Wednesday, October 27, 2010

Agile as Supply Chain Strategy

In one of my last posts, I started a series on the conventional supply chain strategies and why they are inadequate to help firms trying to design their supply chains. A few days later, I followed up with lean as a supply chain strategy. Today, I continue with the series focusing on agile as a supply chain strategy.
Agile refers to the ability to react and adapt to the changes in demand and supply situations in a supply chain. To accommodate the inherent variations in demand and supply, supply chains need to react and adapt to such changes as they happen, to minimize the disruption and optimize the objectives, such as costs, fulfillment rates, inventory, and so on. So what does it mean to have an agile supply chain?
An agile supply chain design will have redundancy built into its processes, allowing it to quickly respond to expected changes. This supply chain will be best to maximize the service levels for fulfilling demand, manufacturing personalized products, and providing excellent customer service. These objectives will drive the supply chain to keep higher levels of inventories to maintain order fulfillment targets, favor on-time deliveries over cheaper shipments, and favor quality inputs and personalized services over mass produced, commoditized goods. These supply chains will have more flexible supplier contracts that enable them to change order quantities, destinations, need dates, and even cancel the orders altogether if the demand falls off a cliff. Suppliers will typically allow such flexibility for a cost. When demand suddenly rises and the primary suppliers cannot cope with the increased demand, an agile supply chain will go to a secondary set of suppliers that would have been established in advance for maintaining supplies for such an eventuality. As purchase volumes for the secondary suppliers will be low and demand uneven, the costs of such contracts is generally higher. However, having all these layers of extra inventories, warehousing, transportation, and suppliers will provide enough buffer to the supply chain to handle most variations in demand, supply, or lead-time while maintaining its stated service levels.
Contrast this supply chain with the one based on lean as the driving principle and you will notice the contrasts.
Agile supports the natural designs of supply chain – which exist to manage variability. However, the extent of variability in the demand, lead-time, and operations must determine the amount of agility (and hence the amount of redundancy) designed into the supply chain.
Also, most firms have a large assortment of material to be managed: Raw materials, WIP, finished goods, and retail assortments almost always consist of a mixed bag of products when it comes to their demand profile. Some of these products may have a stable demand profile, while others will be more volatile. This means that the enterprise supply chain that must be designed to cater to all these types of products must be lean (to best manage the products with a stable demand) and agile (to manage others with volatile demand) simultaneously. After all, you could not run a business with a lean supply chain with the lowest cost, but that cannot respond to any changes in demand or supply. Since all demand and supply has inherent variability, such a rigidly designed supply chain will quickly build up unwanted and obsolete inventories as it is incapable of reacting to changes in demand and supply. To the same extent, one also cannot run a supply chain that is extremely responsive and manages the changes in demand and supplies precisely, because such a supply chain will have an unreasonably high cost to operate, quickly running out of working capital to support daily operations.
Therefore, I see both of these attributes as core capabilities of any supply chain design, being complementary rather than being exclusive to each other.
How can a supply chain be both lean and agile at the same time? A firm can regard both lean and agile strategies as process drivers for designing individual supply chain processes rather than as being all-encompassing strategies for developing a supply chain as a whole. In this context, they become the principles that practitioners can use to develop standard processes that leverage one of these attributes even as process exceptions leverages the other. For example, a firm may establish a store-based inventory policy using the lean principle to cover the supply lead-time from the primary warehouse to the store. While the lean design drives their standard replenishment to the store, the process to handle exceptions to manage stock-outs may leverage agile principles, allowing priority replenishments to the store from a set of alternate sources in order to avoid losing substantial sales revenues.
Successful supply chains are designed to be lean and agile at the same time: The example of Wal-Mart illustrates the complementary use of lean and agile design principles in designing a supply chain that is highly effective. Therefore, the question of whether a supply chain should be lean or agile becomes a rhetorical question. Any large enterprise cannot have a rigidly designed supply chain that is either lean or agile. Rather, both of these aspects of lean and agile are required in designing an effective supply chain to support the business.
If you are looking for an alternate way to design effective supply chains, the answer doe not lie in adopting theories in the hope of finding the right answer, but to build supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain, and learn about the new design imperative to build supply chain capabilities to support your strategy.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.
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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

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