The chief executive officer of a major international consumer products company and I were recently having lunch and the topic of trade came up. “We have made it a corporate priority to diversify our sources of production, so we are less reliant on China,” he shared. Yet, later that week, the stock market seemed surprised when China showed continued growth in its exports in the face of the first few rounds of tariffs.
The recent U.S.-Chinese trade dispute has laid bare some of the difficulties that senior executives experience when attempting to drive change. For the past few years I have had the opportunity to work with many of the top fashion, beauty and other consumer companies on the transformation taking place in the consumer world. Executives have been concerned with the broad array of disruptive forces driving the dynamic consumer industry from consumer behavior, generational change, e-commerce, price transparency, direct-to-consumer, digital transformation to social media.
Among all of these disruptions, supply chain has risen to the top of corporate executives’ minds as they attempt to align their supply lines and infrastructure to the current uncertainty around tariffs and trade relations. Each senior executive has shared with me that they have been directing their organization to diversify their sourcing — largely to make China a smaller portion of the total. These are strategic topics that have been discussed in many boards of directors’ meetings. Yet, as the stock market just learned, less is changing than you would expect. What is happening?
We all know that sourcing is sticky. There is infrastructure that needs to be built; supply of raw materials and intermediate products that need to be put in place; inventory that needs to be cleared; technology that needs to be adjusted; testing that needs to be done; relationships that need to be built, and so on. But why the disconnect between the stated intention of the top-of-the-house and the actions of the companies? Is there more than a time lag going on?
Since I have been the ceo of consumer companies driving change, I empathize with these executives. Organizations don’t like to change. In fact they are trained to do the same thing over and over — and hopefully a little better each time. Most executives learned to make incremental shifts in emphasis of business model, not dramatic pivots. The first company I transformed as ceo was a furniture manufacturer. The prior owner, a large conglomerate, hadn’t found a way to generate an adequate return on capital, so they sold it. One part of my transformation plan was to drive volume through the manufacturing plants to gain efficiency. To do that, we decided to introduce some “promotional specials” at lower prices. Our sales team was successful in getting Walmart to agree to carry the first wave, assuming we could hit certain retail price points. The design team sketched out product costings that showed the products could hit the price points and contribute. We found the sourcing team couldn’t achieve the product cost at the levels outlined by the design team. While these were smart, well-intentioned people, they couldn’t seem to reach the goals that would allow us to turn a profit.
As we dug into the detail, we started to realize that the company’s own processes and policies were inhibiting the sourcing team. For example, the company had a policy that sourcing could only buy particle board — one of the largest raw materials — above a certain density specification. For these specials, that specification wasn’t necessary and lower density board was satisfactory. Another example was a practice that the company wouldn’t buy from a vendor that required a lead time beyond five days, yet these were one-off specials that we were going to produce in batches, so longer lead times weren’t an issue. Over the years, the sourcing group had narrowed its set of trusted suppliers so there were new vendor relationships that would have to be built. And on and on.
Some were well-intentioned guidelines that were originally put in place to make processes more efficient and reliable. Some were simplifications that had become practices. And then there was the personal risk reward. Everyone seemed to remember a story of some junior purchasing manager whose reputation was tarnished after they had found a new, better value source that didn’t deliver, while other purchasing managers succeeded without taking any risks. Under the prior leadership, the executives would have been frustrated with the sourcing team for not delivering, yet it was the company’s own historical practices that constrained its ability to change. The sourcing team was operating under the culture of risk minimization — intentionally or unintentionally — set by the top.
Just like the ceo I had lunch with, most consumer company executives are telling their teams to diversify sourcing. They are expecting that changes will happen quickly, but the needle isn’t moving. I have spoken to leading factories across multiple countries and they aren’t seeing the pickup in enquiries from the U.S., much less the pickup in purchase orders. I don’t see that materially changing anytime soon.
In today’s world, consumer companies need to relearn how to flex on multiple dimensions of their operating model as they are being challenged by disruption around them. Over the past multiple-decade-long consumer boom cycle, companies have grown their ability to adapt to changes in classic merchant categories (e.g., product), but actually become less flexible to changes in overall operating model in their drive to be efficient. This is one of the main reasons many companies have struggled with the disruptions of the past decade. These disruptions will only accelerate in the next decade, so relearning how to flex across all components of the operating model will determine the winners from the losers.
I hope that the ceo I had lunch with is successful in driving the change in sourcing as he intends. How his company follows through on his intention might tell us more than you might think about their ability to adapt to today’s disruptive environment.
Shyam Gidumal is an experienced ceo, board member and consultant advising global brands and retailers on topics of strategy and transformation. He has been an invited speaker at Harvard, Columbia and NYU business schools as well as the Milken Institute.