Addressing Supply Chain Risks Through Agile Strategies

advertisement
ADDRESSING SUPPLY CHAIN RISKS THROUGH AGILE
STRATEGIES
Richard W. Monroe and P. Richard Martin, Wall College of Business, Coastal Carolina
University, Conway, SC 29528, (843) 349-2527, [email protected]
ABSTRACT
In recent years ‘supply chain design’ has been a primary research topic. Another
important topic is ‘supply chain risks’. This paper proposes a framework for supply
chain design taken from a risk perspective. Once the supply chain is viewed from the
risk perspective we offer agile supply chain approaches as prescriptive strategies for
mitigating supply chain risks.
Introduction
Today’s global business environment is characterized by shorter product life cycles, more
demanding customer requirements and a variety of supply chain risks. In this
environment, organizations seek new strategies to address risks and to enhance supply
chain performance. The supply chain is characterized by many exchanges that occur in
the overall process of planning, sourcing, making and delivering products, services and
the related supply chain information. As these exchanges occur and the material moves
through a series of providers and ultimately reaches consumers, the efforts of several
parties need to be aligned – this is referred to as the supply chain [26].
The following definition for “supply chain management” offers further clarification:
“Supply chain management is the integration of key business processes from end user
through original suppliers that provides products, services, and information that add value
for customers and other stakeholders” [10].
By viewing supply chains from a systems perspective, many of the observations from Jay
Forrester will become very relevant. According to Forrester [8], a complex system is a
“high order, multiple loop, nonlinear feedback structure.” Feedback and nonlinearity are
important keys that may result in “counter intuitive behavior” in the complex system [8].
Today, most supply chains are global in nature which makes them large and complex
systems by virtue of the way they have evolved. Conklin [5] concludes that in today’s
global marketplace, it is beyond any single company ability to realize or adjust to market
opportunities in a timely manner due in part to a lack of experience and skill sets. As
large, complex systems, global supply chains share many of the characteristics associated
with global systems models from social and economic research such as those developed
by Forrester and his associates [8][9]. Among these characteristics are concerns
regarding the modeling of global systems. Morgan and Henrion offer a list of five
shortcomings:

“inadequate and incomplete understanding of the systems being modeled and a
concomitant lack of attention to model verification;

failure to be sufficiently specific about the objectives of the modeling project;

failure to examine carefully the implications of uncertainty in input variables
and model time constraints;

inability to deal with the stochastic elements in the systems being modeled; and

difficulties arising from the ideological perspectives of the analysts” [23, p.
297].
The stochastic nature of global systems is further subdivided into:

the problem of variability and

major changes in the operating environment [23, p. 299-300]
“… although a good model of the system may tell you how it will respond to any
hypothetical set of events or changes in the operating environment, predicting such
events is generally impossible” [23, p. 300].
We believe that the systems observations are entirely appropriate for global supply
chains. Supply chain agility is needed to address the complexity of these global supply
chain systems and more specifically agility is needed to mitigate (1) problems with
variability and (2) major environmental changes which are event-based. This
characterization corresponds with the modeling challenges from the global systems
perspective as described by Morgan and Henrion [23]. The other lesson we take from
systems thinking is the use of risk management which will be discussed further later in
the paper. First we look at the literature related to supply chain design and supply chain
agility.
Supply Chain Design and Agility
The concept of Design for Supply Chain Management (DFSCM) and its use by HewlettPackard (HP) was first introduced by Lee and Billington [12] and further explained by
Lee [13]. Based on these references, the idea of DFSCM was well-established at HP in
the early 1990s. The primary issues that were addressed dealt with inventory issues and
were based on a global supply chain inventory model [12][14][15]. Embedded within
DFSCM at Hewlett-Packard were many different supply chain strategies aimed at various
supply chain issues that HP was attempting to address. Included among the list of
supply chain strategies are:

