Dr. Leonidas Baziotopoulos 17-11-04
AGILE SUPPLY CHAIN MANAGEMENT
Author:
Dr. Leonidas Baziotopoulos (BA. MBA, PhD)
Introduction
Successful supply chain management requires cross-functional integration and marketing must play a crucial role. The challenge within the supply chain is to determine how to successfully accomplish this integration. Business management has entered the era of inter-network competition (Lambert and Cooper, 2000). Instead of brand versus brand or store versus store, it is now suppliers-brand-store versus suppliers-brand-store, or supply chain versus supply chain. In this emerging competitive environment, the success of the single business will depend on management’s ability to integrate the company’s network of business relationships (Bhattacharya, 1996). Supply chain management offers the opportunity to capture the synergy of intra-and inter-company integration and management .
With the advent of business-to-business (B2B) electronic commerce and increasingly complex and dynamic competitive markets, companies are exploring alternative long-term relationships with their suppliers in order to improve supply chain agility. The relationship between value creation and inter-organizational relationships has been explored in transaction cost economics (Williamson, 1985), resource-dependence theory (Handfield, 1993), marketing channel theory (Achrol, 1997; Dobler et al., 1990; Johnson, 1999), and relationship governance (Dyer and Singh, 1998; Monczka et al., 1999). Companies as wide as raw materials suppliers, manufacturers and retailers may need to be involved in the process of achieving an agile supply chain (Hoek, et al., 2001). Firms operating in an international environment face a host of uncertainties that make it difficult to meet deadlines reliably. To be reliable in an uncertain and changing environment, companies must be able to quickly respond to several changes. The ability to do this in a useful time is called agility (Prater, et al., 2001). Unfortunately, measures taken to increase agility often lead to increases in complexity and uncertainty, which works against agility. Turbulent and volatile markets are rapidly being increased, as life cycles shorten and global economic and competitive forces create additional uncertainty (Christopher, 2000).
Moreover, changing customer and technological requirements force manufacturers to develop agile supply chain capabilities in order to be competitive (Hoek et al., 2001). Therefore, several firms are stressing flexibility and agility in order to respond, real time, to the unique needs of customers and markets. It is therefore imperative for companies to co-operate and leverage complementary competencies, because resource competencies are often difficult to mobilize and retain by single companies ( Yusuf et al., 2003). Hence, legally separate and spatially distributed companies are becoming integrated through Internet-based technologies.
Businesses and institutions through the Internet now share common databases and collaborate ever than before (US Internet Council, 2000). Therefore, companies submit joint bids for contracts and attribute responsibilities for design and manufacture of complex products, based on their relative competencies (Upton and McAfee, 1996). The drivers of supply chain integration include advances in information technology, complex customer requirements, intense global competition, and the desire to be the first to market with innovative products (Yusuf et al., 2004).
Furthermore, the significance of time as a competitive weapon has been recognized for some time (Stalk, 1988). The ability to be able to meet customer demands for ever-shorter delivery times, and to ensure that supply can be synchronized to extended demand is very crucial in the era of time-based competition (Stalk, 1990). To become more responsive to the needs of the market requires more than speed. It also requires a high level of maneuverability that today has come to be termed agility (Christopher, 2000).
An overview of supplier-buyer relationships
At the beginning of the 20th century, inter-organizational transactions were the domain of marketing and distribution personnel (Handfield and Bechtel, 2002). Because material specifications were much more standard, cost was the primary factor in transaction decisions. Inter-organizational alliances or partnerships between buyers and sellers were not present among early 20th century companies (Fearon, 1989). Instead, vertical integration was usually used to eliminate supply uncertainty in the supply chain. The first truly “long-term” inter-organizational relationships evolved in Japan, which established the new type of integration known as “keiretsu”, characterized by informal but strict cooperation among members (Ouchi, 1980; Prescutti, 1992). Early studies of interactions among supply chain participants in the keiretsu noted that cycle times were lower than those for American counterparts (Nishiguchi, 1994). Since then, a series of shocks to the global economy have driven North American managers to consider alternative forms of relational governance. These shocks included: 1) The globalization of the world economy, 2) the evolution of the World Wide Web and new forms of B2B e-commerce solutions, and 3) increasing requirements for customer responsivess (Handfield and Bechtel, 2002).
Trends towards supply chain networks
Early 1990s companies began to identify their business environment from the supply chain perspective and to build effective supply chains that operate according to the best supply chain management (SCM) practices (Houlihan, 1987; Stevens, 1989; Davis, 1993). Also, operations were typically analyzed and problems were identified from the viewpoint of material flow efficiency (McMullan, 1996). Although, supply chain collaboration extended only to the closest partners, and in many cases second-, third,- and nth-tier suppliers and customers were not even identified. Information was collected from the customer side but was not shared to upstream (Kemppainen and Vepsalainen, 2003).
