Looking back at a Perfect Storm

During the downturn that shook the foundations of the technology industry after the dot.com implosion, I wrote and article about the Perfect Storm that hit the industry.  In that article I suggested that there are Seven Deadly Sins that can challenge the stability of the supply chain and our overall economy.  This was written in July 2002.

Reading it now, seven years later, it is amazing how we have seen the storm hit once again – this time in the construction and finance industries.  Hopefully someday we will learn our lessons.

bigwave2The Perfect Storm:
What happened to the Supply Chain in 2000/2001
and could it happen again?

July 3,  2002.

In November of 2000, Roy Vallee, Chairman of the Board of Avnet, Inc., the worlds largest electronics distributor, announced, at the Avnet, Inc. Annual Shareholders Meeting, that Avnet was seeing indicators that the Technology Boom of 2000 may not be sustainable.

This unleashed a storm of protest from analysts, investors and supply chain participants. While today we all know that those indications were all too true, with hindsight, we, as an industry, only wish he had been wrong. As the technology sector slowly begins the climb out of the most dramatic downturn in its history, the question asked repeatedly is… “How did this happen? & “Will it happen again?”

Many hypotheses have been put forward in the last year as to what happened and why it was so extreme. Some attribute the cause to:

  • The external environment – globalization, industry consolidation, Y2K, or the dot.com implosion and resulting telecom plunge;
  • Industry cyclicality – sharper and more dramatic cycles as the size of the industry and key sectors within it grow disproportionately;
  • Technology – our sophisticated IT systems let us down. The forecasts were all wrong;
  • An increasingly complex supply chain;
  • Wall Street – pressure for growth driving unrealistic forecasts; or
    All of the above – a Perfect Storm!

Pick any of the above and you can find people to agree with you as to what was responsible.

Interestingly, each of these factors is a “thing” we can point to. We do not have to take personal responsibility because it was an external economic effect, an industry group or corporation at fault, not us.

Organizations and IT systems do not make the decisions that drive the supply chain, people do. Each one of us represents a link in the supply chain and it is the choices we make every day that drive the outcome. Until each of us within the industry chooses to accept this responsibility, we are doomed to face similar extreme business cycles in the future.

So, if human beings are the key factors that control the supply chain, what are the human conditions that drive our supply chain behaviors?

The Seven Deadly Supply Chain Sins

The Path of Least Resistance: In our increasingly busy roles, seeking the path of least resistance comes naturally. Whether as engineers, we design with parts we have always used it the past (designing in parts at the end of their product life cycle or missing out on possible benefits procurement or manufacturing may gain with a more commonly available part) or as procurement and materials professionals we do not make the effort to establish part numbering standards so we truly know what we have and what we need. At one time or another, in good times and bad, we have all fallen into the trap of viewing the old ways as “good enough” rather than making the extra effort to optimize our systems and our processes.

Self Preservation: From birth, self-preservation is the most basic human instinct. Each of has a natural inclination to protect ourselves, our jobs, and our companies. In times of allocation or constraint, a buyer may double order or increase forecast requirements to ensure his company gets what it needs to keep the production lines going. In isolation this may be a small thing, but across an industry, this can create a groundswell of demand that may be unrealized as capacity is increased and product frees up. Within our organizations we use this nature of self-interest by creating incentive programs to drive certain behaviors. Unfortunately, these often conflict from department to department. Thus, our materials team must keep inventory low to earn their incentive and the sales team needs product on hand so they can get the sales level they need to make their sales goals. These conflicting interests lead to distrust and ultimately to breakdowns in communication or even distorted information as each individual protects his or her own interests. If our lines of communication break down within our own companies, how can we provide accurate information to our partners across the supply chain?   

Risk Avoidance: If as human beings we have a natural inclination to protect our selves, the next logical progression is to shy away from risk or find ways to shift the risk from ourselves to another. In the supply chain this manifests itself in many ways. In our contracts and legal forms we add penalty clauses and loop holes to shift the risk of doing business from us to another. Whether it’s the quality of imperfect forecasts, the liability for service or product failures, or artificial or often unnecessary restrictions on date codes, we often spend much more time and effort constructing rules and systems to shift risk to another than we do investing together to improve processes and systems to identify and mitigate the real risks we face. 

