Creating an agile supply chain has become the Holy Grail for businesses seeking to offset a broadening spectrum of risk. But is agility always the best option? By Nick Allen
In an uncertain world supply chain agility is seen as critical to retaining competitive advantage. An organisation’s ability to respond quickly to changes in demand or to mitigate unforeseen risks can make all the difference between profit and loss. But how do you engender agility in a supply chain? And is it always the right approach?
According to Richard Wilding OBE, professor of supply chain strategy at Cranfield School of Management, there are seven key steps to supply chain agility: substitute inventory for information (understand where inventory is within the pipeline), work smart and not harder (eliminate and reduce non-value adding activity), partner with suppliers and others to reduce inbound lead-time, seek to reduce complexity, postpone final configuration as late as possible, manage processes and not just functions, and finally, apply cross functional performance metrics (not silo based ones as they discourage agility).
However, he suggests that agility is not a panacea. “Agility, like lean, does not work everywhere,” he says. “You really need to understand segmentation. It may be as simple as volume versus variability. If you have low variability and high volumes, that’s where lean works very well. If you have low volumes but high variability, that’s where you need agility.”
He outlines the problem that most companies have a spread of products with different characteristics, some need to be managed in a lean way, others in an agile way. “Many companies are now segmenting the supply chain dependent on volume and variability,” he says.
Offering Kimberly Clark as an example, he describes how the company created a two-box matrix and how products with high volatility and high volume required high levels of agility.
“So they said, that product is promotional – we need to collaborate with customers; in terms of forecast, we need to integrate with commercial teams, and manufacturing must have a ‘must respond’ mentality. The brief for procurement is minimise order lead-time – you have to invest in ‘time’. Whereas on the other segments, say, low volatility, low or high volume, it’s all about quality and cost,” he says.
“It’s a matter of segmenting products in a lean and an agile way.”
Wilding sees a resurgence of interest in data analytics to support agility. The predominance of data analytics in the early 90’s gave way to an emphasis on supply chain philosophy towards the end of the decade. But he says data analytics is now back “big time”.
“Companies have thousands of SKUs and thousands of customers, and then there are all sorts of other data coming together. You can use data in a new way to identify what to respond to and how you categorise products,” he says. “We now have more information than we have ever had before, but it has to be useful information, it has to become knowledge and effectively give us wisdom.”
He talks about an evolution from data, to information, to knowledge and then to wisdom.
Wilding warns: “You can’t push agile products down a lean supply chain structure – it destroys things. You have to have tailored supply chains depending on what is going on.”
He points out that Cranfield run an “Agile Supply Chain Research Club” with members that include: Hewlett Packard, MoD, O2, Unipart, P&G, and Travis Perkins. Perhaps further wisdom can be gained there.
Martin Green, senior supply chain practitioner at Unipart Expert Practices, says: “You can’t be agile unless you are lean. Excessive inventory and over-complex supply networks disguise potential risks and delay the effectiveness of any corrective action.”
Green explains that in the past, “agility and lean were viewed by many as mutually exclusive concepts. But nowadays it is generally recognised that agility is about flexibility – about being able to change suppliers or products without excessive switching costs and being able to maintain control while you are switching.
“To achieve this, you need to adopt not only many lean principles, but to have a collaborative relationship with your entire supply network. You need to be able to make these changes as you go along, as a matter of routine, not just because of economics but in response to, or in anticipation of, external events or a change in consumer buying patterns.”
Referring to the automotive sector, Green suggests: “Some OEMs manage their T1 suppliers and rely on them to manage T2 and so on up the chain. Others, VW for example, manage their T2 suppliers directly. However, true agility requires all the suppliers, T3, T4 etc to be on the same page. Only in this way can a change in market requirements be accommodated rapidly by the OEM,” he says.
“Getting this process in place creates the potential for the next step in supply chain maturity, the ability to offer ‘mass customisation’.”
