Resilience is a buzzword. CPG companies would like to think that they are resilient. It’s difficult to describe the past 18 months let alone try explain it. Though some time has passed, empty shelves or “limit 2” are still observed at stores. The industry, particularly CPG, has been experiencing a polarized business environment. Sales teams have been enjoying that people are home more, driving positive top line growth however, supply chains are still struggling with a VUCA (volatile, uncertain, complex, ambiguous) environment. Supply chain priorities need to change and account for a more difficult environment in order to properly respond to and protect growth.
Supply chains struggle with balancing the “priority” to run lean. In meetings often one will hear statements such as “we need to hold just enough to cover sales or we have enough capacity for this year.” This implies that more risk is injected into an already risky system in exchange for cash. This works great when one supply chain behaves in this manner. The problem is that most supply chains behave this way and when we have a systemic change (i.e. global pandemic) the risk grows exponentially. A supply chain consists of all suppliers’ supply chains and their upstream suppliers. When they all run lean and are part of the same systemic change, we start experiencing failures such as not enough inventory, no drivers, no trucks, not enough manufacturing capacity, no raw materials, no vessels, delayed shipping, no labor, and much more. This leads to an inflationary environment such as the one experienced in2021.
The businesses which deliberately build contingences into their supply chains and not just rely on supplier resilience, prevail
Systemic change plus “lean” business methods translate to confusion. Top line can grow due to consumer needs changing but the bottom line can decrease. The confusion follows the notion “We are growing, we are buying more, I expect to get volume discounts and rebates.” This narrative generally is dangerous as procurement teams do their best to always source in an optimized manner however, this time the growth is not natural or expected. This time more volume translates into overtime, over the road shipping, airfreight, etc. This means there is pressure on the demand curve with a less flexible supply curve which drives prices up.
Business financials in 2021 when compared to 2020, exacerbate the perception of negative business impact. It gives businesses a false sense that the environment is much worse. It is true that in comparison to 2020, 2021 is worse off due to the YOY market inflation experienced however, 2020 is an anomaly. 2021 cannot simply benchmark against 2020. For example, average crude oil price in Jan-Aug 2021 is 63.44 (eia.gov) in comparison, 2020 was 39.16 (eia.gov). Similar trends can be found in other traded and not traded commodities. To get a better understanding of 2021, adding 2018 and 2019 into the trend line is important. Now 2021 does follow the trend. To see this side by side:
Cash is important. Businesses rely on debt to fuel growth. They have for many decades and it is sensible. The issue is when combined with the pressure from investors, quarterly reports, debt, over committing, under estimating costs, and the tremendous speed of communication, there is a sense of disorganization in the office. The businesses which deliberately build contingences into their supply chains and not just rely on supplier resilience, prevail. When true capacity is understood and that bottle necks are not eliminated, they are simply shifted (The Goal, Goldratt), those businesses are the ones who are best prepared to take on a VUCA world.