16
Agile Supply Chain
“Agility is the ability to cope with unexpected changes, to survive unprecedented threats of business environment and take advantages of changes as opportunities
—Sharif and Zhang1”
Chapter Objectives
To understand:
- Market volatility
- What is agility?
- Agile supply chain
- Role of customer service in supply chain strategy
- Customer service perception and service design
Re-engineering to Agility
Today's global business environment is characterized by turbulent and volatile markets, shorter product life cycles, more demanding customer requirements and a variety of supply chain risks. In this environment, organizations seek new strategies to address risks particularly the volatility in the markets to enhance supply chain performance. The risk attached to long-and slow-moving logistics pipelines is very high. This forced organizations to look at how their supply chains are structured and managed. To address volatility, the supply chains are designed to be ‘agile’, which is described as being able to respond to sudden and unexpected changes in markets.
Re-engineering a Responsive Supply Chain
Ramon Cycles (RC) was a leading player in bicycle market since its inception in the late 1940s till 1990s. They produced a standard bicycle for local transport for low-end markets. However, due to economic liberalization policies, imports became cheaper from China and lot of local manufactures established in the markets over the years. Being an established player, Ramon Cycles had high overheads in the industry. As the bicycle became commodity product, Ramon's high-priced products contributed to the loss of its market share and poor financial performance in subsequent years.
The new CEO reviewed the situation and took note of the strengths in Ramon and decided to exploit these strengths to get over the problem. These strengths were: technical expertise, automated manufacturing setup, skilled workforce, strong brand name and a countrywide network of dealers. They surveyed the market and found that there is lots of demand for high-end bikes for sports, joy rides, trekking, health care and picnic segments. They focused on those segments and used the company's strengths to develop a responsive supply chain that could supply segment specific bikes. They could charge higher prices for these bikes. This strategy was for avoiding the high risk of commodity trap that resulted from their short-life cycle and low cut-throat pricing.
With the new strategy, customers would find numerous options for a bike covering: size, colour, components, special accessories for the particular customer segments, etc. The customer could make his choice at dealer’s place through catalogues and models. The order then was placed to the factory, wherein with automated production set up bikes could be manufactured. The delivery of bicycle was ensured within 2 weeks. The numbers were less but margins were high to sustain and grow. Ramon, with the new strategy of make-to-order and delivery of 2 weeks for finished product, kept its inventory to a minimum as compared to its rival producing commodity (standard) product. Ramon re-engineered its supply chain to meet 2-week delivery time consistently. This is a good example of the responsive supply chain which tackled uncertainty in an innovative way.
INTRODUCTION
It was perception earlier that agility in the supply chain can be achieved through collaboration with suppliers. However, in practice collaboration with customers is also required. The enhanced responsiveness is a major characteristic to be exhibited by an agile supply chain. This characteristic is in addition to the cost-effectiveness, quality and smooth operations flow.
The agility is a capability of business that needs to be acquired through organizational structures, information systems, logistics processes and organization culture. A key characteristic of an agile organization is flexibility. The origin of agility as a business concept lies in flexible manufacturing systems. However, the automation in business may not make the business flexible. It requires the orientation of the people in that organization to work for flexibility. Thus flexibility is wider business concept.
The goal of the agile supply chain should be to carry inventory in a generic form, that is, standard semi-finished products awaiting final assembly as and when required by the market. This strategy is called as postponement, which involves the differing of final configuration of product till order arrives. The advantages of postponement strategy are as follows:
- Inventory is held at a generic level resulting into a smaller number of SKUs.
- Generic inventory ensures flexibility in building final products varieties.
- Forecasting the inventory at a generic level is easy.
The large number of product varieties can be offered with generic level of inventory, which can be mass manufactured with accurate forecasting. This results into reduction in SKUs ensuring better flexibility in offering the final product variants in the markets. In other words, it is mass customization.
WHY AGILITY?
In the volatile markets, product innovation is an important factor for survival. Those companies will be successful that can implement innovative ideas quickly and profitably. For the company's growth new products (innovations) and new markets are the key factors. Globalization has greatly impacted the way firms do business today. With the advancement of technology the companies can collaboratively design, manufacture and market products anywhere in the world. This has created both new market opportunities and difficult challenges.
