Turbulence and volatility are the prevailing characteristics of today’s business environment. Gone are the days when organisations could plan ahead with some degree of certainty. Now the risk of relying on forecasts and buying or making products ahead of demand is significant. More than one business has paid the price of inventory obsolescence and write-offs on the one hand or lost sales on the other because of forecast error.
Whilst some might argue that the solution is better forecasts, the reality is that better forecasts are probably not achievable given the current conditions of uncertainty. Instead the challenge is to make the transformation from a forecast-driven business to a demand-driven business. Demand-driven organisations strive to respond to known customer requirements and to do this in ever shorter time frames. To achieve this level of responsiveness requires an emphasis on creating agility within the business and across its supply chain.
Agility can be defined as the ability to respond rapidly to unpredictable changes in demand or supply. However it is important to recognise that agility is not a single company concept but rather a supply chain wide capability. For example, no matter how quickly the company may be able to respond internally to sudden changes in demand its agility will be impeded if it relies on suppliers with lengthy lead-times.
Paradoxically whilst many companies have sought to reduce costs by sourcing in low cost countries they may also have reduced their agility considerably because in so doing they have extended total end-to-end lead-times. Indeed, if those same companies were to examine the total cost of ownership resulting from the move to global sourcing they would quite possibly find that those costs have increased rather than fallen. These higher costs can arise for several reasons, firstly there will probably be more inventory in the supply chain than before as a result of longer transit times and also because of the need for higher levels of safety stock to buffer against variable lead-times. Secondly longer lead-times mean that the likelihood of lost sales through stock-outs will increase as will the possibility of obsolescence or mark-downs if demand is less than anticipated.
How then should companies seek to re-engineer their supply chains to ensure a higher level of agility?
Essentially there are two vital elements that underpin supply chain agility: visibility and velocity. Visibility relates to the ability of the business to see exactly what is happening, in as close to real-time as possible, in terms of demand as well as having a clear view of upstream supply conditions. In today’s volatile business environment being fore-warned is to be fore-armed when it comes to managing the supply chain. Visibility across the supply chain can only be achieved when there is a high level of collaborative working across company boundaries. Partners in the supply chain must be prepared to share information and to act as if they were a single enterprise.
The second element of agility, velocity, is achieved through time compression particularly in in-bound lead-times. Again this can only be achieved through closer working with key suppliers. Because in the past there was often a view that suppliers should be held at ‘arm’s length’, many opportunities for improving responsiveness have been missed. Joint supplier/customer teams can be used to explore opportunities to better align key business processes thus enabling faster throughput times.
Ultimately supply chain agility can only be achieved by better management of the interfaces between suppliers and customers – underlining the inescapable fact that today we no longer compete as individual businesses but rather as highly connected supply chains.
Blog produced by: Professor Martin Christopher, Emeritus Professor of Logistics and Marketing and Co-Director of the Leading Procurement Strategy Programme,Cranfield School of Management for this blog content.