The new dawn of network and capital planning is here

From the May-Jun 2024 edition of Supply Chain Management Review.

May-Jun 2024

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Traditional long-term network and capital planning is dead. Or, more correctly, it’s past time to lay the traditional approach to network planning down to the rest it so richly deserves. This doesn’t mean companies shouldn’t plan long-term, just that they need to do it differently.

This difference needs to start with taking a comprehensive end-to-end (E2E) look at product portfolios in conjunction with overall supply chain networks, determining what performance and capabilities are required for meeting and exceeding service, resilience, cost, sustainability, business continuity, and related objectives. Done right, this leads to making better, more informed investment decisions with respect to deploying capital on supply chain assets such as manufacturing lines, factories, and distribution capacities.

Also, as the cost of capital and asset prices has increased, having a long-term supply chain and capital plan provides the roadmap and flexibility in prioritizing decisions as demand dynamics evolve and supply-side dynamics and shocks unfold.

Today, we seem to be seeing some stabilization of interest rates and the clearing of COVID-related backlogs. But this doesn’t mean we are back to anything approaching, “business as usual.” Climate-related events are having greater and more frequent impacts (e.g., slowing traffic through the Panama Canal) and proxy battles continue to pop up across the globe. Threats of future global supply chain disruptions remain a question of when versus if.

If all of this isn’t enough to get your attention, new and emerging equipment technologies, advanced digital solutions, and sustainability commitments constantly change the competitive landscape, especially because extended global equipment lead times remain a complication for many manufacturers/producers.

The bottom line is that companies lacking the awareness, agility, and/or motivation to recognize and embrace change and act on it—starting with rethinking both their supply chains and capital deployment strategies—will fall behind.

The voice of the Oracle

The oldest public strategy advice was carved sometime during the 5th century BCE above the entrance to the Temple of Apollo at Delphi. It read: “Know thyself.” It’s still good advice, starting with your product portfolio.

Your portfolio review should include a whole series of considerations around growth, M&A activity, productivity, resilience, sustainability, the potential role of existing and emerging technologies, potential implications of near- and reshoring if appropriate, and understanding consumers in B2C companies, customers in B2B companies, and the competition.

Knowing where you’re going is as important as knowing yourself

Businesses put a lot of focus on the products, customers, and markets they want to serve, but perhaps not enough emphasis on how they want to get there. Before you execute any long-term business strategy, it’s critical to establish guardrails and guiding principles for how your value chain will execute your commercial vision. Odds are, you will end up somewhere in between these three operational archetypes.

1. Asset Light. Reducing Capex and outsourcing as much as possible. This requires a higher reliance on contract manufacturers and third-party logistics (3PL) providers, potentially leading to lower operational agility and higher working capital via additional days of inventory on hand (DoH).
2. Ruthless cost competitor. Adopting a strategy focused on maximizing asset utilization, and minimizing total operating expense while optimizing the financial returns of fixed and working capital.
3. Relentless service provider. This approach leads with service-level performance at the likely expense of higher costs, potentially underutilized assets, and likely higher inventory levels.

The guardrail you chose clearly affects the relative potential of your network and capital strategy. These operational archetypes set the guardrails around how you want to operate, which ultimately sets guardrails around how you allocate capital, set up your supply chain, and where to prioritize your capital investments.

Pushing past profitability

Profitability will always be critical in business, but moving forward focused on profit alone will not be sufficient in a commercial world where corporations are required to do much more than function as one-dimensional profit-generating engines.

New capital allocation models require weighing a series of trade-offs between growth, productivity, resilience, and areas such as sustainability where investments need to be made now to meet commitments 10 years to 15 years out. These new metrics and demands don’t just affect ESG strategies. They cut across every aspect of a business’ strategic planning activity and execution schedule.

A virus causing nearly two years of supply chain turmoil is striking, but so are climate challenges affecting food, energy, shipping, and environmental refugees; trade tensions; regional conflicts; and guerrilla activities. Companies must mitigate liabilities on an ongoing basis amidst constant disruptions.

Designing for resilience uses tools such as scenario-based modeling of supply chain exposure and footprint, and the age and risk profiles of existing assets. This ensures business continuity and facilitates agility for growth within the network. One concrete example is minimizing the single-county risk challenges prevalent with modern global supply chains. Nearshoring and/or reshoring also need to be part of any supply chain scenarios that a company evaluates.

