What are the trade-offs between manufacturing flexibility and total supply chain costs?

A very interesting and important question in today's environment, where the need for both greater flexibility and lower costs are at the top of the supply chain priority list, often butting heads.

In the second part of our Videocast series based on the new book Operations Rules: Delivering Customer Value Through Flexible Operations by Dr. David Simchi-Levi of MIT, Simchi-Levi delves into this topic in detail, as shown in the chart below.

The full on-demand version of that videocast, slides, QA poscast and more can be found here: Operations Rules Part 2 Videocast Content.

This chart shows data from a real company looking to decide how much flexibility to add to its manufacturing network. In the baseline case, each plant was making just one product family. Alternatives were analyzed in which more flexibility was added: each plant could produce two product families, three, etc.

Source: Dr. David Simchi-Levi

The graphic shows an interesting tale. It plots the change in costs across a number of variables as flexibility is increased, with the most important being total supply chain cost. Notice that there is a large drop in total costs in moving from dedicated plants to each plant producing just two product families. After that, it flattens out significantly.

Since investment must be made to add flexibility, and increasing flexibility would also add to supply chain complexity, the company decided to go with the "2X" option, where the return on investment was strongest. That way, It could capture most of the possible gains from increasing flexibility with modest investment.

The Rule, says Simchi-Levi: A small investment in flexibility can make a significant impact on supply chain performance.

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