Top 5: Ways to improve logistics profitibility
ASC Guest Columnist
, August 24th, 2011
Question: What is supply chain flexibility and what are the benefits of the five flexible levers?
Expert: Dr. Anil Khurana, director, PRTM
SUPPLY CHAIN FLEXIBILITY
We prefer to call it operational flexibility because it goes beyond the supply chain and involves the entire supply and demand chain, from product launch to end-of-life management. Operational flexibility is the ability to rapidly adapt to changes in supply or customer demand by ramping up or down internal and partner operations. A company is flexible when it is able to keep customer lead times stable, despite demand spikes and supply disruptions without resorting to constant “firefighting.” Lastly, it does not mean recovery after “black swans”, or extraordinary one-time events, such as the 2011 Japanese earthquake – those are beyond the scope of steady-state operational flexibility and are best addressed by a sound business continuity and crisis readiness strategy.
REQUIREMENT FOR GLOBAL SUPPLY CHAIN EXECUTIVES
True operational flexibility is a strategic objective, because it directly impacts customers and involves top-level planning; so it fits naturally on the executive agenda. It also reflects the fact that volatility has become the norm. Economic, business, political and even geological factors have led to unprecedented uncertainty both at the supply and demand ends of the supply chain. Flexibility is not just a source of competitive advantage anymore, but fundamental to staying in business, significantly impacting both the top and bottom line.
FIVE OPERATIONAL FLEXIBILITY LEVERS
Our recent survey indicates that flexible organisations focus on i) supply assurance and proactively managing capacity, especially of critical resources; ii) relentlessly engaging in supply chain planning with upstream and downstream partners, in a continuous improvement loop; iii) further integrating their supply chain and aligning their performance metrics with those partners, so all participants speak the same language; iv) better involving product development into supply chain management and breaking down silos; and lastly, v) striving for flexibility in all functions of the company, making it a part of the company’s DNA and easier for supply chain practitioners to implement it.
We have observed that companies that successfully implemented those five levers achieved a significantly higher growth rate – up to 15 per cent annually. Flexibility typically helps avoid stock-outs and builds customer loyalty by ensuring fast and reliable delivery times for high-demand products. Hence it becomes a differentiator – business customers value consistent service levels more than ever, because it helps them to meet their customer needs, and also with their own supply chain planning.
Companies can cut costs in many ways, such as less expediting, better crisis management, fewer supply risks and financial exposure, reduced working capital through better inventory control, and generally more effective supply chain planning. The traditional focus on supply chain cost control and operational efficiency remains important, but will not be as effective in reducing operating costs without real flexibility built in.
COMPANIES WHO HAVE IMPLEMENTED FLEXIBILITY LEVERS
One consistent trait that we observed was the top-down commitment from supply chain, sales and other executives, – operational flexibility requires cross-functional teamwork. Another was a willingness to invest – operational flexibility doesn’t come for free. This is at odds with the continued focus on reducing total supply chain costs, but the investment pays off in both the top line and cost savings.
MIDDLE EAST SUPPLY CHAIN FLEXIBILITY
Middle East companies have traditionally been shielded from market volatility due to a stable domestic demand for non-volatile products (food and beverage, textiles, etc.), as well as regulatory barriers to entry and limited market transparency. This has not provided Middle East executives with the same incentives to develop operational flexibility as in other regions. But uncertainty is catching up; geopolitical uncertainty is on everyone’s mind, markets are getting deregulated, global competitors have entered regional markets, and consumer expectations are rising. This should serve as a wake-up call for supply chain leaders in the region. We advise them to start assessing current operational maturity and capabilities, to help determine which levers are appropriate and feasible for increasing.