones on the journey to Digital World Class® performance.

Announcer:

What are the priorities for supply chain leaders in the year ahead? What improvement initiatives are they planning? I’m Gary Baker, Global Communications director for The Hackett Group. On this week’s “Business Excelleration Podcast,” we discussed findings from our 2024 Supply Chain Key Issues research with Principal Erin Blair and Principal Josh Nelson. Erin and Josh, welcome to the podcast.

Erin Blair:

Thank you.

Josh Nelson:

Thank you, Gary.

Gary Baker:

Erin, why don’t you start out by giving us the 30,000-foot look at what the survey’s all about?

Erin Blair:

Great. Hackett does this survey every fall. We reach out to executives to get a pulse on their objectives for the coming year. We pulled hundreds of executives across industries, across geographies – midsize and large-size companies. Those participants included executives from supply chain areas like planning, procurement, manufacturing and logistics. We’re excited to share those findings with you today.

Gary Baker:

Josh, before we get into the results, what are some of the macro trends that companies are contending with at the enterprise level this year?

Josh Nelson:

2024 really presents a complex set of macroeconomic factors. I would call them … headwinds is probably a better terminology for it, but I would say that the biggest one is inflation. Inflation is at historically above average. It’s driving up prices of all the inputs, including labor, materials, any type of service that’s out there. Inflation is one. Interest rates are another. Interest rates are very important from a supply chain. They drive the cost of capital. As the cost of capital increases, it puts more pressure on the supply chain to turn cash quicker. That means pressure on inventory. It means pressure on accounts receivable and pressure on accounts payable as well. That’s another big factor that we’re looking at.

Finally, there are areas of rising unemployment. There’s additional risk of recession, so there’s overall a sense of restraint out there. Companies aren’t looking to really expand like they had been in previous years. They’re really looking for good signals in terms of where the economy’s headed before they make any type of decisions. Now, with that being said, what we are looking at with inflation and being a real factor – coupled with companies are faced with lack of skills in the marketplace – supply chain remains a hot area of the economy. Trying to find skilled workers becomes problematic, and really, that’s another final macroeconomic trend that we’re looking at.

Gary Baker:

Erin, if that’s where the world is and the business world is, how does that translate into the changing agenda for supply chain executives?

Erin Blair:

Well, given all that, cost-efficiency came back as the No. 1 priority for supply chain executives in this year’s survey. Cost had historically been No. 1 on the list for years, but then in 2021, ‘22, ‘23, cost lost its spot, replaced by other priorities to help companies respond to the pandemic and to other supply chain disruptions. During the pandemic, companies were far less concerned about cost. In fact, many of them prioritized spending a lot of money to solve for all those problems. They stocked up on inventory. They paid higher prices. They spent what they needed to – to be able to serve its customers. But with all the economic concerns that Josh just mentioned ­– like the interest rates, inflationary prices – spending has really come back under the microscope. Companies are reprioritizing their need for cash. While costs had gone down to being No. 4 or 5 in recent years on the survey, it’s back to No. 1 for supply chain executives this year. Companies are just putting in place a wide variety of cost optimization initiatives to address that.

Josh Nelson:

I think the other big story is about inventory. The inventory story has really progressed throughout, first, with the response to the pandemic and then post-pandemic. Now, we have another turn of events. But as everyone knows, during the pandemic inventory shortages were rampant. We had shortages on shelf manufacturing – companies couldn’t get supplies. Companies really reacted with, “Well, we’re going to build up inventories. We’re going to cover our risk by having inventory in the warehouse.” It was more of a response to shortages out there. Fast forward a year or two, what ended up happening is people had big stockpiles of certain materials, but they were basically mismatched. They would have plenty of product A, but not enough of product B, and therefore they couldn’t fill orders.

Really, the last couple of years have been spent how do we rebalance the inventories, make sure that we’re spending our inventory dollars where they count most, and that way we can restore customer service levels without having bloated inventory levels. Now, in the era of high interest rates, companies are now getting pressure about, “How do we take inventory out of the supply chain? It costs us a lot of money to tie up capital by having inventory, and we can better use that cash for other things.” There’s really a lot of pressure from the finance teams onto the supply chain about how do you take inventory out? How do you become more lean? That’s a big area of focus for supply chain professionals is how do you take out inventory without sacrificing customer service levels?

Gary Baker:

Erin, with the pandemic, stepping back a little bit, you don’t hear much about supply chain issues on the news anymore. Have they gone away?

Erin Blair:

No, they haven’t gone away. In fact, a few of the top 10 priorities speak to the fact that companies are still continuing to face supply chain issues. The No. 3 issue was enhancing product availability, No. 5 was improving supply chain agility, and No. 9 was reducing supply risk to ensure supply continuity. Supply chain disruptions and supply risks are still very much issues for companies. As you said, it was front page news during COVID, but I think other things have replaced that as talking points. Now, it doesn’t mean that the problems have gone away. We asked companies as part of this survey what metrics they’re tracking and how they’re performing on those.

I’ll say that on-time, in-full delivery really remains an issue for companies. It was the No. 4 most important metric for companies, and it was one of the worst performing metrics for them. Forty percent of companies weren’t able to meet their on-time, in-full delivery targets last year. That really speaks to the fact that they’re unable to get the full amount of product to customers delivered on-time, and then it remains a challenge. Without the ability to use inventory as a buffer going forward due to the cost pressures that Josh was talking about, product availability service is going to continue to suffer, be a challenge area, and some of that’s going to relate to supply shortages and supply risk as well.

Gary Baker:

Josh, how are companies trying to mitigate supply risk?

