Following two benefits outlined in the previous entry, in this last entry of the blog series, let us go over the remaining benefits of Supply Chain 3.0.
By definition, Supply Chain 3.0 improves your cash position
Recall from the previous blog series that “The second measure of interest to us is in Supply Chain 3.0 is the $eed-to-$tore Efficiency. I mentioned that this is the darling of the supply chain crowd especially those coming out of logistics background. Right product, in right place, in right quantity, at right time (there are many other Rs which people add on, but we will stay simple here) – is the catch phrase. The aim is to churn the cash faster so that more of it sticks around for longer.” In fact, the data from a systematic study carried out by the Aberdeen Group reveals two critical insights. Firstly, the companies with more robust business networks have far superior cash conversion cycle – nearly 6 times better cash conversion cycle. Take a look at Figure 1 below: Secondly, and more importantly, their cash conversion cycle actually improved during the 2 years of testing times leading up to the global financial crisis, while the rest of the industry went backwards. As you can see in Figure 2, 92% of business network masters have improved their cash to cash cycle over the two years leading up to the Global Financial Crisis (GFC) while only 18% of business network laggards have improved it, while for 29% of them it became worse. Is the result shown in figure 2 surprising? Hardly, if you reconsider the story of Nokia vs. Ericsson in the last blog entry. Same catastrophic fire nearly decimated one company while left the other one even stronger to later face onslaught of another supply chain 3.0 hero – that of iPhones.
Supply Chain 3.0 has high velocity
In economic booms, whether accompanied by economic volatility, or economic stability, supply chain 3.0 allows you to realise higher profits, quickly. In fact the potential of your company’s capabilities are multiplied many times over, perhaps by a factor of as much as 100 or more, by the leverage effect provided by your supply chain 3.0. How? Let us consider an example – the booming commodities industry. In the last 10 years to 2012, no other industry has boomed as much as the commodities industry. Prices of iron ore, copper, coal, gold etc. have gone up exceptionally during this period. Within this industry, iron ore is one of the largest and most capital intensive operations – dominated by three global giants BHP Billiton and Rio Tinto of Australia, and Vale of Brazil. In this scenario, to build a large iron-ore producer and exporter from scratch took Andrew Forrest of Fortescue Metals the full extent of supply chain 3.0. To raise finances, to build mining infrastructure, to build and gain access to the logistics infrastructure and to market the product in the international commodities trade, Fortescue Metals built a capacity in 3 years that many of its much bigger rivals would have taken more than 30 years to build. This was only possible through extensive utilisation of business networks that the company built, nurtured and managed effectively into creating a supply chain 3.0.
Supply Chain 3.0 help smooth out the volatility
Recall my earlier example of companies using supply chain 3.0 to configure more flexible labour force through use of sub-contractors and outsourcing. In volatile times this is essential to smooth out the earnings. Now let us look at a more concrete example, in a highly volatile industry. Global bulk shipping industry is one of the most volatile industries, with the shipping rates falling as much as 94% with a period of 4 weeks, or rising up to 400% with a period of few months. In such a volatile business environment, budgeting and planning can become a nerve-racking exercise for all the companies except those which use their supplier networks to cushion the lean periods with long term contracts and find scarce capacity during the boom periods. We have only seen a few examples of benefits that supply chain 3.0 – a business network of collaborating entities – can create for businesses. I will discuss more examples and as well as how to get there in future blogs.