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Planning for supply chain flexibility

Planning for supply chain flexibility
The role of the supply chain here is pretty important in this new world. We talk about turbulence being the new normal, so to speak, and certainly, we’re living in an era of significant uncertainty, change. Who knows what tomorrow is going to bring? And I think in that sort of a world, what it’s really implying is we might need to think differently about the design of our supply chains. You see, if we go back to when supply chain management really emerged as a serious concern in businesses we’re probably looking back 30, even 40 years, but no more than that. But the world then was actually rather different than it is today. Things were more predictable. We could plan ahead.
We could build forecasts. And yeah, we could make decisions which were longer term, let’s put it that way. Today, I think we got to be much more focused on the much closer horizon. And to me, that implies the need for much higher level of flexibility. Do I really want to make commitments which are going to tie me down in a world that might be quite different? And this means again, I think, how we make use of external resources. You see, in the past, you could have a vertically integrated business where you owned your upstream suppliers. Take Henry Ford 1st when he built the Model T Ford. He owned steel mills, he owned rubber plantations and a mahogany forest.
Anything that he needed to build that car, he owned. Well today, it’s nothing like that. And it’s going to continue. I think we’re going to see this fragmentation of supply chain because we don’t really want to commit to that sort of investment for a future which we don’t actually know quite what it’s going to look like. So to summarise, what I’m really saying here, I think tomorrow’s supply chains are going to be much more fluid. They’re going to have to be capable of being reconfigured more frequently. Relationships will have to be created, which may only last for a short period of time before we move on because we have to do something different.
Well, I mean the implications are really as I’ve highlighted, that we’re not necessarily - and this may sound a little of a heresy - but not necessarily looking for long-term relationships. We need relationships. We need strong relationships. But they may only just for be for the period of a particular project. We’re obviously going to have to get used to a much more rapid rates of product introduction. But that also means phasing out products, which again, has implications for our supply chain and our relationships with our key suppliers. So I think the idea here that I’m really stressing is that we need to be prepared to change more frequently.
It means that things have to happen more quickly, because the world moves more quickly basically. And whereas in the past we used to talk about the lean supply chain, which was all about efficiencies. I mean today, we have to talk about agility, but also adaptability. How can this thing change as the world changes?

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.

Talking point

Can you think of any examples of supply chains that demonstrate:

  • Dynamic flexibility?
  • Structural flexibility?
  • Both?

How does the supply chain design support the different types of flexibility?

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Supply Chains in Practice: How Things Get to You

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