Josh Nelson:

That’s another area that’s really developed in the past five, 10 years. Companies, as we’ve talked about, have always focused on cost, optimizing service level, optimizing inventory, but at the same time, they’re now faced with, “How do I mitigate risk?” Obviously, risk can come from a number of factors. There’s inherent risk with your supply base. There’s geopolitical risk. There’s risk from natural disasters. You can go on and on with the number of risks. Companies were really looking at an enterprise view of risk. From a supply chain perspective, there’s a lot of tactics that are being pursued by supply chain professionals. No. 1, and we spoke about it with inventory, but they are looking to optimize the inventory levels to buffer against risk. That being said, they’ll look across the supply chain – look at areas of weakness. If there’s a perceived weakness with a supplier or if the product line, they will buffer with additional inventory. In fact, what we found were about 70% of companies were looking to do that particular practice.

The second big pursuit is that they are looking to qualify alternate suppliers. The pandemic really identified anytime you had a single source product or material that put the company at risk. Companies are really pursuing, “How do I get additional suppliers qualified so that in the event of a failure on one supplier, I’ve got to back up or I could have a dual supply situation?” That was another, again, up in the mid-60s in terms of the percent of the companies pursuing that. Third is really enhancing the supplier relationships. In some cases, it doesn’t make sense to have a secondary supplier, because you have such a strong alliance with a particular supplier. In that case, companies are working on improving the relationship, working out a relationship and inventory investment. It’s mutually beneficial for themselves, as well as their supplier, so that remains another tactic that’s well-deployed.

After that, there are a range of other initiatives that are being taken. Depending upon the industry –depending upon the issue – we’ll have certain companies that are using contract manufacturing as a way of buffering against interruptions. They’re looking at really multisourcing strategies across all categories that are out there. They’re looking at reducing logistics timelines. In other words, you reduce the transportation lead time, and you can get supplies quicker – more efficiently to your facilities – whether they be manufacturing facilities or distribution facilities. The other big area, I think, is getting better visibility upward into the supply chain. Traditionally, it was always valuable to get inventory levels from your direct suppliers. Now, there’s a pursuit in some industries to go to Tier 2 and Tier 3 suppliers, and understand any type of supply constraints that are out there. Again, across the board, supply risk remains a big issue, and there’s a range of tactics that are being deployed by companies. This is going to remain in place. Certainly, this year, we expect that it will remain a big topic for the supply chain for the medium term as well.

Gary Baker:

Erin, final question. We talked a little bit about priorities like cost, inventory, availability and then supply risk. Any others that are worth the spotlight?

Erin Blair:

Yeah. I think there were a few others at the top of the list that weren’t a surprise but are very important. No. 2 was improving planning, No. 5 was improving supply chain agility and No. 6 was digital transformation. All of those really speak to the fact that companies, as we said, still haven’t solved for all these supply chain problems yet, and they’re looking to solutions like planning and technology to improve resilience and agility. We’re thinking about what companies are doing to become more resilient and agile. The first thing that comes to mind is planning. The old adage is that “failing to plan is planning to fail.” That’s true now more than ever. Building and improving on sales and operations planning or integrated business planning capabilities, again, was No. 2 on the priority list. That’s because a solid planning process can help mitigate supply risk. It can help reduce costs, help improve service and help build resilience in the supply chain.

A good S&OP process is really critical. We saw that companies who had solid planning capabilities in place for the pandemic fared better than those who didn’t over the last few years. Now, those who didn’t have it in place are scrambling to get it there. Planning, again, a critical priority for companies, and right now really harder than ever, given all of the irregularities in the past few years. With demand spikes and changing trends, and how people are buying and supply issues, you can no longer really rely on historical data or statistical forecasts to generate demand plans and to drive your supply plans. The ability to plan well in a disciplined, sophisticated way – that is really very important for companies right now. The other thing is really technology. Josh, maybe you can talk a little bit about what we’re seeing on that front.

Josh Nelson:

As Erin said, digital transformation has been a big area of focus. I mentioned earlier that skilled labor remains an issue in the supply chain. What companies are doing is trying to fill the gap in skilled labor with investments in technology. Obviously, technology is going to not only better connect the components of the supply chain suppliers, manufacturing facilities, DCs, customers, but it’s also going to make processes more efficient. It’s that efficiency that’s going to be covering the gap in manpower that’s in the supply chain. Across the board, what we’re seeing is that companies are expecting to make continued investments in tech. For example, in planning, we have about 95% of companies pursuing some level of planning, sales and operations planning tools. Inventory optimization tools are a big area of focus for 2024 as well. In manufacturing, what we’re seeing is really an increased focus on supply chain risk software. Network design and optimization software is another big topic. On the general side, there’s a lot of new technologies that are entering the marketplace.

We’ve all heard a lot about artificial intelligence. Companies are really looking at a number of pilot programs across their supply chain to put AI tools in place and see what type of efficiency it can drive. Same thing with cognitive automation, RPA and then blockchain. These are all technologies that are being, well, at this point, piloted. Really, companies are looking to broaden the use of these technologies over time. In particular, with artificial intelligence, we do see a lot of increased focus on artificial intelligence. The big use case that we see is going to be in the planning area. In particular, demand planning, supply planning – there are a lot of potential use cases where AI can add efficiency to those processes. But companies are also pursuing opportunities in manufacturing, as well as in logistics – whether it be transportation or warehousing applications. Again, wrapping it up – whether it be software or enabling technology – these tools are going to be delivering substantial value to organizations, improving efficiency, making companies faster and more nimble, and it’s going to continue to be a trend this year and then into the medium term at least.

Gary Baker:

OK. Erin and Josh, great stuff. Thanks so much for taking the time to talk with us today. Listeners can download a complimentary version of this research from the Supply Chain Insights page of our website. We’ll also put a link in the show notes.

Announcer:

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