December 03, 2019
Understanding the Benefits of Supply Chain Agility
What is supply chain agility?
Supply chain agility can be defined as an organization’s ability to profitably manufacture and deliver a broad range of high-quality products and services with short lead times and varying volumes, while providing enhanced value to customers. The goal is to respond quickly to volatility based on changes in both demand and supply across customers and geographies, as well as to flexibly manage new product introductions. It is imperative that achieving agility goals should not disrupt the performance of the supply chain, which can be monitored with the use of key performance indicators (KPIs), e.g., measurement of customer service, cost, quality and return on net assets against established targets.
To achieve agility in today’s world, the following strategic questions need to be answered:
- How fast can the supply chain respond to demand or supply changes?
- How much change in demand or supply can the supply chain absorb and within what time period, addressing both short-term and long-term opportunities?
- How quickly can a new product be designed, produced and distributed?
Supply chain agility can be divided into two categories: structural and operational agility. Structural agility is the ability to change supply based on the overall capabilities of the supply chain network and organization. A supply chain with structural agility is designed to scale up or down and have flexibility to manufacture or service across product lines. Operational agility is a complementary capability delivered by making decisions on how supply chain resources are scheduled and utilized (Fig. 1).
- To be structurally agile, an organization needs to identify supply chain volatility impacting medium- to long-term plans. Based on the anticipated level of volatility, the organization makes decisions to build (or outsource to third parties) flexible supply chain assets or extra capacity. As a result, the organization is able to scale production based on market demands or adjust production usage for the latest product trends.
- To be operationally agile, an organization needs to rapidly make decisions to adjust the utilization of supply chain assets to meet actual and unexpected demand changes. These decisions often manifest themselves in modifications to production and order lead times, manufacturing cycle times or manufacturing lot sizes. This capability enables organizations to react to short-term demand and supply volatility.
Supply chain business agility is one of the most important priorities among executives
Based on The Hackett Group’s past research, the top priority of executives is to improve the supply chain’s business agility. This ranks above other priorities such as improving supplier performance, reducing inventory levels, supporting enterprise customer-related improvement objectives and enhancing supply chain analytics (Fig. 2). Even though improving the supply chain’s business agility is a top priority, past research by The Hackett Group indicates it is also one of the areas that executives have the least confidence in achieving (Fig. 3). The dichotomous results present an opportunity for innovative supply chain solutions that provide enhanced levels of agility.
Supply chain agility must-haves
Today’s supply chain is becoming more challenging with escalating customer expectations, increasing requirements for omnichannel distribution and sales, expanding product lines, shortened product life cycles, and rising complexity in the global supply chain. The ability to effectively manage these challenges will allow an organization to be both structurally and operationally agile (Fig. 4).
To achieve structural agility, an organization needs to:
- Optimize its complex global supply chain by managing shared manufacturing assets and capacity with other geographies, collaborating with third-party manufacturers and logistics providers, and creating the capability to manage a systemwide inventory.
- Respond to shorter product life cycles by adopting faster product commercialization, while anticipating product discontinuation and reducing inventory obsolescence.
Operate an efficient omnichannel distribution system and sales by developing a seamless transaction flow from multiple sales channels and distribution points. This establishes the ability to meet order fulfillment with near-time or short lead times and deal with the increasing number of lower volume orders while managing the impact of the associated shipping costs.
To achieve operational agility, an organization needs to:
- Manage product line complexity by anticipating more volatile demand patterns preventing stock-outs and unnecessary overstock, reducing the overall warehouse and fulfillment complexity, and leveraging a standard and repeatable process to manage and rationalize stock keeping units (SKUs) and inventory levels across the product portfolio.
- Satisfy the escalating expectations of customers by adopting customer-centric business processes and collaboration to seek a win-win situation along with enhancing responsiveness and service levels.
Challenges to achieving supply chain agility
Traditionally, organizations have used different methods such as expanding capacity, adding inventory, changing production strategy and adopting a rapid replenishment strategy to deliver agility. However, these methods result in a higher cost or unfavorable cash flow for the organization (Fig. 5).
Achieving supply chain agility while mitigating the associated costs can be challenging because it requires a streamlined and collaborative process enabled with the right technology. Furthermore, organizations face limitations in their supply chain planning that exacerbate the challenges. These limitations manifest themselves in process (e.g., ineffective planning process), people (e.g., lack of team alignment and end-to-end visibility) and technology (e.g., multiple enterprise resource planning [ERP] instances, reliance on spreadsheets, and lack of data and systems) (Fig. 6). Although these challenges seem daunting, they can be overcome with the right IBP program that addresses each of these limitations and challenges.
Learn more about leveraging Integrated Business Planning to improve your supply chain agility by clicking here.