Delayed product differentiation

Commonality

Standardization

Process steps switching

And Postponement [11][12][13][14][15][16][17][18].
Many of these strategies or principles are aimed at flexibility, agility and logistics cost
reduction. First among the issues addressed by HP were the combined factors of product
design, inventory placement and design for localized markets [14].
DFSCM is also characterized by the formation of analysis teams and the use of academic
researchers to guide or to supplement the resources within HP [17]. One DFSCM team is
described as being composed of members from “finance, marketing, manufacturing,
distribution and engineering” [17]. This cross-functional collaboration is a key factor for
achieving internal integration within supply chain functions. Internal integration is
suggested as a key requirement to support supply chain agility. Allowing sufficient time
for analysis is another significant factor which makes the HP DFSCM approach unique
[17][11]. Among the academic participants, Dr. Hau Lee from Stanford University has
been the most prominent participant in the various HP initiatives but other academics
have also participated. The benefits from this industry-academia collaboration should not
be underestimated. The academic may bring a particular expertise in one or more
analytical technique and more importantly the academic may bring lessons learned from
other business organizations which may not be accessible by HP management. Those
examples are the main benefits anticipated while individual cases may lend other benefits
from industry and academia working together.
While the intent of many of these supply chain initiatives at HP has been to provide
flexibility and to move towards being more agile, the success of agility tends to be
exposed when there is an adverse condition related to either supply or demand. There are
several excellent examples of supply chain agility where the agile firm succeeded while
the firm that lacked agility failed. Nokia and Ericsson were faced with a supply chain
disruption due to a fire at a facility a radio frequency (RF) chip in New Mexico in March
2000. Nokia executed design changes, quickly worked with alternate suppliers and
implemented their contingency plan within a five day period after the fire. Ericsson was
caught without a plan and was in the midst of eliminating alternate suppliers. They
lacked a coherent contingency plan, experienced drastically reduced production levels for
months and delayed a new product introduction. Nokia gained market share through their
agile response and at the expense of Ericsson [19].
In 1999, an earthquake in Taiwan disrupted the supply of computer components to the
United States and significantly impacted major computer makers including Apple,
Gateway and Compaq. While those companies were unable to make computers, Dell
changed prices and altered their offerings to promote those computer configurations that
could be made without the components sourced from Taiwan. This agile response to the
disruption by Dell also led to an increase in market share at the expense of the
competitors who were not agile [19].
Lee offers the following list of characteristics or “six rules of thumb” for designing
agility into the supply chain:

“Provide data on changes in supply and demand to partners continuously so they
can respond quickly. … Ensuring that there are no information delays is the first
step in creating an agile supply chain.

Develop collaborative relationships with suppliers and customers so that
companies work together to design or redesign processes, components, and
products as well as to prepare backup plans.

Design products so that they share common parts and processes initially and differ
substantially only by the end of the production process. I call this strategy
“postponement.” … This is often the best way to respond quickly to demand
fluctuations because it allows firms to finish products only when they have
accurate information on consumer preferences.

Keep a small inventory of inexpensive, non-bulky components that are often the
cause of bottlenecks.

Build a dependable logistics system that can enable your company to regroup
quickly in response to unexpected needs. (this can be accomplished through an
alliance with a third-party logistics provider).

Put together a team that knows how to invoke backup plans” [19].
We agree with Dr. Lee’s suggestions but we believe that there needs to be a few additions
to this list. From our research and synthesis of many sources we offer the following
supplemental ideas:

Foster and reinforce internal integration through cross-functional teams working
on supply chain issues. This is based on the HP DFSCM teams and this may
supplement or overlap with the team for “backup plans” suggested by Dr. Lee.
We suggest this because we believe that firms that lack agility are very likely to
lack internal integration.