The importance of time as a competitive weapon has been recognized in the Industry. The ability to meet the demands of customers in the stipulated delivery times is of critical importance in this era of time-based competition. To become more responsive to meet the requirements of customers, companies require a high level of manoeuvrability in addition to inventory velocity. The firm today needs to be agile to counter variability (Exhibit 16.2). According to Martin Christopher:
Agility is a business-wide capability that embraces organizational structures, information systems, logistics processes and, in particular, mindsets. A key characteristic of an agile organization is flexibility. Agility is needed in less predictable market environment, where demand is unpredictable and requirement for variety (product SKUs) is high. Agility might therefore be defined as the ability of an organization to respond rapidly to changes in demand both in terms of volume and varieties.2
From the above definition it can be concluded that for an organization to be agile, it should be demand driven rather (Exhibit 16.1) than forecast driven. The information flow and sharing between the supply chain partners is a must to take real-time decisions to meet real-time demand. The information sharing between supply chain partners can be used for gaining competitive advantage through process integration. This will help in collaborative working between buyers and suppliers in different business processes.
Exhibit 16.1 Agile vs. Traditional Supply Chain
| Traditional Supply ChainAgile Supply Chain | Agile Supply Chain |
|---|---|
| Multiple inventory decision points | Few inventory decision points |
| Forecast driven | Demand driven |
| Push strategy | Pull strategy |
| Limited use of IT | IT enablement |
| Functional approach | Cross-functional approach |
| Activity driven | Process driven |
Exhibit 16.2 Sources of Variability3
| Variability in | Reasons |
|---|---|
| Demand | Changes with customer tastes and preferences will impact demand in terms of product volumes and varieties. It creates discontinuity in production |
| Supply | Many suppliers at multiple location and having varied lead times |
| Product | New product introductions, product modification or substitute products |
| Equipment | Variations in equipment reliability and up times and maintenance scheduling |
| Manpowe | Labour turnover, absenteeism and efficiency resulting into an uncertainty in production |
| Information | Disruptions in its journey from market to suppliers via manufacturing.Information reaching upstream of supply chain may be delayed and completely distorted |
Supply chain agility is an operational strategy to get velocity and flexibility in the supply chain. All organizations have supply chains of varying degrees, depending upon the size of the organization and the type of product manufactured. They have networks of supplies, service providers, distributors and customers. It is necessary to coordinate the activities of all partners in supply chain to have seamless integration to respond to the market requirement. To infuse agility in supply chain, it requires radical change in organization thinking and orientation to shift from traditional production orientation of economies of scale and EOQs.
Agile supply chains are market-driven. These organizations go for continuous product research and short product development and launching cycles. All activities are performed quickly and accurately. Here, the key success factors are flow (material and information) and time.
With this, the supply chain can respond to changing conditions arising out of market variability. Agility requires a company to be dedicated in its response to the changing needs of the market. Time-to-market is short. The agile supply chain is one which manages the variability. Information systems or technology play an important role in making the supply chain agile and responsive. Achieving agility starts with the physical flow of parts, from the point of supply, through the factory and shipment through agile distribution channels. It emphasizes bridging the gap between each point in the flow. It requires removing of non-value-adding activities/functions to induce velocity. The natural points of delay are eliminated and simplified.
The information chain is streamlined and electronically connected at every decision-making point, so that information flow is direct without interruptions and delays. This helps to take real-time decisions based on accurate and timely information.
BARRIERS TO AGILITY
The biggest barrier to agility is complexity of the supply chain. As companies grow the number of decision points increases leading to non-uniformity of decision-making due delays in information flow. The complexity is due to organizational structures and management processes that have grown up over time. It is also due to product complexity a design issues and excessive product varieties. The hierarchy or levels of decision-making add further to complexity in the supply chain. The solution is BPR (business process re-engineering). BPR highlights non-value-adding activities that are inherent in traditional functionally-based business. These activities need to be eliminated to enhance agility. To bring agility, organizations require multi-skilling in HR force and cross-functional working approach. Team management will be an important facilitator for organizational agility.
CREATING AN AGILE SUPPLY CHAIN
Agility of an organization can be defined as the capability to produce products for volatile markets in response to the volumes and varieties. The firm's quick and effective reactions to changing markets require enablers to manufacturing process, which are:
- Collaborations with supply chain partners
- Internet-based business processes and information system
Agility brings competitiveness to the organization. The agile supply chain has four underlying principles: delivering value to the customers; being ready for change; valuing human knowledge and skills; and forming virtual partnerships. Agile manufacturing in addition to being flexible and responsive to market demands requires an adaptive capability to be able to respond to future changes. This includes development of internal capability and ability to configure the company's assets (human and capital) to take advantage of opportunities available today and also those that will surface in future. For creating ’agile supply chain’ the firm needs a framework to improve supply chain performance by re-engineering existing industry processes and changing old practices.