Green sees the role of a 3PL as a facilitator for agility – to act as an intermediary, to pull people together and promote open conversations. “To achieve agility you need all the key players in the supply chain to get together to agree what the business processes are, to arrange the exchange of data and information so that all the people involved work off the same information. By doing that you create visibility and agility within the supply chain,” he says.
“It’s critical to have those relationships in place to adapt and change as necessary.”
Mass customisation could be considered as the ultimate outcome of an agile supply chain – where you as a consumer can specify exactly what you want and it will be delivered to that specification within a timescale that is suitable for you. Dell’s agile supply chain is a high profile example of this. There are also examples in the car industry where the final specification can be heavily customised by the customer. This can only be achieved if all suppliers are part of the agile supply network.
Green offers another example. “Unipart Eberspächer Exhaust Systems, makers of the exhaust systems for Land Rover, have a very agile process where manufacture of the exhaust pipe is not started until the vehicle it is destined for has started its trip down the production line,” he says.
“And that means you are not making exhaust pipes and putting them into stock in anticipation of a particular vehicle configuration. This is not only extremely lean, it is also ‘agile’, reflecting real customer demand. This ensures no waste or excess inventory.”
However, being lean, agile and cost efficient can be difficult to achieve. Powerful customers working to demanding just-in-time principles often place pressure on suppliers to perform, with the result that the supplier keeps inventory in the supply chain to deal with variability.
“Variability arises from not being able to forecast demand; lack of reliability in supply; and difficulties associated with order quantity. If you can get these issues under control, then it becomes far easier to be both agile and lean,” says Kirsty Braines, partner at Oliver Wight.
But, she says: “First you have to get your own house in order. You have to be in control, which means everything you plan to do, you do as planned at least 95 per cent of the time.”
Baines points out that the actions of your own business affect others in the supply chain, and ultimately impact the efficiency of the entire supply chain. “One additional part or product variant may have negligible effect on your business, but the cumulative effect can be widely felt, as added cost and complexity is “bull-whipped” across the supply chain,” she says.
“Rather than thinking vertically and working to your target regardless of whether or not it is at the detriment of others within the business or supply chain, you now have to think horizontally. You have to start thinking less about ‘me’ and more about ‘us’.”
According to Baines, the focus should lie on those things that truly add value to the customer. “You have to specify value from the customers” perspective and then align your processes throughout the supply chain and look to improve them as much as possible,” she says.
Simon Bowes, vice-president for manufacturing and transport solutions at JDA, says: “There is still a long way to go for most companies in reducing the bullwhip effect. You need information from as far down the supply chain as possible. You need to be connected to the shelf or driven by point of sale demand, rather than just responding to historical replenishment at a DC level.”
Similar to observations from Prof Wilding, Bowes also identifies a renewed interest in segmentation and the need to respond differently to different types of demand.
“The concept of segmentation isn’t new,” he says. “It’s about aligning available capacity to maximising market share or profitability. The next stage is to get those segments to automatically tune themselves, because things change – demand changes. And we are putting a lot of effort into technology that allows us to recognise the trends in those different segments and to auto-tune accordingly.”
He offers an example: In segments where you want to grow market share you will need to tune products to create high availability, and points out that you will need to be agile around delivery. However, if you have another segment where you are looking to retain profitability, then you may look at different service levels for that segment and you might have different parameters for safety stock, lead times or where in the supply chain inventory is held.
However, Bowes highlights the complexity segmentation can create. “We are seeing categories being far more multi-dimensional and this becomes an administrative impossibility trying to deal with the complexity. You can end up with a proliferation of segments and they need to be constantly reviewed,” he says.
“In the past we’ve seen the use of dummy warehouse codes, but this just creates complexity. So we are seeing companies trying to link planning to execution, which makes perfect sense,” he says.
“But trying to manage with just an ERP system is where it gets complex. All these levels of dummy control doesn’t work.” Bowes believes that a supply chain layer, designed to support segments, enables you to be agile and efficient.