Fallibility: “Nothing and no one is perfect. There is always a margin for mistakes. But naturally the other guy will let us down more often then we will err. We must protect our selves from his failures.” This is the thinking that leads us to greater supply chain inefficiencies – bonded inventories, excessive buffers, padded forecasts, and ultimately inventory gluts. It is often easier to assume our supply chain partner will let us down than it is to pick the RIGHT partner and work closely with that them to develop strategy and process so both of us will be successful. 

Distrust: If everyone else is driven by self-interest, risk averse and fallible, no wonder we find it so hard to develop the levels of trust we need to share good information and partner effectively. When we do not trust our suppliers to deliver, we compensate in the supply chain. When we do not trust the product groups to have enough inventories, we pad the sales forecast. When we do not trust the MRP system we tinker with it. When numbers don’t give us the answers we need, we “adjust” them until they do. With everyone doing what comes naturally, it’s a wonder we get any good information across the supply chain at all. 

Greed: Whether you believe that “Greed is Good” or greed is bad, the interesting thing we often forget is that greed is not just about money. Greed is getting your “unfair share” of money, market position, market power, attention, and information. Interestingly if you take the word greed out of the description, it reads like the objectives of many of our companies. 

Increase Revenue & Profits
Increase Brand Position
Increase Market Share
Increase Market Intelligence

It is when greed gets out of control that we get into trouble. At the peak for the last technology wave, that is what happened. As investors we got caught up in escalating stock prices based on company projections that had little basis in financial reality or business basics. This influx of capital created a flurry of investment in telecom systems, IT infrastructure, and other products creating a groundswell of demand. As demand increased and supply became constrained, as buyers, we compensated within our supply chain to ensure we got our “unfair share” of what we needed. As sellers, we raced to capture orders and market share to get our “unfair share” of this inflated demand. And as an industry, we reeled in shock as the whole thing imploded. And then we started looking for someone to blame.   

Denial: When we refuse to acknowledge the truth, we are in denial. Another way to look at denial, one we got caught up in this last time around, is getting caught up in a wave of unrealistic optimism that approaches euphoria. Things were so great in our industry and we were so proud of our strategies, our growth, and our success, that we failed to look closely at the business basics our companies were founded on. Not only do we need to be aware of our own tendencies to get caught up in unrealistic optimism, but we must also be aware of the affect of those around us. When our biggest customer doubles his forecast, we double ours, plus a little extra just to be safe. So does his next supply chain partner and the next one. Soon the forecast has grown beyond anything sustainable, even assuming that the first projection of double growth was correct. At an industry or market level it is even more complicated. Here, when the analysts predict the market will grow by X%, each market participant projects that they will capture their unfair share. If you go back and add each company’s projection up, the aggregate often exceeds the level of projected growth. These are some of the storm clouds on the horizon that signal rough weather ahead.

Are We Doomed?

So with all of our faults, is it hopeless? Are we doomed to ever increasing and sharper cycles? NO! Each of us, at each level of our organizations has the power to drive change in the performance of the supply chain.

Looking at the bigger picture: Whether we call it a supply chain or a supply network, the reality is that the choices, decisions, and actions of each of us, individually, link to others within our companies and across the supply chain. If we are to truly develop the level of quality information needed to drive to success, we need to recognize the linkages to internal customers, partners, and external customers and ensure that we are sharing the highest quality information available at all times if we are to be successful in reaching optimal levels of performance.

Each of us must Dare to Innovate – Design for Supply Chain Information – Providing the design engineers with not only easy access to technical information, but also information on the product life cycle of the components, their availability over time, and parts that are most commonly used within their company and within their industry to reduce the potential for stock outs in time of constraint and liability inventory in times of excess. 

Materials Management and Procurement – Investing in resources, tools and partnerships to create solutions for standardization of part numbers and sharing that information between departments (like engineering) and other manufacturing sites around the world.
Manufacturing – exploring systems, tools and processes that add visibility into inventory activity at the point- of use and relaying it back through the supply chain to support lean manufacturing for lower manufacturing costs and greater inventory trend data to support improved forecasting within the materials management function.
Operations – establishing systems and processes to link global operations and create inventory and supply chain visibility. (This is especially challenging for international companies running on disparate computer systems.)  