For an agile supply chain, flexibility is a prerequisite and it should exhibit the abilities to:
- Reorganize and reconfigure assets in line with customer's need
- Change processes as demand changes adjust capacity
The logistics process flexibility involves alliances with third-party logistics providers and it should have ability to:
- Align to global requirements
- Provide differentiating services to each customers
- Vary warehouse space
- Vary transportation carriers
- Introduce product postponement
- Meet changing channel needs
To infuse flexibility in supply chain, firms have partnership with multiple logistics and channel service providers across the chain for delivery to specific customer locations. It should exhibit flexibility in product movement between nodes in the supply chain. Changing customer demand may translate into changing load and delivery requirements and these requirements may be in many forms such as shipping volume or schedules. As these requirements change, carrier cost and service time may also change resulting in the need to consider other carriers. Hence, a flexible supply chain, then, must be able to balance load and delivery requirements against carrier capabilities and costs.
Tesco: Supply Chain Agility for Achieving Global Competiveness
The business transformation of Tesco in the last four decades is one of the most remarkable in the British retailing industry. Changing with time, Tesco with appropriate planning infused achieved agility in supply chain to sustain and grow in international markets. From being a small retailer in local market, the company has become one of Europe’s leading retail businesses, with retail operation in countries such as Ireland, Poland, Malaysia and Japan. In the United Kingdom, their ’loyalty card’ and ’e-commerce’ operations are considered to be world’s leading and its expertise in this field.
The logistic and supply chain transformations have been the most important and impressive one, but they received less public consideration than the transformation in the location and format of Tesco. With passage of time, the company increased its services and range of products in the stores and online. In the past, the strategy of Tesco was to establish control over distribution. Tesco made its name by the operation of a ’pile it high; sell it cheap’ approach to food retailing. Price competitiveness was critical to this and fitted well with the consumer requirements of the time. The company and its store managers were empowered to be individual entrepreneurs.
Tesco found a way with the ’operation checkout’ to be closer to its consumers. Tesco adopted a new positioning, which helped itself to change its image and control its business. This retail transformation brought into sharp focus on the quality and the capability of Tesco supply systems and the relationships with suppliers.
In the 1990% Tesco changed its business strategy. Earlier, Tesco focused on out-of-town superstores but later Tesco decided to begin a multi-format approach (hypermarket, supermarket, down town stores, etc.). The corporate brands have been strongly developed and Tesco decided to target the international market. All of this strategy success is due to the supply and the logistics management support. The distribution and supply of the products direct to Tesco’s different stores has been the key to its success.
There have been many phases in the reconfiguration of the distribution strategy and operations. First, there was a period primarily of direct delivery by the supplier to the retail store. Second, there was the move to centralize regional distribution centres for goods and the refinement of that process of centralized distribution. Third, a composite distribution strategy was developed in the 1990s. Fourth, is the advent of vertical collaboration in the supply chain to achieve better operating efficiency.
With direct to store delivery process (DSD), suppliers and manufacturers went directly to the store to deliver. The store managers build their own relationships with the suppliers and manufacturers. The control was local. Tesco did not have central control and standardization. The same products were not found in all the Tesco’s stores. The system could not contribute to the growth of Tesco. When the ’operation checkout’ began, Tesco changed their supply chain process because the volume of products and quality was not enough with the DSD models. Tesco decided to centralize its distribution system.
The centralization of Tesco began with the diminution of the responsibility of the store managers. Tesco HO now had a control over products, pricing and stocking decisions. The centralized system became more and more efficient effecting delivery of all products within 48 hours. This strategy produced a more rationalized network of distribution centres linked by computer to stores and head office.
Tesco built its own electronic system to follow its supplier. This system based on the sales allowed Tesco to generate order for delivery to store within 24 hours. The change to the supply chain has been concentrated mainly on the distribution centre to the retail store component. This change popularized Tesco as a model of supply chain and logistics expertise.
The supply chain model of Tesco is a success story. The way Tesco chose to graduate itself to be an international player was a very good approach. The credit goes to the timely reforms in supply chain management practices which were well planned. Tesco had always kept supply chain in forefront to build up competitive advantage leading to growth of the company.
