Expert Insight:

Is Inventory A Corporate Asset?

by Jim LeTart

(First, you may note a change in my column, as we have increased the line spacing a bit. Not only will that improve readability, but frankly will also allow me to reduce the word count a bit each week – which has kept expanding in part to match up to the length of our growing list of sponsors, events, guess columnists, etc, on the right side – which then also means I have a little less to write and you to read each week.)

There are a handful of terms or concepts that seem to universally be at the top of every supply chain executive’s wish list. Common ones these days include “improved supply chain visibility,” “supply chain risk management,” and - the focus of today - “greater supply chain flexibility.”

Sounds great. I agree.

What does it mean, really?

I have actually been thinking about this question for more than a decade, starting when I took my relative brief turn as an industry analyst in the late 1990s. I and many other pundits at the time frequently exhorted companies to make their supply chains more flexible, though if I remember right now without a great deal of specificity on how to do it.

I suppose in part in flexibility might come down in a way to the “I can’t define it but I know it when I see it ” sort of thing.

We can all agree, I think, that whatever it really is, supply chain flexibility is increasingly important.

Virtually every survey of CEOs I have ever seen has put “the ability to respond more quickly to demand and opportunities,” or something along those lines, at the top of the executive wish list.

The overall pace of change and the level of dynamics in everything from commodity and oil prices to consumer demand and competitive threats are at all-time highs. Add in the continued reduction in product lifecycles, and the need for greater flexibility becomes pretty clear.

More than a decade ago, I broke down supply chain flexibility into two types:

Micro flexibility: That meant how fast a supply chain could detect and respond to issues and opportunities in the short term – maybe even right now. The truck is late, demand suddenly surges, a customer needs some sort of special packaging or handling: how fast and how effectively can this these changes and needs be managed?

Macro flexibility: That referred to the speed at which a company's supply chain adapt and execute new strategies and programs to support changes in overall company strategies or market place changes. Easy example: company decides it wants to build a consumer direct e-commerce channel, maybe with new SKUs in the mix. How fast can the supply chain out in place what it needs to do to make that happen? Another: Dell decides to move into retail.

In retrospect, not sure “micro” and “macro” were really the best words to choose, but hopefully the sense of them is clear, and maybe you agree with the two categories and why its important to look at this distinction.

It made me feel good then when in 2004 Stanford’s Dr. Hau Lee wrote an important Harvard Business Review article on “The Triple-A Supply Chain,” which was very consistent with my breakdown, at least for two of the three A’s.

The first was “Agility,” which was close to my Micro Flexibility notion. Lee said the objective of being more agile was to “Respond to short term changes in supply and demand more quickly.”  The concept as Lee described in was quite similar to the “demand-driven” supply chain notion currently in vogue.

Lee’s second A was “Adaptabilty,” which again was very similar to my macro flexibility idea, and can almost be seen as being "evolutionary” – the supply chain must constantly evolve and improve as times and conditions change.

Lee gives some characteristics of Agile and Adaptable supply chains, but not what I would call anything that helps us really measure either dimension.

My friend Dr. David-Simchi-Levi of MIT has over the last couple of years introduced some other thinking on SCM flexibility. While focused specifically on manufacturing, he does offer a more specific definition around what flexibility means in this context. If you have 5 manufacturing plants for a given business and each one can only produce one family of products, you have 1X flexibility. If each can make two families, you have 2X, etc. “Full flexibility,” or 5X in this example, would mean every plant can make every product.

Simchi-Levi has done some great work showing the trade-offs in costs and benefits at different levels of this type of flexibility. The short summary is that best bet is usually to invest in some levels of flexibility, but at a relatively low level (say 2X or 3X).

I will briefly note that Honda was praised for its more flexible factories that allowed it to survive both the surge in gasoline prices in 2008 and then the big drop in demand with the recession by having factories that could produce numerous models versus the more model-specific nature of the competition's plants.

It also seems to me that the notion of “flex manufacturing” has a role to play here as well. It has been awhile since I have spoken with an expert on that topic or even heard the term used, but five years or so ago I spoke at length with a former supply exec at Carrier Corp., which had been a pioneer in this area, and one of the foundations was being able to profitably produce and meet customer demand at plus or minus 20% of the base forecast.

At least there, we have a clear definition of what "flexible" means. Is there a way to use that approach to the broader supply chain? I am not sure yet.

Finally, all the way back in 1999 a Prof. Martin Christopher of London's Cranfield School of Management wrote a well-received article on "The Agile Supply Chain" that said agility had four dimensions: (1) a supply chain that is driven by true demand; (2) that is "virtual," replacing inventory with information whenever possible in the extended supply chain; (3) true process integration between trading partners; and (4) relatedly, a supply chain network working as one.

At one level, this feels a little dated; on the other hand, think most companies have a long way to go across all four dimensions.

One last point: clearly the flexibility topic ultimately brings in ERP and othre supply chain software, as these can be enablers and detrators from flexibility, I think most would agree.

So are we any clearer on what supply chain flexibility really means? Is there any way to really assess or even actually measure either type of flexibility?

I don't year have any clarity on either question, but I am going to be working on it. Think it would be good for the industry to have some better definition of these important concepts. What gets measures gets managed, as they say.

Do you have definitions for supply chain flexibility, agility, adaptability, etc.? Is there any way to actually measure these supply chain attributes? Would having such an assessment or measure be useful? Let us know your thoughs at the Feedback button below.

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Why and when were "industry standard" wood pallets developed?

In early 1940s, to support the logistics efforts needed for World War II.