What is The Price of Flexible Supply Chains? Part I: Flexibility
In this series of posts, I'm going to discuss highlights from the CPO Executive Debate on the price of flexible supply chains and focus on not only why you need flexibility in your supply chain, but what you have to do to get it.
In response to how do you balance flexibility with cost and quality considerations and can you measure whether you are striking that balance, Michael Walsh said that beyond knowing that it will be cold at some point in the year and it will be warm at some point in the summer, it is hard to be accurate. We need to build in flexibility to drive the volume responsiveness, and the trade-offs need to be thought through carefully and he was right. With many types of consumer goods -- like electronics, fashion, and toys, you can't predict precisely what demand will be or when demand will surge. You have to be ready to respond or lose business. It's as Guy Allen said, the nearer you are to the consumer retail market, the more flexible you will need to be. This requires long term flexibility in your supply chain, especially if you are selling multiple types of goods, as well as short term agility which, in the words of Martin Hogel, determines how you react to sudden changes on the demand or on the supply side.
With regards to longer term flexibility, also in the words of Martin Hogel, you need to figure out how you adapt to wider changes in the market structures, such as shifting vertical industry structures, stricter environmental legislation, technological changes or movements in international labour costs? How do you incorporate that into your corporate strategy, your manufacturing footprint, your supply chain approach and so on?
The reality is that vertical industry structures always change over time. In the early part of the century, we had centralized supply chains where companies owned their end-to-end supply chains and centralized them as much as possible. Then we had the downsizing, rightsizing, and outsourcing crazes where everything was outsourced and sophisticated multi-echelon supply chains were formed that cross many borders and included many players. Now we are seeing a shift to center-led supply chains where a center of excellence, which some consulting companies might term a 4PL, will manage (warehousing and global shipping) operations across a supply chain for multiple parties (in contrast to a traditional 3PL that would manage logistics for a single player).
Environmental legislation is still in its infancy, and we are soon going to see many Asian equivalents (in India, China, and other progressive countries) to the European RoHS legislation and at some point, as India and China take more and more global GDP, the US is going to have to sit down and play nice with the rest of the world. Technology never stands still, and the low cost country of today is not the low cost country of tomorrow once the low cost labour market is saturated, which results in a swelling middle class, which results in the demand for a better quality of life, which results in higher salaries. You have to be flexible, or you'll be left behind.
However, you're only going to get this flexibility if you design it into your supply chain. As Andrew Vaughan said, one of the keys to flexibility is effective supply chain design where you segment your supply base to focus on key components that you source as generic parts from a variety of suppliers, and customized parts that are specific to your requirements. With your generic parts, you set up a structure that allows you to resource from auxiliary or new suppliers quickly if you need more than your current suppliers can provide, and with customized parts, you set up relationships with custom manufacturers who have the ability to increase production when necessary (even if it is at overtime costs, etc.).
And finally, you have to be cognizant of the impact of each decision you make. As Martin Hogel said, when you look at the supply side, really advanced procurement supply chain organisations understand today the ripple effects that a natural disaster, or an epidemic, has on their overall supply chain, and take immediate preventative action even though only a sub-tier supplier to their main supply base is directly affected, because they know that if their supplier won't be able to get they part, they won't be able to get the part ... and by taking action right away, they know they'll have the product when they need it.
In the next post, we'll discuss how flexibility starts with strategy.