Rationalize and select the method for integration with key suppliers. Potential
options for external integration include: Information Sharing, New Product
Development or Relationship [21]. The nature of the supplier-buyer relationship
requires very different resource involvement and very different approaches to
achieve the desired integration.
Agility and Risk
Agility in the supply chain is described as being able to “respond to sudden and
unexpected changes in markets. Agility is critical, because in most industries, both
demand and supply fluctuate more rapidly and widely than they used to. Most supply
chains cope by playing speed against costs, but agile ones respond both quickly and costefficiently” [19]. Clearly, a one dimensional response by an organization is not
acceptable and does not constitute agility. Common sources of supply chain risk to
performance have previously been investigated; location, logistics, order processing,
purchasing, quality, supply lead time, supply availability, and demand [3][2][15].
Competitiveness from an agility perspective, depends upon companies be able to adapt
their supply chains efficiently while building strong relationships with customers and
suppliers quickly [28]. Supply chain agility becomes the key to adapting to market
variations more efficiently by integrating with suppliers more effectively [20]. As more
companies pursue production capability ability by outsourcing or off-shoring, explicit
risk factors increase.
The connection between agility and risk is implied in many different references. We
suggest that the use of agility as a response to risk needs to be addressed in a more
explicit manner. We also suggest that many of the scenarios in existing supply chain
agility research can be more appropriately characterized as risk management. Extended
supply chains increase the risk factor for operational and inter-firm linkages. Companies
attempt to manage this risk by agile practices. A case can be made that the selection,
management, and coordination of these suppliers take on the standard problems
associated with project management. Olsson [25] addresses aligning projects with the
company’s business strategy through internal and external flexibility where external
flexibility is more related to the definition of agility presented by Baker (1996).
Extended supply chains need the ability to respond to risk from market and economic
changes by choosing the most effective resource (supplier) at the appropriate time just as
projects match resources to requirements by becoming temporary extended organizations.
Supply disruptions from the various examples constitute what we believe is a greater
magnitude of “fluctuation” that goes beyond the fundamental supply fluctuations [10]
that are described in the definition of supply chain agility. The need for backup plans to
deal with supply disruptions is one indication of the risk management for the supply
chain. We think the risk aspect should be given greater emphasis. Supply chain events
are the situations where supply disruptions occur and these events require those backup
plans or detailed contingency plans. Some of the details for the planning that is required
are provided by Lee [19], Collin and Lorenzin [4] and Engelhardt-Nowitzki and
Zsifkovits [6].
For the purposes of developing a model for supply chain agility we suggest that risk
management is the appropriate framework with sublevels for variability and event-based
changes of greater magnitude. The details of the proposed model are presented in the
following section.
Supply Chain Agility and Risk Model
In order to design agility into the supply chain, the cross-functional design team must
consider the full range of risks. The full range of risk includes Complexity; Demand
fluctuation; Supply fluctuation; and major SC Events (contingency planning and SC
event preparedness). This description and earlier discussions in this paper are combined
to develop the following model for SC Agility and Risk.
Figure 1. Design for Supply Chain Risk Model
Source: adapted from Monroe and Martin (22)
This model differs from most of the basic supply chain agility discussions in the
literature. The various strategies that HP has employed are among the “Appropriate
Agile Strategies” but they are primarily “appropriate” only for “SC Variability.” So the
proposed model involves drawing strategies from other sources and expanding the risk
elements beyond the commonly used definition of the environment where supply chain
agility is needed. “SC Major Events” require specific agile strategies and require
significant planning, scenario analysis and cross-functional teams to prepare the needed
contingency plans. “SC Complexity” is another large risk element that needs to be
addressed in a different manner from “SC Variability” and “SC Major Events.” Supply
chain rationalization, strategic alliances, long-term “evergreen” contracts are just a few
examples of strategies that may be employed to address “SC Complexity” [24].
By subdividing risk and then matching each risk element category with appropriate agile
strategies we believe that supply chain issues will be addressed in a more effective
manner. This approach of using agility to proactively address the full spectrum of supply
chain risk is what we suggest is a framework that we might also call ‘design for supply
chain agility.’
Conclusions
This paper proposes a “risk-agility” model of the supply chain which takes a very
definitive view from a risk management perspective. The model incorporates “Risk