As regards total flexibility in supply chain, both the product and the process are required to be modular in design and operations, respectively. Alternatively, the organization should adopt product standardization and keep stock of only few products.
The other flexibility required in supply chain is flexibility of network. It is the ability to meet the changing needs of customers. It requires changing the supply of product, including mix, volume, product variations, and new products. This further requires flexibility in sourcing product from raw materials to outsourced finished product. Supply flexibility influences agility. This covers the ability to add and remove suppliers. It addresses the ability of an organization to select suppliers who can add new products quickly, the ability to vary supplier relationships and the ability to have suppliers make volume changes.
The firm should select suppliers who can introduce new products quickly can add responsiveness to a supply chain. The most vulnerable aspect of product development in many companies is the failure to use the creative potentials of suppliers. Suppliers’ involvement could contribute to new product success.
To bring about all the above changes, the organizational commitment and information systems capability is at the root. To achieve agility, employees should have right mindset greatly influenced by employee empowerment, organization structure and culture. Organizational designs that need to be considered with respect to supply chain flexibility are the organizational structure, the human resource practices and the workforce capabilities. HRM practices of the organization must support the competitive strategy of the organization and help develop the organizational capability to adapt to environmental changes. Culture can serve as a strategic resource in supply chains. Trends, such as globalization and technological innovation make business environment more challenging and further require the supply chains to act in a more integrative way.
Information sharing between the supply chain partners is crucial to flexibility. Information visibility within the supply chain means sharing information to manage the flow of products and funds in real-time between all supply chain members. The overall goal for the supply chain is to have visibility across the supply chain.
The cycle time compression is essential to flexibility. Hence, it is necessary to compress the four cycles such as procurement, manufacturing, replenishment and order fulfilment. Most organizations face a fundamental problem: the time it takes to procure, make and deliver the finished product to a customer is longer than the time the customer is prepared to wait for it. This difference in time is referred to as the lead-time gap. In the flexible supply chain design this needs to be taken care of and reduced. For the organization which matches demand with supply the process of forecasting and inventory management becomes redundant.
The biggest barrier to agility is the long lead-times from suppliers. This can be addressed by reducing supplier base and building a long-term relationship with the suppliers. The organization should consider the supply chain of supplier as an extension of his supply chain. M&M has reduced its suppliers’ base to 500 from 1800 earlier and shared information with suppliers on a continuous basis.
To bring about these changes the traditional methods of procurements need to be replaced with e-procurement to bring speed and reduce transaction cost so as to remain competitive in product offerings. Hence, the organization should take a close look at the way things are procured. This can be done by outsourcing non-core activities to outside experts and focus only on core activities to use time and money productively.
Mapping the supply chain processes is the first step in understanding the scope for improvements in productivity through logistics process. In logistics, the non-value-added time is idle time. The product remains as inventory either as raw material, semi-finished product or finished product. In such a situation, if a product is produced early before the actual demand arises, then postpone the final configuration of the product. This would enhance the supply chain flexibility to meet the demand. However, for implementing postponement strategy, the organization should have a clear view of the demand in the marketplace. Hence, for enhancing agility the organization should be able to capture information on demand as close to the final point of consumption. This will help in managing the inventory at the optimum level to cater to the flexible demand.
A close connection with the marketplace through shared information enables a more responsive supply chain to be created. For example, at Cisco Systems, a fast-growing provider of network routing and switching equipment, orders are entered by customers directly through the internet. Typically these orders are for uniquely configured products which are assembled to order. Because Cisco's suppliers are linked directly to the information system they are immediately alerted of the requirement for components. At the same time, the third party logistics service provider is informed of the impending shipment requirements. As a result, customized products can be delivered and installed in much shorter time-frames.
Addressing the Uncertainty
Sport Obermeyer is a leading US fashion skiwear producer and distributes its products through 800 specialty retailers located throughout the United States. Every year the firm has 95 per cent of its products which are new. Because of this reason, it constantly faces the challenges and risks of demand uncertainty. This resulted into stock-outs of running styles during the selling season and leftover inventory of old fashion at the end of the season.
To reduce the uncertainty, the company solicited early orders from important customers, that is the retailers. The company invited its 25 largest retailers to its factory each February to evaluate its new line. The company found that the early orders from these retailers helped to bring down forecast error to the level of 10 per cent. This helped them to get this information in advance but it didn’t solve company's problem. The reason is long lead-time to commit itself to products at the time of planning.
