The VUCA World Invades the Supply Chain

As I walk into my sixth decade in the world of business, I can say I’ve seen a lot. Anyone can see that 2022 is turning into a challenging year (It already has been for many). 

We’ve been living in a VUCA world (volatile, uncertain, complex and ambiguous) for decades - long before the pandemic seized the supply chain. Demand is up, prices are up, consumers are spending and Russia’s invasion of Ukraine will only exacerbate the situation.

At the same time, there are constraints and shortages throughout the supply chain, with the fewest available workers in decades who are demanding higher wages and more benefits.

As an aside, I was very fortunate and very appreciative to be able to go to graduate school at Harvard Business School in the mid ‘70s paid for by the G.I. Bill (I had served 5+ years in the US Navy during the Vietnam conflict) and to secure a US Veterans Administration mortgage at an interest rate of 8.5% to buy the first home for my young family in 1978.

The best approach is adaptability. In Darwin’s survival of the fittest, the fittest were the most adaptable. The ability to ADAPT, to stay agile, fast, and flexible is the key to surviving the current supply chain crisis, which is likely to be with us for awhile.

Let’s look at some common supply chain issues.

Commodities

Commodities are basic goods that are generic or interchangeable inputs in the production of other goods or services. Commodities are priced on the basis of supply and demand. Increased demand and/or constrained supply drives prices up. Right now, we are experiencing BOTH constrained supply and increased demand for many commodities. Some are simply unavailable for any amount of money for some amount of time. If unavailable, then there are three options: stockpile, do without, or find a viable substitute.

Stockpile

If you have time, storage space, and sufficient cash/credit, then stockpiling may make sense for certain critical raw materials, depending on how long supply will be limited and how fast prices are increasing.

I will never forget stockpiling as much gasoline for cars and trucks and kerosene for home heating as we could when I was the Navy Exchange Officer at the US Naval Air Station in Atsugi Japan in 1973.

As soon as we got word that prices were going up in a matter of days, we commandeered all the empty and underused large storage tanks on the Atsugi airbase tank farm, commissioned the SeaBee battalion to clean them out, and bought nearly a full year‘s supply of both gasoline and kerosene.

Stockpiling enabled us to not only secure supply for the naval base and all of its operations, but also for the military personnel and their families living on or near the base. We were able to maintain prices for nearly a full year at our gas stations and for our home kerosene delivery service customers that heated homes and apartments during the cold winters.

(In addition, and not anticipated when we made the stock piling decision, Air Force and Army personnel from nearby faces in the greater Tokyo area drove to Atsugi on the weekends to fill up their cars with lower priced gasoline and shop in our department and grocery stores. For a year, Army and Air Force dollars spent at Atsugi Navy exchange retail and service stores paid for Navy family recreation and special services, including bowling, golf, movies, special events and more).

Do Without

At Procter & Gamble, occasionally but fortunately not very often, we had to temporarily suspend sale of a household or personal care product because a key ingredient was not available. Take psyllium, for example, the active ingredient in the popular Metamucil.

This situation often confronts small businesses. And many times, their best move is to offer a similar product or service that uses different but available and affordable ingredients or materials.

Substitute

More often, we were able to adapt our formulas or provide product substitutes. For example, many of our cleaning products contain surfactants that can be derived from natural plants or oil based commodities. 

Initially, our response to supply chain constraints was to switch back and forth between the commodity raw materials depending on availability. As we became more capable and more experienced, we were able to shift in and out of formulas quickly across categories and countries, depending on commodity raw material sourcing locations, supply availability and prices.  

Now, in many household cleaning products and several personal care categories, we offer product lines that are formulated from either “natural” or synthetic materials to meet the changing and different needs and wants of consumers in markets around the world.

Energy

Oil is a classic commodity that cycles through supply availability and price swings that can be very large and represent a significant cost to businesses across a wide range of industries.

Oil or natural gas powered virtually all of P&G’s more than 150 manufacturing plants around the world. Gasoline fueled the fleets of automobiles the sales reps drove to call on customers, and the supply chain trucking fleets that moved raw materials into manufacturing plants and finished goods to distribution centers and stores.

The response to this challenge was similar to the response to the formulation challenge: adapt and find flexible alternatives and substitutes.

Energy Alternatives

The initial motivation to move beyond oil and natural gas to alternative energy sources was the need to be able to continue to provide P&G products to customers. Ultimately, the end goal was to find good economic balance between providing P&G consumers a good price value while also ensuring sustainable business and financial returns for the company.

Since 2000, these consumer and economic motivations have been reinforced by climate change and environmental sustainability motivations. It’s a win for all.

Specialty Products

Beyond commodities, most businesses use unique inputs or specialty materials in their products or services. After all, this is what makes their product and service different, more desirable, and a better value to their customer.

This was certainly the case at P&G. And, some of our most difficult supply chain challenges were caused by the unavailability of a unique ingredient or specialty material.

An accident, an explosion, a fire, a natural disaster like an earthquake or a hurricane would occasionally knock out P&G’s key supplier of one of these ingredients. A couple of times, our only supplier’s only production facility.

An accident took down our Japanese supplier’s only production facility that made AGM, the proprietary and unique absorbent gel used in Pampers baby diapers. We had no choice but to substitute natural cotton fibers for the more absorbent gel, but we continued to provide Pampers to moms around the world.

Other accidents and natural disasters took out a proprietary and unique bleach ingredient supplier and one of our two major coffee plants in the US. In the first case, we had to use a more generic bleach for a while. In the second case, we were able to negotiate an agreement with coffee competitors to use their excess capacity to roast our Folgers and Millstone coffee beans to help keep those brands on grocery shelves.

Good industry relationships with competitors can help when disasters like Hurricane Katrina took out P&Gs New Orleans coffee plant.

P&G probably faced as many or more supply chain challenges as any company given the number of industries and categories the company competes in.

However, global reach, and broad industry and category scope, also turned out to be an advantage.

P&G had access to virtually every possible source of supply in the world, and we had forged partnerships that extended across categories and countries, and in some cases over decades, which led to partnerships that trumped transactions when times got tough.

Talent: The Scarcest Resource

As a lasting note, perhaps the most important input in any business during challenging economic times occasioned by high inflation and supply shortfalls is a company’s human resource.  

At P&G, we believed our people made much of the difference. In fact, R.R. Dupree, the first non-family CEO, famously said that you could take away all of the company’s brands and products, offices and manufacturing plants. You could take away everything except our people, and we would build it all back again in a decade.

For Sarasota businesses and nonprofits, 85% of which have 5 to 10 or fewer employees, and many of which operate in the service sector, taking care of the players on the team might be the most important supply chain decision any company can make right now. 

Focus on the resources that matter most. To ensure an adequate supply, you need to adapt. Stay agile and flexible. Be prepared, be decisive, and move fast.