Elements” which are further specified as “Supply Chain Complexity”; “Supply Chain
Variability”; and “Supply Chain Major Events”. These different categories of Risk
require Agile Strategies which must be developed and implemented in a proactive
manner.
Using this model as a prescriptive approach for supply chain design is
suggested as a way to achieve better SC performance, meet customer requirements and
do so at a lower overall supply chain cost.
The proposed model is strongly influenced by the Six Sigma “Design for X” approach
[27]. The model is labeled as “design for supply chain risk” but has also been described
as “design for supply chain agility” in previous research [22]. The idea is that any
perspective can be substituted for “X” depending on the researcher’s/company’s
preference.
Future research should be developed to investigate the practicality and application of this
model in actual organizations. This may also be combined with Action Research where
the model is first employed to assist the organization when developing strategies for
providing greater supply chain agility. Results of such research should validate the
usefulness of this model.
REFERENCES
[1]. Baker, J. 1996. “Agility and Flexibility: What’s the Difference?” working paper, Cranfield School of
Management.
[2]. Baramichai, M., Zimmers, E.W., Marangos, C.A. 2007. “ Agile supply chain transformation matrix: an
integrated tool for creating an agile enterprise”, Supply Chain Management: An International Journal, 12,
5, 334-348.
[3]. Christopher, Martin and Lee, Hau. 2004. “Mitigating Supply Chain Risk through Improved
Confidence,” International Journal of Physical Distribution &Logistics Management, 34, 5: 388-396.
[4]. Collin, Jari and Lorenzin, Dennis. 2006. “Plan for supply chain agility at Nokia: Lessons form the
mobile infrastructure industry,” International Journal of Physical Distribution & Logistics Management, 36,
6, 418-430.
[5]. Conklin, J.M. 1994. “Extending capabilities through contract manufacturing”, Electro Internatiaonl
Conference Proceedings, pp. 145-153.
[6]. Engelhardt-Nowitzki, Corinna and Zsifkovits, Helmut E. 2007. “Creating Adaptive Supply Chain
Networks,” International Journal of Agile Manufacturing, 10, 1, 37-45.
[7]. Fetzinger, Edward and Lee, Hau L. 1997. “Mass Customization at Hewlett-Packard: The Power of
Postponement,” Harvard Business Review, January-February, 116-121.
[8]. Forrester, J.W. 1969. Urban Dynamics, MIT Press, Cambridge, Massachusetts.
[9]. Forrester, J.W. 1971. World Dynamics, Wright-Allen Press, Cambridge, Massachusetts.
[10]. Lambert, Douglas M., Cooper, Martha C., and Pugh, Janus D. Supply Chain Management:
Implementation Issues and Research Opportunities. The International Journal of Logistics Management,
9:2, p. 1, 1998.
[11]. Laval, Claude, Feyhl, Marc and Kakouros, Steve. 2005. “Hewlett-Packard combined OR and expert
knowledge to design its supply chains,” Interfaces, 35, 3, 238-247.
[12]. Lee, Hau L. and Billington, Corey. 1992. “Managing supply chain inventory: Pitfalls and
opportunities,” Sloan Management Review, 33, 3, 65-73.
[13]. Lee, Hau L. 1993. “Design for supply chain management: Concepts and examples,” In R. Sarin
(editor) Perspectives in Operations Management, Kluwer, Boston, pp. 43-65.
[14]. Lee, Hau, Billington, Corey, and Carter, Brent. 1993. “Hewlett-Packard gains control of inventory
and service through design for localization,” Interfaces, 23, 4, 1-11.
[15]. Lee, Hau L. and Billington, Corey. 1993. “Material management in decentralized supply chains,”
Operations Research, 41, 835-847.
[16]. Lee, Hau L. and Tang, C. S. 1997. “Modelling the costs and benefits for delayed product
differentiation,” Management Science, 43, 1, 40-53.
[17]. Lee, Hau L. and Sasser, Marguerita M. 1995. “Product universality and design for supply chain
management,” Production Planning & Control, 6, 3, 270-277.
[18]. Lee, Hau L. and Billington, Corey. 1995. “The evolution of supply-chain-management models and
practice at Hewlett-Packard,” Interfaces, 25, 5, 42-63.
[19]. Lee, Hau L. 2004. “The Triple-A Supply Chain,” Harvard Business Review, October, 2004.
[20]. Mason, S.J., Cole, M.H., Ulrey, B.T., Yan, L. 2002. “Improving electronics manufacturing supply
chain agility through outsourcing”, International Journal of Physical Distribution & Logistics Management,
32, 7, 610-620.
[21]. Monroe, Richard W. and Martin, P. Richard. 2008. “Achieving supplier integration for the agile
enterprise,” 2008 ICAM Conference.
[22]. Monroe, Richard W. and Martin, P.Richard. 2008. “Designing Agility into the Supply Chain,”
ICAM International Conference on Agile Manufacturing Proceedings, Kalamazoo, MI.
[23]. Morgan, M.G. and Henrion, Max. 1990. Uncertainty: A guide to dealing with uncertainty in
qualitative risk and policy analysis, Cambridge University Press, Cambridge, UK.
[24]. Monczka, R., Trent, R. and Handfield, R. 2001. Purchasing and supply Chain Management, 2nd
edition, Southwestern Publishing, Cincinnati, Ohio.
[25] Olsson, N.O.E. 2008. “External and internal flexibility – aligning projects with the business strategy
and executing projects efficiently”, International Journal of Organization and Management, 1, 1, 47-64.
[26]. Stock, James R. and Lambert, Douglas M. Strategic Logistics Management, Fourth Edition,
McGraw-Hill/Irwin: New York, 2001.
[27]. The Certified Six Sigma Black Belt Primer. Quality Council of Indiana, 2001.
[28]. Tolone, W.J. 2000. “ Virtual situation rooms: connecting people across enterprises for supply chain
agility”, Computer Aided Design, 32, 2, 109-117.
Download