Agile Supply Chain Principles and Practices - Term Paper Example

A critical review of Agile Supply Chain Principles & Practices Introduction Agile implies an exceptional ability to be nimble. It is the ability of the firms and the partners in the supply chain, to sense the changes in the market place, and react to the same very fast. Agility principle mainly focuses on a nimble organization and the ability to reconfigure the business processes, resources and systems, in rapid a response to the changing competitive environment. Companies that focused on lean principles to have the strategic advantage of cost leadership, are rethinking their priorities, some of them facing a dilemma of whether or not, and how of a transition to an agile supply chain. 1.0 The agile supply chains principles Technical superiority and ability to sense the market changes in real time, and to be able to act in real time, are some of the demands of modern agile supply chain. But today’s systems are still not rigorously tested and proven, hence they cant be treated as mature. A lot of work needs to be done before they are used and considered proper instruments agile business systems. IT plays an important role in ensuring visibility of agility and the benefits to customer and other partners. IT has been making its presence felt in manufacturing, helping mass customization, having an impact on paperless transactions in upstream supply chain, minimizing cost of procurement and inventory holding. Enterprise Resource Planning adopted in global businesses, has helped them to be process focused and lean. Technology has been continuously upgraded, helping the industry to cope with vagaries of customers demand changes. The firms have continued focus on lean operation and got the strategic cost advantage. In spite of the progress in larger companies, the medium and small firms have not become involved In technology upgradation, and automation of the customer-supplier, interface. These companies have got to participate in overall technology changes, as otherwise, supply chains cant be a homogeneous and smooth system, as some entities will be holding back the progress. The agile supply chain management emphasizes the need to develop quick sensing ability in the supply chain. Anderson (1997), dwelling on the agile supply chain principles, recommends customer segmentation based on service needs of customer, differentiating the product close to customer, listening to the signals of market changes, and reworking the plans, developing technology strategically, and customizing logistic network. Sidhu (2006), on the other hand emphasizes, agile IT systems, and an agile organization structure for a nimbler supply chain network. Craig(2004) says that the assessment of the network is very crucial for the agility. Assessing the strategy and objectives, along with performance measure and contribution of Information Systems to be analyzed vis a vis the level of agility needed, in various customer segments and the components of supply chain responding to the customer segments. Mayor (2004), recounting the experience of honorees of Agility Award, says that Information technology makes a big difference in the flexibility and quick response capability of manufacturers and their service chain partners. Examples given include, how the real time shipment status data, helped avoid constraints, by helping to route deliveries, through least busy service centers, and also about how the sales data and inventory data relayed to production planning system, helped to manufacture products, based on updated customer demands. 1.2 Lean Versus Agile Systems Companies that could compete effectively, due to lean principles, were initially under the impression that, “lean is agile as well”.. But that was not to be. Lean with no inventories or buffer stocks were not in a position to respond to changes in demand pattern. Bartels (2006) opines that lean is not adequate in today’s economy, and agility can make the difference. Marshall and Fisher (1997) deal with the differences in approach between Lean Supply Chain systems and Agile supply chain systems. While the goal of lean system is lowest cost, agile system has the goal of quick response even at a higher cost. Lean strategy aims at very high capacity utilization for lowering per unit cost, the agile system would plan for lower capacity utilization to take care of last minute changes in demands from customers. Lean systems would require supplier selection on the basis of cost with acceptable level of quality. Agile systems select supplier on the basis of speed and flexibility, though reliability and acceptable quality would also form the needed parameters. Lean system would not encourage lead time reduction at a higher cost, the agile system would accept lead time reduction even at a higher cost. Chopra (2005), links the strategic choice between lean and agile systems with the life cycle of the product in question. According to him, products at introductory and growth phases would have greater uncertainty of demand and agile strategy is appropriate. On maturity, the demand would stabilize and lean strategy could be adequate. This could mean at penetration and growth stages, higher price (skimming) could be charged and on maturity, the price competition would be intense and lean strategy would ensure lower unit cost and the lowest price offering.. A contrasting argument would be the penetration pricing strategy on introduction stage of life cycle of the product. The price is increased during growth stage and maturity stage, to cover full cost plus profit . In this pricing strategy, the agile strategy would be applicable during growth and maturity, when more variety of products would be needed. The strategic fit and alignment, between enterprise strategy, marketing strategy and supply chain strategy is very crucial in such an environment. Thus the stage of the product in the life cycle would also be crucial for determining the possible choice between lean strategy and agility strategy. Martinez, et al (2003), discuss the applicability of risk pooling concept in USAF. Risk pooling concept says that benefits are derived from transforming an inventory system from fully decentralized system to more centralized network system. Total demand variability is reduced in this case, as higher demand from one customer will be offset by a lower than normal demand from another customer, So the variability of aggregate demand is reduced, thus the safety stock required to address this variability will come down. By following this principle, US Air Force was able to reduce the inventory at decentralized locations, and shift some of that to higher echelon inventory, at a central location, which could be shipped to any of the decentralized locations, if needed, thus increasing service level, even with an overall reduction in aggregate inventory. 