Today’s Businesses Need to be Agile and Flexible, Starting with Supply Chains
Despite the success of vaccination efforts in some parts of the developed world, the Covid-19 pandemic is not over—and neither is the economic disruption it has brought into our lives. In places like India, hundreds of thousands of new Covid-19 diagnoses are made every day with no sign of slowing. Meanwhile, the downstream effects of the Covid-19 demand shock have led to a chip shortage with the potential to cripple the auto industry for years.
And the pandemic isn’t the only factor contributing to the sense of disruption rippling throughout the business landscape.
So far this year, a deep freeze took hold of Texas and a sandstorm jammed a shipping vessel in the Suez Canal, blocking global trade for the better part of a week—just two manifestations of a climate crisis that has arrived in full force.
Meanwhile, China continues to ramp up its presence in the South China Sea, part of an ongoing escalation that has left many concerned about the potential impact of geopolitical tensions on the global supply chain.
The near future is likely to feature more destabilizing events, not fewer: more chaotic weather disasters, more global health crises, more international conflicts with the potential to disrupt the global economy. Forget about the occasional “black swan” event—our new normal will include a whole flock of them.
This uncertainty has required a new way of thinking among the world’s most dynamic businesses. For decades, we’ve been taught to follow the North Star of “efficiency,” which we define as leanness, a lack of slack in the system. But in today’s business landscape, where the only certainty is uncertainty, CEOs must find new ways of defining efficiency to avoid getting caught flat-footed.
Strategic Stockpiling
The most successful companies of this moment, and perhaps of the coming era, have redefined efficiency as the strategic work of balancing leanness with resiliency.
For example: Automakers are expected to lose more than $60 billion in revenue in 2021—the equivalent of as much as 10% of global demand for the year—because of the shortage of semiconductor chips.
But while many car companies are suffering—Honda and Nissan expect to sell 250,000 fewer cars in 2021—Toyota’s seemingly counterintuitive approach to efficiency has helped it weather the storm.
Toyota has long been known for pioneering the concept of just-in-time manufacturing, in which suppliers deliver parts days or even hours before they are needed. The success of this approach made lack of inventory the hallmark of manufacturing efficiency.
But in 2011, when a major earthquake and tsunami struck Japan, Toyota got a crash course in the downside of “just in time.” Key suppliers to Japanese carmakers were knocked out of commission for months, delaying output by approximately 760,000 vehicles globally at Toyota alone. It took the company six months to get back to normal levels of output.
In the aftermath, the company estimated that the supply chain for more than 1,200 parts or materials might be affected, and it drew up a list of priority items to stockpile. Holding inventory was no longer seen as anathema to lean manufacturing, but rather as a way of preparing for the certainty of uncertainty—an insurance plan for the guaranteed unforeseeable.
Today, as some automakers struggle with the global chip shortage, Toyota foresees no near-term consequences for its business.
The Dividing Line
Toyota’s experience offers a lesson for businesses throughout the global economy: that in a new era of constant—and constantly increasing—uncertainty, efficiency requires not just a new definition but also a new strategy.
Companies that cannot adjust—the ones still clinging to a definition of efficiency rooted in lowering head counts and driving speed—will be left behind. That view of efficiency remains conventional wisdom for much of the S&P 500—and it’s why many economists expect more than half of these companies to drop off the list within the next 10 years.
To be sure, efficiency will still be a major factor in defining the dividing line between winners and losers. But in the modern era, the companies that will win will be those that take a more holistic approach to efficient planning and strategy and that build into their operations the expectation of sudden change.
The world is flat, and business competition has never been more intense. CEOs can only bet on two things: differentiated strategy and operational execution. Put another way, your success comes from what you’re going to do and how well you’re going to do it.
Indeed, in a hypercompetitive and fluid marketplace, companies cannot expect today’s strategic advantage to last long enough to excuse a lack of planning for what tomorrow will bring.
Ultimately, the fundamental challenge of this new era will come down to balancing just-in-time efficiency against just-in-case strategy. In a world increasingly defined by its unpredictability, agility is king.
Agility Is the New Efficiency
Executives may not be able to predict the future—but that doesn’t mean they can’t prepare for it.
At Coupa, we have long recognized the importance of Business Spend Management to any company’s operational strategy. And as companies scramble to adjust to this era of constant change—and back-office operations surge to the forefront of their action plans—we’re working with our clients to build strategic plans that will survive the ever-changing business landscape.
In doing so, we’re helping to establish a new playbook for an era when flexibility is the new leanness and agility the new efficiency.
ind out how our platform is transforming the way that businesses manage their spend—and delivering real, measurable value—at coupa.com.
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August 24, 2021 at 04:39AM
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