Ask yourself: When it comes to productivity—beyond just adding capacity to meet new demand—how are investments actually adding to the overall unit economics? Understanding this helps fund other current and future projects that are sometimes hard to put dollar values on, like investments in sustainability. For example, investing in vertical integration projects may not only help introduce more control and flexibility to your supply chain/value chain, but may also help internalize the frequently expensive
co-manufacturing/co-packing costs.

Sustainability and environmental standards are growing and globalizing faster than ever, requiring many companies to invest in new technologies to reach sustainability commitments and targets that are years away. More importantly, they need to not make near-term capital decisions that may effectively lock in poor environmental performance for years to come because they didn’t look at those requirements now.

The view from inside the crystal ball

And then there is the consumer.

No longer the passive buyers of mass market and mass-advertised products, consumers are getting increasingly engaged with—and vocal about—the goods they buy and the companies that produce them, carefully scrutinizing ingredients, sourcing, packaging, and corporate policies.

Rather than one-dimensional, end-all-be-all commercial targets, you should create several demand scenarios based on both internal and external factors. These scenarios should be near-continuously updated as things change.

Each of these scenarios should incorporate multiple tools including consumer/customer preferences, macroeconomic conditions, the existing and potentially emerging competitive landscape, and an executable competitive positioning that will dynamically change demand.

Ultimately your supply chain network is, or at least ought to be, built to meet and enable your consumer demand in the most efficient way possible against the supply chain archetype you choose.

One is never done

Whatever your approach, it is important to not think of strategic planning as a “one-and-done” exercise, but rather as part of a continuous process that integrates into E2E planning from long-term planning (multiple years out) to sales and operations planning (quarter to year out) to sales and operational execution (immediate quarter).

Of course, you have to begin somewhere so it is critical to establish a roadmap with milestones, metrics, and guidelines. You can’t anticipate everything, but that doesn’t mean that comprehensive planning isn’t possible, only that you have to be agile and flexible enough to quickly respond to challenges and disruptions as they occur.

Equally critical is a deep understanding of the assumptions/projections you are making to establish this initial roadmap. As things play out in real-time, you can readily see which assumptions are changing and, because you understand how they informed your initial roadmap, you can quickly pivot with the new information. Without this deep understanding, organizations tend to restart their analysis from the beginning and frequently lose out on opportunities because they can’t pivot their plan quickly enough.

Thinking and planning this way allows you to, for example, work with equipment OEMs on locking in capacity without having to finalize exact technology and/or manufacturing lines until the last possible moment. And this can’t be effectively done in a vacuum. You need to encourage your supply chain partners, vendors, and anyone else engaged in helping you go to market to adopt this approach or—at the very least—communicate your long-term plan to them to facilitate joint business planning.

Why now, why not later?

At this point some readers—not sensing a “burning platform”—may argue that this is a valuable theoretical discussion for another day. We, on the other hand, smell smoke.

As we said in the beginning, four major tailwinds are fueling the case for action in developing E2E networks and capital strategy.

1. The cost of capital and asset prices has increased with higher interest rates. A long-term capital plan provides flexibility in prioritizing capital decisions across business units and portfolios.
2. Rising tensions in global trade and regulatory dynamics lead to longer supply lead times and supply disruption risks. E2E network strategy builds globally resilient supply chains leveraging nearshoring and reshoring.
3. Developments in new equipment technology and sustainability commitments are constantly changing the competitive landscape. E2E network strategy mandates a defined pipeline to proactively build new capabilities.
4. Thanks to COVID-related backlogs, equipment lead times across global OEMs have significantly increased. An E2E network strategy and capital plan enables businesses to deal with longer turnarounds and plan in advance.

Not a conclusion, but a new beginning

Adopting a “portfolio view” of your organization isn’t hard, but it does require a relentless focus on long-term objectives, prioritizing long-term goals over short-term gains, and considering the full lifecycle costs and potential future uses of your investments. It also forces the many siloed organizations and functional teams to cooperate and coordinate cross-functionally.

Again, done right, the ongoing, periodic review and maintenance of a long-term supply chain and capital plan means an organization stays in lockstep on where it is going, how it intends to achieve goals, and how it will quickly pivot as assumptions don’t meet realities and the world continues to throw challenges and opportunities their way. •

About the authors

Steve Mehltretter is a partner in the Strategic Operations practice.  He can be reached at Steve.Mehltretter @kearney.com. Steve Cunix is a partner in the Consumer and Retail practice.  He can be reached at Steven.Cunix @kearney.com. Paul Cho is a manager in Consumer and  Retail practice. He can be reached at [email protected].

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