Supply Chain Frontiers issue #21. Read all articles in this issue
Domestic auto suppliers in Japan sustained damage from the 6.8-magnitude earthquake that hit the country this July, causing shut downs at major manufacturers such as Toyota and Honda, because the supply of key components was interrupted. The manufacturers’ just-in-time operations are heavily reliant on the suppliers hit by the quake. The episode highlights one of the most important capabilities of supply chains: flexibility.
Developing contingencies for earthquakes is perhaps an extreme example, but the ability to flex with sudden market changes is gaining in importance. It is one of the defining characteristics of future supply chains identified by attendees at the Future Capabilities in the Supply Chain symposium that took place this May at the MIT Center for Transportation & Logistics (MIT-CTL).
One company explained how it has created a “playbook” of contingencies to help it manage new production transitions, one of the most volatile periods experienced by companies. The playbook provides a set of contingencies and responses that managers can use as a new product takes the place of an old one. It was created in response to a product introduction several years ago, when the company’s sales department dropped the price of the new offering and demand skyrocketed. The spike jolted the company from an excess-capacity situation to one where it had no spare capacity. Production systems went into overdrive to cope, further disrupting schedules and exacerbating the capacity shortage.
A possible approach to building flexible capacity is to make it easy to adapt contracts with suppliers and contract manufacturers to demand changes. Such a contract might specify baseline production levels with a supplier that can be exceeded when/if necessary for a pre-negotiated price. For example, contingency clauses might require suppliers to ramp up production by 25% at a week’s notice and 100% at three weeks’ notice under certain circumstances.
Customers can be encouraged to play their part by agreeing to flexible services. Chris Caplice, Executive Director of MIT-CTL’s Master of Engineering in Logistics program, pointed to online grocer Peapod as a proponent of this approach. The company offers lower delivery costs to customers that agree to wider, six-hour delivery windows or off-peak delivery times.
A tactic suggested by MIT-CTL director Yossi Sheffi is to build options into operational plans that can be taken up at a future date. Examples include vetting possible backup suppliers, building relationships with government agencies, and adding some surplus capacity. These measures may require additional funding, but, as Sheffi pointed out, any management decision that removes an option costs the organization in terms of reducing its flexibility and hence capacity to act when the need arises. Postponement, where the final configuration of a product is delayed, is another tactic companies may consider.
Empowering employees to make decisions at the local level also enhances flexibility, said Sheffi. As supply chains become more global more knowledge resides with frontline employees, and enabling these workers to take action rather than waiting for a decision to percolate through the chain of command can prove crucial in emergencies. One attendee noted that owing to the different time zones involved, it can take two to three days to coordinate a solution to an urgent problem between counterparts in the United States and Asia.
An impediment to flexibility cited by some attendees is the highly structured and rigid nature of finance functions. This can be particularly obstructive when planning three- to five-year supply chain goals. A possible solution: try to bring the CFO onboard when setting important supply chain objectives.
But there are limits to how flexible companies can be. Some products provide little leeway for coping with demand surges. For example, a food crop can have a three-year planning cycle before the produce is fully grown, presenting obvious limitations on what responses the organization can put in place to cope with a sudden shift in demand.
For more information on the Future Capabilities in the Supply Chain symposium contact Jim Rice, Director of CTL’s Integrated Supply Chain Management program.