As per their calculations, one day reduction in lead-time would have accrued saving of $25, 000. This is the amount they spent each day at the end of September shipping products by air from plants in Asia to reach in retail stores by early October when the season starts. To shorten the lead-time, they acted on improving information flow speed to get design information to the production manager in Hong Kong. Through such efforts, company was able to avoid uncertainty on half of its production by committing that production after early orders have been received in February.
To tackle the problem of uncertainty in styles, the company asked each of the six members of the committee responsible for forecasting to construct a forecast for all products, and used the average of the six forecasts as the company's forecast. After a year, it was found that the average forecast was accurate in the case when the six individuals forecast agreed. All these efforts resulted in cost cuts of over production and under production as a result profits increased by 60 per cent.
These information linkages need to be based on, latest technology to share information across the supply chain partners. The key requirement is the willingness of all parties in the supply chain to act as partners and to recognize the need for open communication. The biggest improvements in supply chain can come through a change of attitude amongst the parties involved.
Dell computers has successfully introduced agility in supply chain. A customer initiates the sales process on the Internet. The Dell receives the order and begins manufacturing within hours. Each computer is custom-built and put through several hardware and software tests in less than one day. After an inspection, the computer is dispatched to a distribution centre to further transport customer. Thus, Dell computer keeps computers inventories to a minimum. This has helped the company to optimize the cost. Dell has rationalized the supplier base and suppliers are kept just functional to meet the need. The real-time information from customers enables Dell suppliers to change product mix and maintain their inventory velocity. Dell is transparent in sharing the customer demand information with suppliers. This is the root cause of Dell being an agile supply chain.
SUMMARY
The changed conditions in the global marketplace demand a much more agile response from the organization and its partners in the supply chain. True, competitive advantage is gained when an organization is able to consistently meet the needs of customers more precisely and in a more timely way than anyone else. Today, it is no longer companies competing against company but rather supply chain against supply chain.
In the dynamic environment, companies would survive based on their ability to keep up with continuous and unexpected changes. This has led to an increase in the importance of agility in supply chain. By being flexible, the supply chain can meet specific customer needs and influence the long-term commitment of customers. In terms of customer satisfaction, flexible supply chains should lead to improvements both in terms of service and responsiveness. Supply chain responsiveness factors involve velocity in execution.
For innovative products and firm with mass customized product, satisfying the customers will require a responsive supply chain that can manufacture closer to the time of the order. Customers today are demanding more variety, better quality and service, including both reliability and faster delivery. The flexible supply chain requires lower inventories at each node as product is produced closer to customer consumption and lead-times are reduced. Inventory in transit is reduced as supply chain partners choose modes of transportation that shorten lead-times.
One of the biggest challenges organizations are facing today is the need to respond to ever-increasing volatility. For a variety of reasons, product and technology lifecycles are shortening, competitive pressures force more frequent product changes and consumers demand greater variety than ever before. To meet this challenge, organizations need to achieve greater agility such that it can respond in shorter time-frames both in terms of volume change and variety change. In other words, it needs to be able to quickly adjust the output to match the market demand and to switch rapidly from one variant to another.
REVIEW QUESTIONS
- Discuss the dimensions of ’agile supply chain’.
- Compare and contrast ’lean’ and ’agile’ supply chains.
- Explain, how ’agility’ can be induced in the supply chain?
- Discuss the various issues in agile supply chain.
INTERNET EXERCISES
- To learn more on agile supply chain visit http://www.marcbowles.com/courses/adv_dip/module4/module11/m11five.htm
- http://www.logistics.about.com; presents many articles and case studies on supply chain management in various industry segments. Visit the site to study techniques used for bringing agility in supply chain.
VIDEO LINKS
- The agile supply chain http://www.youtube.com/watch?v=_Ct7azFYQw8
- Cisco's agile aftermarket supply chain http://www.youtube.com/watch?v=nbWaIgv3f7s
PROJECT ASSIGNMENT
- Consider two competing retail chains; Wal-Mart and Spencer or Pantaloon and Westside (Trent). Find out the factors, which decide the agility of supply chain for the retail chains. Measure these factors giving proper weightages/ratings on 1 to 5 scale for the companies you have chosen. Comment on the ’agility index’ of the supply chains of these companies and suggest strategies to improve the same.