Supply Chain Agility: Even More Relevant in Times of Economic Uncertainty

September 2nd, 2009 5:39 pm Category: Network Design, Supply Chain Agility, Supply Chain Improvement, by: Editor

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We’ve heard a lot about supply chain agility over the past decade. While many companies have taken steps to improve their agility, how many actually achieve their agility potential? So, in light of the current economic situation, this brings the following question to mind, “Is your company’s supply chain as agile as you thought it was?”

If today’s economic doldrums aren’t a good litmus test for your organization’s true agility, then what is?

What is Supply Chain Agility?
First off, what is supply chain agility anyway, and what does it mean to be agile? We most closely associate the term agility with some type of athletic endeavor, so let’s frame our understanding of agility from that perspective. Referencing Wikipedia, we can find the following definition: “Agility is the ability to change the body’s position efficiently, and requires the integration of isolated movement skills using a combination of balance, coordination, speed, reflexes, strength, endurance, and stamina.”

So, agility has something to do with responsiveness, presumably to respond to an internal or external stimulus.

What does agility mean in business terms, more specifically what does agility have to do with a supply chain? Again referencing Wikipedia, “In business, agility means the capability of rapidly and cost efficiently adapting to changes.”

For businesses, agility reflects the supply chain’s ability to deliver in a rapid and cost efficient manner, through the integration of physical infrastructure and processes that govern supply chain execution.

Theory is well and good, but the real question decision makers like you are concerned with is “How agile is my supply chain?” Is your business capable of making adjustments during periods of slower economic activity without sacrificing its principles – loyalty to employees, customers and stockholders – and remaining fiscally viable? Are you well-positioned to react to an uncertain, but eventual economic turnaround? And, how do manage the trade-offs associated with these uncertainties?

If you are concerned with these questions, then use what follows as your own litmus test to challenge or verify your perceived agility. If you’re not too concerned, then hopefully you’ll gain some insights on where you can focus your energies to move your organization to a more responsive and agile supply chain network.

What is a Supply Chain?
In order to apply agility to a supply chain, we need to know a little more about what we’re dealing with. For purposes of this article, a simplified description of what is needed to make a supply chain work yields the following elements:

  1. Physical infrastructure
  2. Organization and people
  3. Business systems
  4. Processes, policies and business rules

In essence, a supply chain is comprised of the physical network infrastructure and the people, processes and systems that govern it.

Most advice on supply chain agility focuses on one or many of these aspects providing enlightened visions of how to make the world better, stronger, faster. While much of this advice is well formed and well intentioned, very little addresses what to do when the purse strings are drawn. Let’s take a look at these four factors that make a supply chain tick and see what can be done to improve agility in a capital constrained environment.

Opportunities to Improve Agility
We’ve all heard the saying “there’s no such thing as a free lunch”. While, for the most part this may be true, it is also said that you have to “spend a buck to make a buck.” Agility improvements don’t come for free, but there are areas where you can get substantial returns on your investment and others that just require you to roll up your sleeves. Endeavors related to the 4 factors can vary significantly in cost but that does not imply that one should start seeking improvement in less expensive areas simply because they are less expensive. Rather, focus on areas where you expect the greatest leverage and return, or where you are currently feeling the most pain.

Physical Infrastructure (Network Design)
The physical infrastructure or network design consists of production facilities and equipment, storage and distribution facilities, etc. The agility of a supply chain’s physical infrastructure relates to the age old question, “Do you have the right assets in the right place at the right time?” Well, do you? How well does your ability to supply match your projected demand? Do you need to restructure your physical infrastructure to better align supply with demand? The name of the game here is low cost and short lead times. Unfortunately, when it comes to infrastructure, we’re usually talking big bucks. The flip side is that the money spent restructuring to improve operational and economic efficiencies has the potential to save far more than you spend.

But how do you know what to do? The best way to accomplish this is through a network design (infrastructure) study. Even a back of the envelope effort can yield target areas for improvement, rough estimates of the magnitude of potential cost reductions or savings, and the anticipated ROI for restructuring physical assets. If the time isn’t right for capital improvement, at least you know where your strengths and weaknesses lie, and you can focus on the remaining three factors accordingly.

Organization and People
How important are the people in your Supply Chain Management team to your organization? The answer is often reflected in your organizational philosophy and the mindset of the people within the organization. Does your company promote or inhibit cross-functional communication and decision making? Does your company have consistent objectives from top to bottom that ensure aligned decision making? An agile organization promotes communication through interdisciplinary teams capable of establishing operational and financial objectives good for the organization as a whole. Incentives should be designed to eliminate conflicting objectives and allow functional departments to have a common goal.

Your test for agility here is how quickly information flows to the stakeholders and fuels decisions that can be put into action. The frequency of interactions between product development, marketing, sales and operations must increase to elevate your agility index. If the right people can’t congregate to make the right decisions, how can you expect to respond in an expedient, profitable manner? While organizational alignment is not without pain, it does not have to be financially burdensome. To add another cliché, “no pain, no gain.”