A major trend in the emerging supply chains appeared to be that each company focused on their first-tier suppliers and customers. Today supply chain collaboration extends better beyond first-tier suppliers and customers (Meja and Wisner, 2001). Organizations are more aware of the complexity and the increasing uncertainty of business operations, and inter-firm relationships are no longer tailored and fit into simplified supply chain illustrations despite of the continuous attempt to reduce the number of suppliers (Yusuf et al., 2004; Christopher, 2000; Prater et al., 2001). As Bensaou (1999) describes, good practice is to manage effectively portfolios of buyer-supplier relationships adapted to product and market conditions. Industrial companies are also learning to listen to customer needs, and both standardization and modularization are implemented to enable cost-efficient mass customization (Kemppainen and Vepsalainen, 2003). Fawcett and Magnan (2002) state that chain-wide transparency has not realized and only few firms completely understand their supply chains even though more and more are working to make processes and relationships transparent and workable.
Furthermore, the view of the future reveals the expected impact of SCM- Anderson and Delattre (2002) assign to SCM the best part of service revolution; Monczka and Morgan (2002) address the growing specialization and interdependence as the major trend at the beginning of the 21st century; and Bowersox et al. (2000) outline the emerging foundations of business relationships and promoting value management. Kemppainen and Vepsalainen (2003) address the following significant issues:
- Collaboration will be the most strategic capability in the extended supply chains
- Service and support will become as important as the product itself
- Organizations will improve their service capabilities to adapt in turbulent environment
- Assets and functions not at the core of value delivery are to be divested.
Acknowledging the current operating modes of industrial companies the trends outlined above cannot be considered radical, because a majority of those are being implemented. For example, component suppliers are transforming into module suppliers, providing not only a narrow manufacturing expertise but a holistic service solution, and product manufacturers not only selling the product but services such as financing, maintenance, and replenishment (Wise and Baumgartner, 1999). Also, information sharing and collaboration are praised everywhere as the new dominant operating mode.
Consequently, the importance of focusing on core competencies is resulting in the increasing outsourcing of operations which the major issue within the SCM. How then, will ongoing outsourcing and specialization affect the supply chain structure and practices? The problem expected first was potential loss of control (Kemppainen and Vepsalainen, 2003).The term “hollow corporation” was coined early on (Jonas, 1986) to remind of the risks of losing both assets and talents as an outcome of outsourcing of manufacturing operations and coordinating product flows to markets. Although, the slump of the economy taught the virtues of coordination soon enough, and new business models were justified using innovative coordination mechanisms (e.g. Lambert and Cooper, 2000; Christopher, 2000; Yusuf et al., 2004). In addition to data sharing enabled by the Internet, the new models address the role of routines and incentives in the supply chain.
Drivers of Supply Chain Integration
Today, where turbulent and volatile environment exist, there are pressures on companies to improve their operational efficiency for enhanced competitiveness and overall business performance. Such pressures include competition from foreign products, new product introduction by competitors, falling product life cycles, unpredictable customer shifts, and advances in manufacturing and information technology (Browne et al., 1995). Other pressures include the privatization of public enterprises, economic downturns and agitation by shareholders for higher returns on investment (ROI).
Moreover, the most difficult challenge facing manufacturers today is how to integrate the upstream outsourcing functions and the downstream delivery functions with product design and manufacture ( Helena, 1997). Integration would enable the value creation and transfer process, from the supplier to the end customer to operate as a seamless chain along which information, knowledge, equipment and physical assets flow as if water (Gunasekaran and Yusuf, 2002; Yusuf et al., 1999). Seamless flow of physical and non-physical assets amongst firms would lead to enabling synergy and optimization of tangible and intangible assets that are potentially available to the individual firms (Kasarda and Rondinelli, 1998; Upton and McAfee, 1996).
However, advanced information technology (IT) is a major driver of supply chain integration. Through the Internet, a single data file can be accessed simultaneously by spatially distributed entities ( Yusuf et al., 2004). As well, companies’ growth vertical integration and search for new markets in different countries has given rise to large administrative structures. Hence, the need to process and transfer large volumes of data in the form of designs, plans, budgets, and reports across several administrative and operation units becomes even more necessary (Yusuf et al., 2004). In addition, companies allying to become integrated global businesses needed mutual access to data on cost, personnel, stocks, sales and profit profiles. This is in addition to being able to monitor several alliance conditions such as compliance, contribution and attribution. This business scenario necessitate advanced IT applications, with greater functionality than electronic data interchange (EDI) (Christopher, 2000).
Nevertheless, market turbulence arising from factors such as rapid introduction and customization of products, difficult design specification and customer shifts make continuous contact with customers and suppliers through supply chain integration most important (Russ and Camp, 1997; Davenport, 1998). Also, as competition intensified, efforts to reduce cost through just-in-time (JIT) purchasing, scheduling and distribution, led to more frequent monitoring of specified and delivered quality, schedules and other customer expectations as a routine process (Yusuf et al., 2004). The process of conception design, manufacture and delivery are therefore becoming a relay race between legally separate firms, who work with equal vigour and commitment to add the greatest value to end customer continually (Badaracco, 1991; Lee and Lau, 1999; Soliman and Youssef, 2001). In this regard, sharing of design and manufacturing knowledge between companies who work and operate in the same supply chain is a vital tool of competition.
