Time to add complexity?

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Companies may be slightly more confident about prospects for 2010 but, caution is still very much the key word. The likelihood is that we are on a long, slow path to recovery which, will no doubt, be punctuated by bouts of contrasting and conflicting economic data that will keep nerves on edge.

Under these circumstances, predicting demand and drawing up accurate forecasts is going to be hellishly difficult. However, getting it wrong now will have a far more damaging affect on the business than it would have had 18 months ago.

During the boom years, the consequence of over-investing in inventory, with its resulting mark-downs, was generally offset by the growth of the business. Any loss of margin through mark-downs was a reasonable risk to take.

With growth expectations for most businesses being decidedly modest for the foreseeable future, and with demand difficult to predict, companies are increasingly reluctant to invest in inventory that may not sell. Most are looking for greater flexibility in their supply chains, leading many to re-evaluate their global sourcing strategies.

There is plenty of evidence to suggest that a growing number of procurement professionals are now willing to trade cost per piece for increased responsiveness.  Strategies are being tested where new products are being manufactured in short runs at  near-shore locations, tested on the market and then backed-up by longer production runs – if required – from far-shore factories.

This approach, although more costly, is far more flexible, as shorter production runs and closeness to market facilitate responsiveness and, consequently, reduces exposure to risk. If the product proves itself in the market, demand can be more easily gauged and accurate estimates calculated for larger production quantities produced at lower cost in a distant location.

The only drawback to this strategy is the increased complexity. Ordering in bulk from the Far East was relatively simple if you could just mark it down at the end of the promotion.

Balancing cost, quantities, transit times and responsiveness across two separate sourcing locations greatly increases complexity, something that places the onus on your supporting IT systems. Those with the IT to match may well have the edge.

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