1.3 Combining Lean strategy with agile strategy Naylor, et al (1997) have described the advantage of combining Lean strategy with Agile strategy. The supply chain normally could take advantage of combining these two, and a paradigm shift could be possible. Particularly the small and medium size suppliers could benefit from lean strategy and where as the down stream partners like Finished goods warehouses, shipping units and distributors with retailers’ part of supply chain could benefit from agile principle. This could provide advantage of cost leadership for suppliers at one end of supply chain, and flexibility and fast response to customer demand changes and variability in consumption pattern at the other side of supply chain. 1.3.1 Relationship and trust IT enabled relationship management is emphasized by Anderson (1997). The system design must emphasize the mutual benefits cooperation and trust for all partners, including distributors, retailers, customers, dealers, transporters, first stage and second stage vendors Common performance goals and performance measures can go a long way for ensuring trust. Contribution and benefits accruing to each partner must be clearly spelt out. To ensure interdependence decision rights at each level to be emphasized. Mechanism for conflict resolution should be in place. Bull whip effect due to lack of coordination and cause of great mistrust to be kept in mind. Correct evaluation of contribution and division of surplus value generated to be documented clearly. In any case the confidence building has to be done over a period of time. For ensuring good intimacy with customer, the segmentation in lines with industry type and sometimes according to the distribution. This could have helped lowering of cost, but , other ways of segmentation, with different criteria needs to be evolved, Customer Segmentation for determining the quickest way to know their requirements and changes in the requirements, has to be based on capturing those common features of the need, that helps designing novel products and services for them, and delivering to them in most cost effective ways. Customer need determination can help customization of product offerings. A dedicated effort is needed round the clock to determine changes in customer needs. Segmentation can ensure that customization is in the right strategic direction While working on the collaboration, usually measures are needed to work out the contribution and costs at each stage of supply chain. This can be done in a transparent manner by adopting activity based cost system.. . Most enterprises have a large opportunity to better align their facilities, in a particular customer relationship, with the return that customer generates. To do so, companies must analyze the profitability of segments, plus the costs and benefits of alternate service packages, to ensure a reasonable return on their investment and the most profitable allocation of resources. To strike and sustain the appropriate balance By having an integrated view of the supply chain, most manufacturers can realign and balance the facilities, by having a good idea of how customer perceptions and needs are changing. New revenues generated by customer intimacy can be used for these changes. The profitability and cash flow generation from each segment would be under review and product service package alternatives needed for the segment would be constantly explored and experimented. Economic considerations would need to be delicately balanced against the gains in customer satisfaction. Similarly the opportunity exists for helping suppliers with value enhancing opportunities. Vendor managed inventory could be an example. Using the extended enterprise concept the vendors can be given more real time information on customers new demands and new products to be offered and cost of new product development are sometimes shared with vendors and they are facilitated with long term contracts to enable them to invest in additional or balancing facilities, tooling, infrastructure, etc. Manufacturers go to the extent of providing assisting or arranging finance. 2.0 Discussions on Case study 2.1 Existing versus redesigned system Existing network has the elements of multiple points of supply , with a non streamlined network. Every MRO point and OEM point have to deal with each of the stage 1 suppliers and there will be unnecessary competition, mistrust and confusion. Similarly Stage 1 suppliers also deal with too many, stage two suppliers. There cannot be any vendor selection based on capabilities and too much of mistrust once again. The system cannot be suitable for operation of an agile system, as the necessary ingredients of success are not there. Also the need to treat AOG orders, MRO orders and OEM orders are to be treated differently. AOG orders being random in nature, would need higher level of inventory to be able to respond quickly. This needs to be treated as a different segment. MRO and OEM orders can be predicted on the basis of past data. Analysis of data and prediction of consumption can improve the service level. .In the New redesigned network , the streamlined flow is ensured by allocating customization in some cases .Competition has been either eliminated or curtailed to a great extent. Vendor selection system has been introduced, based on the supplier skills capabilities and past performances. This is for enhancing mutual trust and cooperation between partners of the redesigned agile supply chain system.. 