Channels To Market – Ensuring that we have the right channels mix to match our products and services to the needs of our customers. Then, ensuring that the right information and support systems to support those channels are put in place to get maximum return on the Sales and Marketing efforts across the direct, representative, distribution, and self -service channels. 

Be generous with your supply chain partners: The opposite of self-preservation and self-interest is generosity. This willing ness to give and share freely is the key to our success as partners in the complex supply chain. Generosity manifests itself in the willingness to share complete and accurate information to partners, not just that portion that supports what you need right now. It also extends to the willingness to pay for the value a supply chain partner provides, and the openness to share what portions of the partners’ value proposition truly adds value. In today’s tight financial times, neither buyers nor sellers can afford services that do not add measurable value to the supply chain process. 

Understand Risks and create process improvements to mitigate them – Accept responsibility: No business relationship is without risk, especially as you move across a complex supply chain. The key is to mapping the process to identify the potential for problems and establishing service recovery systems to address them. In recent years the trend has been not to manage risk, but to try to shift it across the supply chain from the OEM to the CM to the distributor or Manufacturer of the component. For the supply chain to work effectively and for the participants to openly share information, each supply chain partner must accept responsibility for that part of the supply chain information and risk that belongs to them. Otherwise, innovation and trust between partners becomes impossible. 

Dare to Trust/Share REAL information: The key to being able to trust your supply chain partners is to pick the RIGHT partner, then give them complete and accurate information, set reasonable allocations of risk based on accountability for the supply chain information each generates, and then let them do their job. Choose the right partner based on their ability to get the job done, their track record within the supply chain and the innovations they can bring to your processes that add value and help you realize your goals. 

Greed is not all bad, but blind greed is dangerous: Wanting to get your “unfair share” is what business is all about. However, when we blindly pursue market-share, revenue, or other business metrics beyond what the marketplace can support, we all ultimately suffer. New innovations and businesses are developing to help us look at excess inventories across the supply chain. Identifying these excesses and redirecting them inside our businesses, channels, industry groups or the marketplace allows us to circumvent the build-ups of inventory that ultimately lead to gluts and market declines. As an industry we must enter into new types of relationships with our supply chain partners to add greater transparency to not only the product we need for the future, but also the residual inventory that is left sitting across the supply chain. By increasing this visibility, we get a better picture of what is needed, what is left over. We then have the opportunity to shift the resources back through the chain and put those assets to work for us rather than pushing them off to a partner as a liability. 

Temper Optimism with Realism: At the height of the boom, optimism was at its highest point. The cyclicality of the technology industry was “a thing of the past” and business was continually headed up and to the right. As the market drastically corrected, reality set in and we all scurried for cover, drastically cutting back on our product requirements, canceling orders and pushing as much liability away from our selves and back towards our supply chain partners. In the darkest days of the downturn, we lost our optimism and trust in each other, cut our costs wherever we could and battened down the hatches to ride out the storm. Looking around us, we hoped that we would make it through and knew that some others may not.

Today the storm clouds are beginning to dissipate and many analysts predict that we are starting a slow recovery from the Perfect Storm that started in 2000/2001. As we move towards recovery, there are lessons we have learned that point us towards smoother sailing in the future if we choose to heed them and learn from the painful times we have been through. We must hold on to the optimism that better times are ahead, and invest accordingly, but we must also temper that optimism with a never ending awareness of the market forces swirling around us and not be afraid to raise the storm flags when optimism conflicts with market reality. 

So, to answer the questions we started with: How did this happen?
Because we let it.

Will it happen again? By the nature of technology, there will always be a measure of cyclicality in our industry, but the shape of those cycles is up to all of us based on our supply chain behaviors. Eventually, there will be other storms in the high tech industry. It is our choice if we sail right into them, as we did this time, or if we plot a new course, one marked by the sharing of accurate and complete supply chain information between partners, a willingness to be held accountable for our supply chain information and decisions, and a willingness to take the time to find the RIGHT partners and then give them what they need to support us across the supply chain.

How will you chart your course?

(This article was originally published in the CorePurpose Executive Brief,  July 2002)

Thanks for stopping by.  Stay  Tuned…

Joan Koerber-Walker

Advertisements

Comments are closed.

%d bloggers like this: