Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
  - July 26, 2010 -  

Supply Chain News: Our Guru Panel Weighs in on How to Define and Measure Supply Chain Flexibility

Excellent Insight from Stanford's Dr. Hau Lee, MIT's David Simchi-Levi, Adtran's Tom Dadmun and Other Experts; "Beam me Up, Scotty"

  by SCDigest Editorial Staff  
SCDigest Says:
The “ability to respond to change” implies that even in the face of a disruption the firm should be able to match supply and demand to avoid hurting customer experience.

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Last week, SCDigest editor Dan Gilmore wrote a column about the challenge of defining and measuring supply chain flexibility. (See Defining and Measuring Supply Chain Flexibility.)


The topic isn’t only of academic issue. A recent survey of CEOs by IBM found that increasing operational “dexterity”, another term for flexibility, was near the top of the corporate priority list.


But what SCM flexibility means and how to measure it remain illusive.


Gilmore’s column included highlights of insight SCDigest received on the subject from some of the supply chains leading thinkers. That includes Stanford’s Dr. Hau Lee, who’s famous article earlier in the decade on “The Triple A” supply chain included “Adaptability” and “Agility” as two of the three A’s. (The other A was “Alignment.”)


Dr. Lee offered some brief comments on the topic to SCDigest, and we publish those below as well as the full comments we received from Tom Dadmun of network gear manufacturer Adtran, Dr. David Simchi-Levi of MIT, former Unilever/Best Foods supply chain executive and now independent consultant Bob Nardone, and Gene Tyndall of Tompkins Associates. 


Dr. Haul Lee

Stanford University


Just a small contribution:


Flexibility should be measured with a time-element in it. Hence, the flexibility to change volumes and mix, must be time-based.  Flexibility one month out, versus flexibility three months out, are very different things.


We should look at the whole time profile of flexibility in evaluating an operation - what is the flexibility over different time frames?



Tom Dadmun

VP Program Management Office



To me flexibility equals responsiveness to the customer. We can all debate whether we should call the process “Demand Chain” or “Value Chain” but the key here is to have the Supply Chain respond to the customer’s demand.


Today we live in the “Fast Food” world where buying an item must be like Type, point, click, done, then click again for when FedEx will deliver it to your door.


Responding to a customer is an art form. We all bowed to Dell’s prowess in this arena back in the early 2000 era, and now marvel at Apple’s delivery engine for what used to be wandering the aisles in your local music store.


So how do we achieve flexibility to respond to the customer’s ever changing whim? Sorry to use an old cliché’ but there is no silver bullet. Instead you need a bandolier with many bullets ready to be chambered. Some of them are as follows:


  • A collaborative system with suppliers – E-Procurement
  • A postponement strategy to avoid excesses
  • VMI where applicable, even Line Side Stocking (LSS) where applicable
  • Virtual S&OP system ( let’s not wait for the once a month process)
  • Real time forecasting – Immediate updates – You cannot use historical algorithms with today’s economic earthquakes  
  • Value Chain Dashboard for responsiveness; that is, business intelligence and analytics (We’re implementing a tool called Qlikview across the enterprise)


To be truly flexible is to have a responsive process at every link in the chain that will quickly respond to the new input signal.


Who’s in this control tower overseeing the entire value chain, even beyond the 4 walls of the enterprise? The Chief Supply Chain Officer of course. And his measuring stick of success is a hierarchical list of KPI’s with alerts triggered by real time events identified by control limits on the BI Dashboard.


“Beam me up Scotty.”  




Dr. David Simchi-Levi




Increasing competition in the manufacturing industry is leading to mounting pressure to reduce supply chain costs. Companies are responding by pursuing strategies such as outsourcing, off-shoring, and lean manufacturing to retain market position or gain competitive advantage. Unfortunately, such cost-cutting measures are sometimes adopted at the expense of managing risk within the supply chain. Indeed, current industry trends correlate directly to the rising risk levels in the supply chain. As off-shoring and globalization of manufacturing operations continue to grow, supply chains are geographically more diverse and therefore exposed to various types of natural and man-made disasters. Similarly, for lean manufacturers that focus on low inventory levels, one disaster can bring their businesses to a halt.


With the threat of mega-disasters an increasing reality, industries need to establish risk mitigation measures that accurately reflect their levels of risk exposure. Unfortunately, while many companies are concerned with supply chain resiliency, only a small fraction of them actively and effectively manage risk.


The increase in the level of risk faced by the enterprise demands that supply chain executives systematically address extreme risks (such as port closings and natural disasters like hurricanes, epidemics, and earthquakes) as well as operational risks (such as forecast errors, sourcing problems, transportation breakdowns, and recall issues).


Unfortunately, little can be done after a disaster has occurred. Companies therefore need to plan their supply chains so that they can better respond to both mega-disasters and mundane operational problems.


(Supply Chain Trends and Issues Article - Continued Below)




Perhaps the best way to address many of these challenges is through flexibility, which is a key to overcoming supply chain risk. Introducing flexibility into manufacturing, supply chain, and network strategies is essential if companies are to respond effectively to ongoing change. Of course, the question is how to achieve flexibility and how much of it is required since flexibility does not come free.


In my new book “Operations Rules” (MIT Press, September 2010) I define flexibility as the ability to respond to change without increasing operational and supply chain costs and with little or no delay in response time. In this definition, change refers to change in demand volume and mix, commodity prices, labor costs, exchange rates, technology, equipment availability, market conditions, the production and logistics environment or any supply disruption.


This definition includes three key words—change, cost, and time—that refer to the three most critical performance measures influenced by operations—customer experience, operational costs, and business response time. The “ability to respond to change” implies that even in the face of a disruption the firm should be able to match supply and demand to avoid hurting customer experience. Similarly, everything else being equal, implementing flexibility should help the firm reduce long-run operational costs or improve response time or both.


So how can the firm achieve flexibility, and how much flexibility is required? The last question is particularly important since flexibility does not come free. Typically, the higher the degree of flexibility, the more expensive it is to achieve it. Consequently, organizations need a systematic process to measure the level of flexibility that currently exists in their business, identify additional degrees of flexibility possible in their business, and characterize the costs and benefits associated with each one so that they can choose the best course of action.


These are precisely the topics covered in my new book. My approach is an engineering systems approach because it takes a holistic view of the business; it integrates manufacturing, logistics, transportation, and product design and hence is interdisciplinary; and it focuses on reducing system, process, and product complexity.


I classify the different strategies that can be applied to achieve flexibility into three categories: system design, process design and product design.


System design:  Firms can achieve flexibility by carefully designing their manufacturing or distribution network.


Process design: Examples of achieving flexibility through  process design include a flexible workforce, worker cross-training, a lean manufacturing, organization and management structure, and varied procurement strategies such as flexible contracts, dual sourcing and outsourcing.


Product design: Product design solutions that allow a firm to achieve flexibility include modular product architecture, standard components and interfaces, postponement strategies, and component substitution.


In each case, I provide design guidelines and information on organizational structure, technology and supply chain processes that support flexibility.




Bob Nardone

Supply Chain Guidance LLC



Defining Supply Chain flexibility concisely is a challenge and one that probably has different nuances for different businesses.  However, I believe that flexibility is the ability to quickly respond to changes in demand while achieving your customer service, cost, inventory and ROA objectives.

This puts me more in line with what Dan Gilmore called “micro” flexibility. Referring to his March 4, 2010 column, I’d probably define “micro” flexibility as “tactical flexibility” and “macro” flexibility as “strategic adaptability.

I think that the ability to build new supply networks to adapt to changes in business strategy or market conditions as adaptability.

I don’t think flexibility can be determined by one measurement but rather by a composite of metrics that many businesses currently measure.  These would be:

  • Inventory levels
  • ROA
  • Customer Service (e.g. OTIF)
  • Order lead time
  • Number of items in the portfolio produced per week

The target metrics for a specific business can be established based upon sound benchmarking with perhaps top quartile performance in all performance metrics.


Gene Tyndall
Tompkins Associates

Supply chain flexibility is a term we are hearing more about these days, especially as markets and channels change, customer preferences change, the supply base changes, etc. 

The business issue, however, is what that means and how can it be achieved?  We see supply chain managers struggling with what should be their degrees of flexibility, while maintaining control, security, and risk management.

Our advice to supply chain managers in this area is to first, define your needs and goals for flexibility; then, define the areas where it is needed (strategy, organization, processes, people, technology); then, define how you will build it into what supply chain processes; and, decide how you will build that into your performance management system (KPIs).  Only by following this process will you identify the trade-offs necessary and their value to the overall business.

But you often need to be cautious about flexibility. While customers may want it, financial, security, and risk controls may limit it. Flexibility usually comes with an added cost, and this must be weighed against the value proposition for it.

Supply chain managers strive for predictability and consistency, for mostly cost control reasons. However, when flexibility is introduced, so usually are uncertainty and exceptions. These, then, introduce more room for errors and rework, not to mention inevitable increases in inventories and capacities.  So, the business value must be clear to go down the path of more flexibility, regardless of which supply chain strategy, organization, or process is affected.


What’s your reaction to our expert panel’s perspectives on Supply Chain Flexibility?  What can you add to the discussion? Let us know your thoughts at the Feedback button below.


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