Creating the responsive supply chain

Creating the responsive supply chain
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Published Date:25-10-2017
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Creating the responsive supply chain 5 M M Product ‘push’ versus demand ‘pull’ M M The Japanese philosophy M M The foundations of agility M M A routemap to responsiveness One of the biggest challenges facing organisations today is the need to respond to ever increasing levels of volatility in demand. For a variety of reasons product and technology life cycles are shortening, competitive pressures force more fre- quent product changes and consumers demand greater variety than ever before. To meet this challenge the organisation needs to focus its efforts upon achiev- ing greater agility such that it can respond in shorter time-frames both in terms of volume change and variety change. In other words it needs to be able to adjust output quickly to match market demand and to switch rapidly from one variant to another. To a truly agile business volatility of demand is not a problem; its proc- esses and organisational structure as well as its supply chain relationships enable it to cope with whatever demands are placed upon it. Agility in the sense of the ability to match supply with demand is not necessar- ily synonymous with ‘leanness’. Much has been written about lean manufacturing 1 – often with reference to the automobile industry. The lean approach to manu- facturing seeks to minimise inventory of components and work-in-progress and to move towards a ‘just-in-time’ environment wherever possible. However, while ‘leanness’ may be an element of ‘agility’ in certain circumstances, by itself it will not enable the organisation to meet the precise needs of the customer more rap- idly. Indeed it could be argued that, at least until recently, the automobile industry, for all its leanness, is one of the least agile industries around. Webster’s Dictionary makes the distinction clearly when it defines lean as ‘containing little fat’, whereas agile is defined as ‘nimble’. Agility has many dimensions and the concept applies as much to networks as it does to individual companies. Indeed a key to agile response is the presence of 99 agile partners upstream and downstream of the focal firm. Whilst organisations may have internal processes that are capable of rapid response, their agility will still be constrained if they face long replenishment lead times from suppliers, for example. Agility, as we have said, is not synonymous with ‘leanness’ but it can build upon it. Leanness in a sense is about doing more with less. It owes its origins to the Toyota Production System (TPS) and its pre-occupation with the reduction or elimi- 2 nation of waste (muda). Lean manufacturing is characterised by ‘level schedules’, i.e. a forward plan to ensure that the use of resources is optimised. The backdrop against which lean thinking originated was the Japanese auto- mobile industry of the 1970s. This was an industrial context typified by the volume manufacture of relatively standard products (i.e. low levels of variety) and a focus on achieving efficiencies in the use of resources and in maximising economies of scale. In this type of situation, i.e. standard products and relatively predictable demand, experience has shown that lean practices work well. However, in market environments where demand is uncertain, the levels of vari- ety are high and consequently volume per stock keeping unit (SKU) is low, then a different response is required. Whilst efficiency is always desirable, in the context of unpredictable demand it may have to take second place to ‘effectiveness’ as the main priority for supply chain management. By effectiveness in this context is meant the ability to respond rapidly to meet the precise needs of an often frag- mented marketplace. In other words, rather than the emphasis being on producing standard products for mass markets ahead of demand, the requirement becomes one of producing multiple product variants (often customised) for much smaller market segments in response to known demand. Figure 5.1 reflects the different contexts in which the ‘lean’ and ‘agile’ para- digms might work best. Figure 5.1 Agile or lean? ‘Lean’ works best in high volume, low AGILE variety and predictable environments ‘Agility’ is needed in less predictable environments where LEAN the demand for variety is high Low High Volume per variant LOGISTICS & SUPPLY CHAIN MANAGEMENT 100 Variety/Variability Low HighIn reality, within the same business it is likely that there will exist the need for both lean and agile supply chain solutions since some products will have predictable demand whilst for others demand will be far more volatile. In fact it can be argued that rather than the conventional ‘one size fits all’ strategy for supply chain design, the need today is for multiple supply chain solutions. One way to identify what types of supply chain strategies might be appropriate in different circumstances is to position the products in an organisation’s portfolio according to their supply and demand characteristics. By ‘supply characteristic’ is meant the lead time of replenishment. This could be replenishment of the product itself if it is bought in (e.g. a retailer) or of components in the case of a manufacturer. Clearly, if replenishment lead times are short then a different supply chain strategy can be employed than when lead times are long. Demand conditions may be characterised by the predictability of demand. One measure of demand predictability is the variability of demand; by definition demand that does not vary much from one period to another is easier to predict. Figure 5.2 suggests four broad generic supply chains strategies dependent upon the combination of supply/demand conditions for each product. Figure 5.2 Generic supply chain strategies Hybrid Lean De-couple Plan and through optimise postponement Kanban Agile Continuous Quick replenishment response Predictable Unpredictable Demand characteristics In those cases where demand is predictable and replenishment lead times are short, then a ‘Kanban’ type of solution is indicated. This is a philosophy of continuous replenishment where, at its extreme, as each product is sold or used it is replaced. In the top left-hand box where lead times are long but demand is predictable then a ‘lean’ type approach will be appropriate. Materials, components or products can be ordered ahead of demand and manufacturing and transportation facili- ties can be optimised in terms of cost and asset utilisation. Conversely the bottom right-hand corner is the real domain of the agile supply chain. Here demand is unpredictable but lead times are short, enabling ‘quick response’ type solutions – the extreme case being make-to-order (but in very short time-frames). CREATING THE RESPONSIVE SUPPLY CHAIN 101 Supply characteristics Short Long lead times lead times The top