Jim Fulcher had an interesting blog post on the Supply Chain Expert Community the other day, when he wrote about Volatility, uncertainty and their effect on the supply chain. In his post, Jim referred to the Tompkins Supply Chain Consortium survey, which said that companies in the future must become highly flexible while remaining efficient so they are able to react to changes quickly and efficiently.
This reminded me of a journal article that came across my own desk recently: "Supply Chain 2.0": managing supply chains in the era of turbulence, by Martin Christopher and Matthias Holweg. The paper questions the established approach of supply chain management and argues that in the light of increasing turbulence a different approach to is needed. What is needed is an approach that builds structural flexibility into the supply chain. Many companies only appear to have flexibility in their supply chains, but this dynamic flexibility is very different from the structural flexibility that Christopher and Holweg advocate in their article.
The traditional approach to variability and uncertainty in the supply chain has been to add measures of control and stability. This has given rise to operational practices such as Lean, Six Sigma, push-based production, vendor-managed inventory and many more strategies. Firstly, although seemingly effective, these are very specific strategies geared towards certain industries and/or certain products, but what is needed, so the authors say, is a generic strategy that anticipates, rather than reacts to, turbulence. Secondly, although many companies have managed to build dynamic flexibility into their supply chains by being able to quickly reacting to changes, these are more like contingency plans than actual structural changes to the supply chain.
Structural flexibility implies the use of the following strategies:
- Dual sourcing
- Asset sharing with other companies, including competitors
- Separating base demand from surge demand
- Postponement of final product assembly
- Flexible labor arrangements
- Rapid manufacturing of small batches
- Outsourcing and contract manufacturing
So what exactly is structural flexibility? Well, according to Christopher and Holweg it refers to the ability of the supply chain to adapt to fundamental changes in the business environment. This, so they say, is done by first and foremost designing the supply chain for flexibility, not for efficiency, which is the case with most supply chains today, where flexibility is a sort of added option. In a structurally flexible supply chain, flexibility takes center stage, and efficiency becomes the second violin. I find that an interesting thought.
In the efficient supply chain, the focus is on control and the aim is to reduce too much variability. In the adaptable supply chain the focus is on volatility and the aim is to develop a superior ability to adapt. The former sees turbulence as bad for business. The latter sees it as unevitable and thus creates adaptable structures to accomdate it. While the efficient supply chain tries to eradicate turbulence, the adaptable supply chain embraces it and works with it.
I think Christopher and Holweg are on the right track here. We should not fight volatility, we should perhps not welcome it, but we should not view it as an enemy. Rather, it is an opportunity. And no, I am not thinking about the Chinese sign for crisis here, because contrary to popular misbelief, it does not mean opportunity. The most important lesson for business concerning volatility is that it challenges the mindset of economies of scale as being the most efficient manufacturing strategy. It is most certainly not the most efficient strategy for dealing with volatility. Responding to volatilty requires small numbers and the ability to fill niches. It may appear more costly, but in the long run, the return on investment will pay off.
Reference: Christopher, M. and Holweg, M. (2011). "Supply Chain 2.0": managing supply chains in the era of turbulence. International Journal of Physical Distribution and Logistics Management, 41 (1), 63-82.