2.2 Role of Info system .Information system transforms the previous unorganized system, into streamlined, agile system. As all the orders and requests, as well as data pass through this system, the duplication is avoided. Order management will be done on the basis of real time data. Information system makes this network a transparent system. That enhances customer trust and confidence as well as the trust of all other partners including MRO, OEM, AOG, Suppliers at level 1 and level2. as well as the processors at the central facility and warehouse people.. Info system helps us create different strategies and streamline and balance the strategies and approaches. This can help determine performance measures for all partners, set the goals and objectives, determine contribution and the way to distribute surplus among the partners. This is an important enabler for setting stage for trust and collaboration and understanding, so vital for the agile supply chain management system. Info system helps to predict demand, provide solutions to problems of bottlenecks, provide cost effective alternatives to partners. Info system provides visibility to the operation and enhances customer confidence. Info system also helps day to day operations, operational decision making and optimization.. Tactical decision making by the vendors of stage 1 and stage 2 is also helped and facilitated by data generated by info system. This also helps bring about further opportunities of improvement. Changes in the network can be visualized on the basis of the data provided by the system. Hence the role of IT is very crucial for the agility of the Supply chain system. 2.3 Role of Supplier Development agency: . Up stream side of the network, the chance of competition is already reduced. Now, cooperation and collaboration can be enhanced by generating interdependence by the supplier development group. This group can develop different sets of competencies with different Suppliers at level 1 and level two. Also interdependence can be increased by providing other motivators like, preference for contract terms etc. By providing opportunity to each and every vendor on each footing the trust of the vendors can be gained. Use of performance data, visibility of equal treatment, sharing of benefits of agile supply chain and acceptable criteria for evaluation important aspects, the development group can use to improve trust and credibility with vendors and other partners. 2.4 Marrying lean with agile . combining lean-agile strategies will help the organization take advantage of low cost supplies from upstream and fast response system on the downstream. Upstream can provide efficient lean operation with the benefits of cost leadership, high utilization of assets, minimization of setup time, scrap, wastage etc. Downstream needs to be nimble, agile and quick response organization. Here emphasis will be to reduce the lead time, even if the cost goes up due to this. This will ensure the variability in demand is taken care and there are no lost sales. It is very important to determine the exact point at which the decoupling between lean network and agile network to be done. There are three choices. If decoupling is done at the end of kitting, , the treatment unit and kitting will have cost Leadership, But leverage for prioritizing based on customer demand is lost. If the decoupling is done before the treatment facility, then cost advantage of lean production at treatment and kitting is lost. But the agility of the network will be of higher level. But capacity of both may have to be enhanced due to ensure some flexibility and buffer capacity for unexpected need. So the decoupling at this level looks to be most logical, at the beginning of treatment plant Conclusions and recommendations 1. OUTWARDLY focused enterprises need to be conscious of the opportunities for improvement and choose strategies and goals in a aligned way to ensure the opportunities are used ti the fullest extent. 2. The Supply chain system focus ensures that these opportunities are explored and used. 3. Agile Supply chain can ensure value creation for all partners. Agreed performance measures go a great way to ensure trust and credibility of the system 4. Information system investment can greatly enhance visibility of operation and foster cooperation and collaboration. Vital data for quick response can be generated in real time by the IT. Critical … 8 5. Mindset of agility is important across the Supply chain. 6. To maximize the advantage, combining lean systems in the upstream and agile systems in the downstream can be a great advantage. References : Anderson, D .L, Frank ,F. B., & Favre, D. J..(1997),”Seven Principles of Supply Chain”, Supply Chain Management Review; April,1,1997 Hill, T.(1993),Manufacturing Strategy ,Mcmillon: London Naylor, JB, Nain M. M.,Berry, D.(199”)Legality: Interfacing lean and agile”, International Journal of Production, p107-118 Sidhu S,(2006)” Seven principles of agility”, Supply Chain Leader, Spring,2006 Martinez, S.L.,Amostegui.,A.M Brady, S. P.” Improving logistic pipeline”, Air force Journal of Logistics,Vol.126, 4,. Sidhu,S.(2006),” 7 Principles of Supply Chain,” Supply Chain Leader, Spring, 2006. Mayor , T.(2006) Supply Chain, CIO 27 November 2006 ( www.cio.com/archives/081504/supply.htm) Marshal & Fisher(1997), Efficient Vs responsive,HBR,March97,pp83-93 Chopra,S,, Mandlel, P.(2005),Supply Chain Management, Prentice Hall, New Delhi Naylor, JB, Nain MM, Berry D(1997),”Leagility” International Journal of Production Economics, Vol62, pp107,118 Bartels N.(2006), Agile is more important than lean, MBT Magazine, Read More