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Planning for supply chain flexibility

A world where turbulence is the new normal, requires a different way of thinking about supply chain design.

Reflecting on the way that the global environment has changed over the last 30-40 years, Martin Christopher (Emeritus Professor of Marketing and Logistics, Cranfield University) explains that supply chains will require a higher degree of flexibility. In the past many organisations were part of more permanent vertically and horizontally integrated supply chains, that gave access to both the direct and indirect resources required to produce products and services. A shift to outsourcing and more fluid networked configurations demand new ways of managing or ‘orchestrating’ global supply chains.

Martin believes that supply chains of the future will require 2 types of flexibility. They will still require ‘dynamic flexibility’, the ability to respond to variations in demand, characterised by the efficient-lean and responsive–agile responses. But in addition, they will increasingly require structural flexibility, the ability to fundamentally adapt or change the supply chain design to changes in global demand or supply.

Planning for supply chain flexibility

This will lead to a fundamental re-think in the way that we approach global supply chain design and orchestration.

Challenge	Approach
Local vs. global sourcing	Investigate ‘local-for-local’ alternative to global sourcing and centralised manufacturing
Economies of scope vs. scale	Focus on the ‘economies of scope’ rather than the ‘economies of scale’
Wide vs. narrow bandwidth	Create ‘bandwidth’ through asset sharing, e.g. capacity and inventory
Multiple vs. single options	Adopt a ‘real options’ approach to supply chain decision making

It will challenge us to investigate what supply chain activities should be conducted globally, regionally and locally. This could be linked to the role a particular factory plays as a part of the global network. A global factory may compete on economies of scale (i.e. the cost advantage obtained due to volume of output) but more localised manufacturing may compete on economies of scope (i.e. efficiencies due to variety of output rather than volume). In consumer electronics when the total supply chain cost of a product is considered, we have already seen shifts from global manufacture to more regional solutions (e.g. Flex manufacture consumer electronics in Hungary and Ukraine for Europe instead of China).

Another shift is the trend to create wider ‘bandwidth’ through asset sharing. One of the more obvious examples of this is the sharing of logistics or transportation, but it also happens in factories. For instance, the Taiwan Semiconductor Manufacturing Company (TSMC). Whilst there may be IP in the individual integrated circuit (IC) designs, competitive advantage is not gained through the manufacturing process. It is better to enable one company (TSMC) to develop broader ‘bandwidth’ and expertise in the manufacturing process, to the mutual benefit of all the companies who source from them. Interestingly, the websites for both Flex and TSMC both mention collaboration of their landing pages.

The final shift is one to a more ‘real option value’ approach. This borrows from the field of finance. It calls for an approach to supply chain design, that may not be the lowest cost today, but balances cost today with the requirements for flexibility in the future. For instance, organisations that outsourced 100% of their production to China 20 years ago don’t have the capability to return manufacturing to the UK. If they had retained just 10% of manufacturing in the UK, they would have the structural flexibility to shift production volumes between the UK and China.