member, to discuss the topic of supply chain agility. In the next four posts, Tom will define supply chain agility and then provide insights on creating a strategy, identifying opportunities and managing the execution of an agile supply chain.
The retail revolution, changing consumer tastes and evolving business relationships create significant pressure for consumer products supply chains. Traditional consumer products companies fight for every inch of market share, knowing that more nimble competitors can very quickly displace them. An agile supply chain can be the lifeblood for consumer products companies that are serving the complexities of the retail relationship. The term agile supply chain has been discussed, adapted and reiterated in an array of supply chain literature over the last several years. Studies and discussions commonly compare supply chain best strategies in terms of lean or agile. As the question of lean versus agile has been examined, researchers have concluded that ‘leagile’ (derived from combining the two words) is the best approach. Nonetheless, both lean and agile approaches have merit, though each has a separate focus. Lean practices are primarily centered on driving all forms of waste out – time, money and product. Thus, lean encourages:
- Improved efficiencies;
- Doing more with less;
- Providing inventory just in time;
- Carrying minimal inventory.
Although this sounds appealing from a cost perspective, adopting a purely lean approach may harm agility. This is especially true for innovative or new to market products, where demand cannot be predicted with a high level of certainty. The challenge is heightened when a new product experiences high demand, as companies employing a lean strategy will face long replenishment lead times and stockouts on store shelves. In the words of a major retail executive, “If we ain’t got it, we can’t sell it,” and for new products, this could be devastating. Sometimes commitment to agility is a challenge given the complex structure of supply chains. A traditional consumer products company has their own plants, contract manufacturers, sub-contractors, domestic sourcing, off-shore sourcing, freight forwarders, third party logistics providers and a myriad of other moving parts that can affect agility. With so many cost centers, departmental fiefdoms and large overhead, supply chain leaders often focus on cost-out first. If cost-out and agility were combined priorities, the motto would be “ship everything yesterday for free.” As a rule of thumb, the gains from improving supply chain responsiveness are usually much greater than the gains from improving the chain’s efficiency. For every dollar a consumer products company invests in increasing supply chain responsiveness, it typically yields a decrease of more than one dollar from the cost of stockouts and forced markdowns on excess inventory from mismatches between supply and demand. Consider the following example of a new to market product:
- Contribution margin: 40%
- Average stockout rate: 25%
- Lost contribution to profit and overhead: 10% of sales
- Loss > Profits before taxes
High profit margins, and the importance of early sales in establishing market share for new products, increase the cost of shortages. One recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting $30 billion annually. Intelligent investments in supply chain responsiveness will yield positive returns, from internal cost gains through smarter inventory practices, and more importantly, customer service improvements from accurate, complete and on-time delivery of orders. In summary, supply chain agility starts with understanding the dynamic nature of the retail marketplace and aligning supply chain practices to flawlessly serve the customer, and ultimately the end consumer. This responsive supply chain alignment is achieved through tactical expertise that pinpoints bottlenecks in the supply chain and creates efficiencies. To diagnose responsiveness, executives should consider:
- Is timely POS data used to provide early variations of consumer demand?
- Do major customers provide timely demand projections and plans for growth?
- Does purchasing, inventory and transaction information flow unconstrained throughout the supply chain?
- Are major suppliers provided business plans and demand projections?
- Are major inbound and outbound carriers provided business plans?
- Have service analytics been established to measure the performance of supply chain linkages?
- Have corrective action and contingency plans been put in place for supply chain variability?
- Are supply chain processes coordinated horizontally across the supply chain to maximize throughput?
If the answer is “no” to most of these questions, it is likely there are gaps in your supply chain’s responsiveness. If you prioritize a cost-out approach over a customer-centric focus, it is time to start addressing agility improvements. Your nimble competitors are already doing so. In the next post, I will cover the sobering realities of creating a supply chain agility strategy.