Flexibility- A strategic prerequisite in global supply chain

Globalisation has created a world without boundaries. The new business environment is characterised by informed customers, customized products, short product life cycle, and short lead-time. These factors have led to fierce competition in global operations of manufacturing and logistics.

The impact of failure of one entity in the supply chain can lead to a number of entities closing down and in some instances the whole supply chain shuts down. Recent events like hurricane in New Orleans or earthquakes in Japan have demonstrated that risk events are inevitable and that they are even more likely to affect today’s supply chain with their increasing global stretch and complexity. One such example is a fire at a single source supplier for Ericsson, which led to loss of sales of $400 million, culminating in Ericsson’s exit from that part of business. Even political problems can bring about supply chain disruptions, like an agreement between EU and China on trade limits stalled delivery of 80mn pack of clothing, which were ordered well before the agreement was enforced. Still, some companies appear to be able to weather such events more effectively than others to come to a state of normality from where they can operate. The apparent ability of some supply chains to recover more effectively from others has proved supply chain flexibility to be a strategic weapon.

Flexibility refers to the maintenance of the customer service levels by adapting to disturbances in supply and sudden changes in demand. Flexibility measures the capabilities of promptness and the degree to which a firm can meet the changes required in its supply chain speed, destinations and volumes. Global supply chain categorizes the entire supply chain into five flexibility perspectives – product development flexibility, manufacturing flexibility, sourcing flexibility, logistics flexibility, and information systems flexibility. Some researchers also classify flexibility as range flexibility and response flexibility. Range flexibility is concerned with the extent to which the operations can be changed. Response flexibility is defined as the ease with which the operation can be changed.

Managing Flexibility

Certain Risk management strategies are used by global supply chain operators to ensure smooth functioning and faster recovery during turbulent times.These strategies can be divided into three major categories such as Product modularity, Supply chain practices and Supply chain structure.

Product Modularity

Postponement includes delaying the actual packaging, assembly, labelling and manufacturing of resources to maintain flexibility in the supply chain. Form postponement refers to delayed customization whereas time postponement refers to movement of goods only after consumer orders are received. However, this strategy involves a substantial investment in terms of understanding product design for Form postponement and coordinating with suppliers and customers in Time postponement. There is always a trade off between Cost of flexibility and Cost of Postponement, but with increasing attention to mass customization and agile operations, organization now days are more interested in postponement.

Supply chain practices

Hedging is a supply side risk management strategy that keeps an organization flexible to serve during currency fluctuations or a natural disaster. Hedging is undertaken by having a globally dispersed portfolio of suppliers, thus creating multiple options for decision variables, that provides protection against risk of quality, quantity, disruption, price, variability in performance, and opportunism.

Selective risks is speculating demand to make product available in advance. By predicting the number of the finished goods at the earliest point, it is possible to gain economies of scale in production, procurement, and transportation, as well as lead to reduction in sorting costs.

Supply Chain structure

Integration increases the ability of a member to control processes, systems, methods and decisions. Toyota was first company that introduced flexibility in its entire business system. Toyota’s “lean philosophy” incorporated suppliers into their production program, ensuring better exchange of information improving the quality level of products and services to their customers. Currently, several automobile brands clearly recognize the strength of “lean thinking” in relation to increase flexibility in their supply chain activities.

Disintegration helps an organization to respond easily to environmental changes. The firms are going for outsourcing of non core activities while focusing on core competencies. Outsourcing firms customize themselves with growing and changing needs of markets hence creating flexibility for their customers. A knowledgeable third-party provider with global expertise that can offer network design and optimization, primary and secondary packaging support, campus-based warehouse and transportation solutions, labour management, real estate services, regional expertise, and collaboration opportunities will be equipped to deliver the service, flexibility and value needed to remain competitive in any market.

The Cost-Flexibility Trade off

None of these strategies ensures full flexibility and operational efficiency. Consider A car manufacturer uses postponement strategy to manage global operations. It has to incur an additional cost of having either an assembling plant at client side or faster transportation system to deliver cars at short notice. Figure shows a relationship between flexibility and cost dimensions in operation strategy. There are two options left to an organization to handle situation of increased cost. One is to pass cost to customers as premium. Generally as flexibility increases, the perceived value of the product also increases and customers do not complain about paying a premium for flexibility. Other option is to develop system to overcome such trade off obstacles in comparison with those of their competitors. With the advent of sophisticated manufacturing philosophies and technologies it has become possible to pursue this option. The smart choice for any company is to map its business model with suitable flexibility criterion.

- By Mohit Talwar & Anubhav Kumar (NITIE), among the top 5 entries chosen for being published on the blog in the February edition of the article writing competition