The notion of Agility
According to Christopher (2000) agility is a business-wide capability that embraces organizational structures, information systems, logistics processes, and, in particular, mindsets. A key feature of an agile organization is flexibility. Indeed, the origins of agility as a business concept lies in flexible manufacturing systems (FMS). Available literature on agility has provided conceptual overviews (Gunasekaran, 1999; Sharifi and Zhang, 1999; Yusuf et al., 1999; Sharp et al., 1999; Naylor et al., 1999; Anderson and Pine, 1997; Youssef, 1991).
However, agility should not be confused with leanness (Christopher, 2000). According to Christopher, lean is about going more with less. The term is often used in connection with lean manufacturing to imply a “zero inventory” just-in-time (JIT) approach (Womack et al., 1990). While leanness may be an element of agility in certain circumstances, by itself it will not enable the company to meet the precise needs of te customer more rapidly (Christopher, 2000). There are certain conditions where a lean approach makes sense, in particular where demand is predictable for variety is low and volume is high (e.g. Japanese industry-Toyota). Although, the requirement for variety is high and, consequently, volume at the individual stock keeping unit (SKU) level is low (e.g. Western industry).
According to Christopher (2000), agility can be defined as the ability of a company to respond rapidly to changes in demand, both in terms of volume and variety. The market conditions in which many companies find themselves are characterized by volatile and unpredictable demand; hence, the increased urgency of the search of agility (Fig. 1).
Figure 1:Agile or Lean (Christopher, 2000).
HIGH
Variety/
Variability
LOW
LOW HIGH
The operating environment of agility
Customer responsiveness is key to success in today’s markets. Agility is all about creating that responsiveness and mastering the uncertainty (Hoek et al., 2001; Handfield and Bechtel, 2002). The agile mindset questions such stability, instead of locking up the manufacturing game plan for such long periods, why not loosen it up? This does not mean a return to the production chaos which characterized so many traditional engineering companies: it will actually depend on using new learning and capabilities (Hoek et al., 2001).
The relevance of agility depends on the operating environments of the supply chain in which a company operates. Fisher (1997) suggests two specific operating environments. Functional products with predictable demand benefit most from “physically efficient” supply chain operating structures; innovative products demand “market responsive” supply chain processes that are focused on speed and flexibility rather than on cost. Also,
Figure 2 shows Fisher’s supply chain matrix: efficiency has been defined in “lean” terms of productivity and quality. A different approach to production scheduling called accurate response (Fisher et al., 1994) is proposed to distinguish stable demand items from unpredictable items.
In addition (Figure 3) to the two dimensions used by Fisher, in this comparative positioning of operating environments a further dimension has been introduced, that of “economic trade-offs”. Economic trade-offs based on physical assets, labor, capital and land are most relevant in the functional, lean, environment that is focused on eliminating waste in operational processes (Fisher, 1997). Trade-offs, also, based on time, information and knowledge are more relevant in the innovative agile environment.
Figure 2 & 3: Fisher’s supply chain matrix.
Efficiency focus
Responsiveness
focus
Efficiency focus
Responsiveness
Focus
Agile Supply Chain Framework
Having insights from existing literature, Figure 4, shoes what might represent the dimensions of agility in the supply chain (Hoek et al., 2001). According to Hoek et al., (2001), customer sensitivity includes market understanding and customer “enrichment”, but also includes initiatives such as customization, postponement and rapid response. It also means that collaborative initiatives should be driven by quick response to customer requirements (Yusuf et al., 2004). Virtual integration relates to leveraging information, but now has a focus on the wider supply chain. It also envisages access to information, knowledge and competencies of companies through Internet.
Also, process integration relates to mastering change and uncertainty internally, but now, through managing the supply chain as a whole, to mastering change across organizations. Network integration relates to cooperating to compete, and the broader critical issue of supply chain governance. It requires that companies in the chain have a common identity, which can range from commitment to agile practices, compatibility of structure, information architecture and tradable competencies.
Measurement is added as a separate element, given the focus on measuring agility in the supply chain as well as its all-round relevance for the specific dimensions.
Figure 4:Elements of an agile supply chain (Hoek, Harrison and Christopher, 2001).
The aim of the integration
The aim of integration is to ensure commitment to cost and quality, as well as achieving minimum distortion to plans, schedules and regular delivery of small volumes of orders (Yusuf et al., 2004). Supply chain agility can be discussed in terms of three inter-dependent dimensions of supply chain maturity (Venkatraman and Henderson, 1998). The three dimensions are shown in Figure 5 as customer interaction, asset configuration and knowledge leverage. The challenge of an agile supply chain will be to improve and ensure balance across the three dimensions.
According to Venkatraman and Henderson (1998) model (Figure 5), on customer interaction, the first stage of remote experience of products includes attempts to reach out to customers through sales catalogues, television demonstrations etc. By remotely reaching out to spatially distributed customers through virtual teams, a company can identify clusters of unique preferences for dynamic customization (stage 2). Also, dynamic customization can be targeted at communities of customers (stage 3), who have strong commitment to customer-specified product upgrades rather than variety as an end in itself.