Business Systems
Business systems include information systems, decision support systems, execution systems, etc. Here are some more questions for you to ponder: Do you know what tools your organization has in place to manage your supply chain? The end game here is decision making and execution. Business systems cover a diverse range of technology and functionality but ultimately their collective purpose is to provide capabilities to collect, store, manage, synthesize and propagate information to promote sound decision making and timely execution of core business activities.

Modern organizations have configured database applications or ERP systems at the
core of their business system network, with integrated peripheral systems designed to perform more specific, detailed tasks. In regard to supply chain management, these systems provide tools for operations and finance to plan and manage customer activity, distribution, production, and procurement. Agility is dictated by how flexibly these systems are architected. Software design and integration are key. Do your systems talk to each other? Are data exchanges dynamic and generic or are they fixed and unresponsive?

Are your planning and scheduling systems capable of rapidly responding to shifts in demand, product or process changes, and evolving business priorities? Or are system updates and new integration goals costly and drawn out? If so, you may not be reaching your agility potential.

What can you do? Start with the mindset of “continuous improvement.” Business systems should be treated as living entities that require monitoring and nurturing to stay consistent and relevant to an ever-changing business environment. Choose software carefully and put design and maintenance in the hands of those who embrace the philosophy of the Agile Manifesto.

Unfortunately, business systems can also require big dollar investments with ERP systems costing tens or hundreds of millions of dollars. Start your quest by looking for low hanging fruit. Ask yourself, Which decisions make or lose the most money? What information is needed to make sound operational or financial decisions? Is the information current and readily available? Can the information be synthesized to answer the right questions within the necessary timeframe? While many systems are expensive, spreadsheets are not and you’d be surprised at the power of a spreadsheet application embedded in the right set of business processes.

Processes, Policies and Business Rules
Here is where you can make a big impact without breaking the bank. If your situation is not conducive to infrastructure or business system reengineering, consider improving the way you make use of what you already have in place. The process, policies and business rules that govern a supply chain’s behavior are referred to here as Supply Chain Management (SCM), as opposed to supply chain management software which falls under the business systems umbrella. Here we refer to the processes which make use of said software and the set of business constraints that guide decision making.

SCM processes usually take the form of strategic and tactical planning, scheduling and execution. They address the links in the supply chain from supplier to customer (in some instances supplier’s suppliers and customer’s customers). Agility is enhanced through vertical and horizontal process integration as well as decision propagation to other parts of the organization.

Vertical integration is how well connected your business processes are from strategic planning to execution. Does your organization connect these functions? How well do stakeholders follow the plan? How realistic is the plan? To become vertically agile, the first step is to align the frequency of each planning process with the frequency the issues addressed by that process significantly change. Second, information exchange, or feedback loops, must be bi-directional and immediate.

For example, if demand is highly uncertain, an S&OP (Sales and Operations Planning) process should capture the changes and reflect the consequential changes to distribution, sourcing and production. These needs are then conveyed to transportation and production to make the necessary routing and scheduling adjustments. Conversely, real time dynamic constraints recognized by these lower level functions should be communicated back to planning to alter sourcing plans if necessary.

Vertical integration promotes a responsive system with the agility to handle uncertainty at the customer or supplier end of the supply chain, as well as points in between.

Horizontal integration ensures the integrity of the supply “chain.” Procurement, production, distribution and sales are not independent activities. The processes that govern these activities should not be treated independently either.

Horizontally integrated processes allow visibility into the “ripple effect” that decisions or actions in one “link” of the supply chain have on preceding or subsequent activities. Horizontal agility is the ability to anticipate and manage consequences before they happen. While agile SCM business systems are designed to be reactive, agile SCM processes should be proactive so that business users spend their energies avoiding unwanted situations instead of fire fighting.

Policies and business rules determine everything from customer priorities to re-order points and policies, batch sizing to procurement policies. It is these policies, when applied in the planning processes, that influence your actual customer service levels, inventory levels, production line or asset utilization, and purchase material availability. The execution and adherence to these policies directly relates to your unit costs and profitability.

This can be a good thing or a bad thing. If your processes, policies and rules stay fixed, then they will not reflect changing business conditions. To attain high levels of agility, a policy of continuous review is necessary.

Start with knowing your customers, since without them you wouldn’t be in business. Review high cost activities on a regular basis to ensure the policies driving decision making are relevant and cost effective to your customer service goals.

Business process integration and a continuous review philosophy don’t cost much to implement but they can have a huge impact on your bottom line. What they do require, however, is discipline. If economic conditions do not allow for necessary physical infrastructure or business system alterations, then a methodical, disciplined approach to execute the supply chain’s governing business processes will put you in control of your supply chain’s agility.

At Profit Point, we understand supply chains and we’re mindful of your supply chain needs. Contact us to see how we can help you reach your agility potential.

This article was written by John Muckstadt, Profit Point’s Infrastructure Planning Practice Leader.

To learn more about our supply chain network design services, contact us here or call (866) 347-1130.

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