Volatility, uncertainty, complexity and ambiguity (VUCA) is an acronym first used after the Cold War to describe the state of the world. Decades later, this term is as appropriate as ever, particularly in the world of business. To pull a business out of a VUCA state, we need to accept our current reality and adapt. Reminiscing about pre-pandemic conditions is not going to move a company forward. It is just going to stall it further. This is especially true for supply chain teams as they face both product availability and cost escalation challenges.
According to the U.S. Census Bureau, the average days of inventory went down by more than 33% from 2019 to 2021. This means businesses have very little inventory to sell and drive cash flow. On the cost side, shipping a container from China to the West Coast of the U.S. went up five-fold in 2021.
These statistics help explain the volatility and uncertainty of the current business environment. The resulting complexity and ambiguity demand more than a short-term fix. They require an organizational ability to understand and adapt to new and uncertain conditions, injecting the distributor’s supply chain with resilience.
Bob Johansen of the Institute for the Future introduced a framework called VUCA Prime as part of his research into leadership traits required for managing VUCA in the state of the world at the turn of the century. He proposed four key elements to counter VUCA challenges: vision, understanding, clarity, and agility. We can use these elements to frame and understand how four distributors are managing supply disruption today by building supply chain resilience.
1. Shifting Vision to Manage Volatility
Product availability — the table stakes element of a distributor’s value proposition — has come into the limelight in the past 18 months. Supply chain issues and product shortages, coupled with growing demand for products and reduced labor availability, have created the perfect storm. This is evident in industries such as construction, where demand for building material products has increased significantly in the past year.
A building materials executive communicated this challenge to their employees by saying, “It used to be you heard, ‘Cash is king.’ Now, I believe that inventory is king. Whoever has it wins in our space. But what I’ve learned from that is how important our supplier relationships are.”
The CEO surmised that the key to managing inventory shortages is to treat suppliers as additional customers to build better partnerships.
The above example demonstrates how distributors are redefining their channel value proposition. Distributors are familiar with answering why customers should buy from their firm. It’s time to answer why suppliers should do business with their firm. This is an ideal starting point to improve supplier relationships and develop more resilient supply chain operations.
The distributor identified opportunities to improve its supplier relationships by leveraging underutilized purchase-order transaction data to enable information-sharing and channel analytics.
2. Understanding Objectively to Cope with Uncertainty
Supply chain disruption has forced distributors to revisit the following three questions often:
- Which items to focus on based on the degree of supply variability?
- Which suppliers to focus on and how to realign spending?
- Which customers to prioritize when faced with a limited supply?
Though these are straightforward questions, few distributors choose to leverage their transaction data (both sales and purchasing) to answer the above objectively. Many distributors answer these questions with personal bias and best guesses, which fuel the crisis.
Using channel data, an HVAC distributor approached the first question: Which items should we focus on? They quantified disruption in terms of demand and supply variability and established three zones as follows:
- Surge (supply and demand variability above 10%).
- Slump (less than 10%).
- Static (all other items).
The resulting matrix helped them narrow down the items that needed constant attention. This also helped them communicate with suppliers, making it easy to identify trade-offs when asking for special requests such as expedited orders.
The distributor also increased the frequency of their communication for “surge” items to weekly. They updated lead time dynamically as they received products at their locations during the week.
By monitoring point of sale (POS) and dynamic lead time data, collaborative forecast accuracy improved, making production costs more efficient for the supplier. This increased mindshare for the distributor, especially considering that the supplier didn’t receive such analytics from other large distributors. This example demonstrates the power of channel data in building supplier relationships, resulting in greater mindshare and trust.
3. Bringing Clarity to Counter Complexity
Other questions inevitably come to the surface as distributors manage product shortages and seek greater resilience and agility:
- How do we mitigate risk by creating secondary sources?
- Which suppliers can we consolidate, and for which product categories?
- How do we balance multi-category suppliers?
With hundreds of suppliers, thousands of stocking items and growing customers, answering these questions has never been so complex. The best place to start is to look beyond spend and work to understand existing suppliers’ performance holistically.
A pet supply distributor took this approach to better answer these questions for their company. The distributor had 22 product categories and more than 300 suppliers. They decided to analyze suppliers in each product category separately to make clearer decisions about alternate sourcing.
The answer lay in analyzing their annual purchase order data to identify four performance dimensions: supply chain performance, profitability, channel alignment and volume. The distributor segmented the suppliers into four quadrants within each product category, namely core, service driver, marginal and volume driver.
The analytics shed light on the suppliers who were causing them to incur additional working capital due to delivery inefficiencies. The analytics also helped the distributor team manage sourcing complexity by identifying secondary suppliers within each product category. The distributor was able to rationalize its supplier base by consolidating spending and aligning volume and profitability.
4. Building Agility to Attack Ambiguity
As distributors continue to manage supply chain disruption for a second year, one common thread stands out: Time is of the essence in placing and following up on purchase orders. Though many distributors initially placed excessive orders, they now realize the impact on cash flow — especially when demand comes down or normalizes in certain product categories.
This begs another question: How do we make timely, reliable buying decisions? Agility (and reliability) in decision making — especially when one does not have all the information — is a critical factor and plays a key role in whether your customers are happy or disappointed. It is also an essential component of resilient operations.
To solve for this, an HVAC distributor focused on analytics for three critical data sets: items, customers and suppliers. The distributor had built out customer stratification programs over the course of several years. During the pandemic, they recognized the need to develop and implement supplier and item stratification analytics to complement their customer analytics. Doing so helped the distributor navigate disruptions and make timely decisions concerning working capital and product acquisition, in addition to product allocation. In essence, leveraging data from these three critical areas allowed them to be agile.
When will the supply chain return to normal?
If you have been asking this question for some time now, you’re not alone. Google returns 174 million answers to that question in less than a second. Many predictions range from mid-2022 to late 2023. A distributor executive recently commented as follows: “It’s a wrong question to ask and it reflects our change-resisting attitude and naïve expectations of returning to normal. Instead, one should ask how to use the opportunity to create a competitive advantage using supplier relationships and supply chain analytics.”
The pandemic and a range of other social, political, economic, and technological forces have contributed to today’s “VUCA” state. There is no silver bullet to escape. The pragmatic approach is to adapt and evolve by re-defining and re-developing VUCA Prime elements — vision, understanding, clarity and agility — to navigate the emerging business landscape and develop resilience against volatility and complexity. As the old saying goes, “Adapt, or get left behind!”
Senthil Gunasekaran is co-founder of ActVantage, which helps distributors drive profitable growth through analytics and talent development. He has more than 18 years of experience helping hundreds of distributors and manufacturers. He also delivers executive education and speaks at industry forums, and he recently compiled a guide to revenue recovery for distributors to use in navigating through the coronavirus pandemic. Prior to ActVantage, he led research and industry projects at Texas A&M’s ID program. Contact Senthil at [email protected] or visit actvantage.com.