right-hand corner presents an interesting situation: lead times are long and demand is unpredictable. In situations such as this, the first priority should be to seek to reduce lead times since the variability of demand is almost certainly outside the organisation’s control. Lead-time reduction would enable the applica- tion of agile solutions. However, if lead times cannot be reduced the next option is to seek to create a hybrid lean/agile solution. These hybrid solutions require the supply chain to be ‘de-coupled’ through holding strategic inventory in some generic or unfinished form, with final configuration being completed rapidly once real demand is known. This is the classic ‘postponement’ strategy. An alternative form of postponement where the final physical configuration cannot be delayed is to postpone the actual distribution of the product by holding it in fewer (or even only one) locations and using express transportation to move it to the final market or point-of-use once actual demand is known. The goal of a hybrid (or ‘leagile’ as it is sometimes termed) strategy should be to build an agile response upon a lean platform by seeking to follow lean principles 3 up to the de-coupling point and agile practices after that point. Figure 5.3 illus- trates this idea. Figure 5.3 The de-coupling point Lean Agile • Forecast at generic level • Demand driven • Economic batch quantities • Localised configuration • Maximise efficiencies • Maximise effectiveness Strategic inventory A good example of a de-coupling point enabling a lean/agile hybrid strategy is provided by the paint industry. Today, consumers can be offered customised solutions in terms of the colour of paint through the use of paint mixing machines located in retail outlets. The retailers only need to stock a relatively small number of base colours to provide an almost infinite number of final colours. Thus the paint manufacturer can utilise lean processes in producing base colours in volume but can provide an agile and timely response to end users. This example also illus- trates the principle of seeking to reduce complexity whilst providing the requisite level of variety that the market demands. To be truly agile a supply chain must possess a number of distinguishing char- acteristics, as Figure 5.4 suggests. Firstly, the agile supply chain is market-sensitive. By market-sensitive is meant that the supply chain is capable of reading and responding to real demand. Most organisations are forecast-driven rather than demand-driven. In other words, because they have little direct feed-forward from the marketplace by way of data on actual customer requirements, they are forced to make forecasts based upon LOGISTICS & SUPPLY CHAIN MANAGEMENT 102 past sales or shipments and convert these forecasts into inventory. The break- throughs of the last decade in the use of information technology to capture data on demand direct from the point-of-sale or point-of-use are now transforming the organisation’s ability to hear the voice of the market and to respond directly to it. Figure 5.4 The agile supply chain Virtual Agile Market Process supply sensitive alignment chain Network based Source: Adapted from Harrison, A., Christopher, M. and van Hoek, R., Creating the Agile Supply Chain, Chartered Institute of Logistics and Transport, 1999 The use of information technology to share data between buyers and suppliers is, in effect, creating a virtual supply chain. Virtual supply chains are information based rather than inventory based. Conventional logistics systems are based upon a paradigm that seeks to identify the optimal quantities and the spatial location of inventory. Complex for- mulae and algorithms exist to support this inventory-based business model. Paradoxically, what we are now learning is that once we have visibility of demand through shared information, the premise upon which these formulae are based no longer holds. Electronic Data Interchange (EDI) and now the Internet have enabled partners in the supply chain to act upon the same data, i.e. real demand, rather than be dependent upon the distorted and noisy picture that emerges when orders are transmitted from one step to another in an extended chain. Supply chain partners can only make full use of shared information through process alignment, i.e. collaborative working between buyers and suppliers, joint product development, common systems and shared information. This form of co-operation in the supply chain is becoming ever more prevalent as companies focus on managing their core competencies and outsource all other activities. In this new world a greater reliance on suppliers and alliance partners becomes inevitable and, hence, a new style of relationship is essential. In the ‘extended CREATING THE RESPONSIVE SUPPLY CHAIN 103 enterprise’, as it is often called, there can be no boundaries and an ethos of trust and commitment must prevail. Along with process integration comes joint strategy determination, buyer/supplier teams, transparency of information and even open- book accounting. This idea of the supply chain as a confederation of partners linked together as a network provides the fourth ingredient of agility. There is a growing recognition that individual businesses no longer compete as stand-alone entities but rather as supply chains. Managing networks calls for an entirely difference model than the conventional ‘arm’s-length’ approach to managing customer and supplier relation- ships. Clearly a much higher level of collaboration and synchronisation is required if the network is to be truly agile. It can be argued that, in today’s challenging global markets, the route to sustainable advantage lies in being able to make best use of the respective strengths and competencies of network partners to achieve greater responsiveness to market needs. Product ‘push’ versus demand ‘pull’ There have been many new ideas and concepts in business management over the last 30 or so years, some of which have endured and others soon discarded. However, perhaps one of the most significant principles to become widely adopted and practised is that of just-in-time. Just-in-time, or JIT, is a philosophy as much as it is a technique. It is based upon the simple idea that wherever possible no activity should take place in a system until there is a need for it. Thus no products should be made, no components ordered, until there is a downstream requirement. Essentially JIT is a ‘pull’ concept, where demand at the end of the pipeline pulls products towards the market and behind those products the flow of components is also determined by that same demand. This contrasts with the traditional ‘push’ system where products are manufactured or assembled in batches in anticipation of demand and are positioned in the supply chain as ‘buffers’ between the various functions and entities (see Figure 5.5). The conventional approach to meeting customer requirements is based upon some form of statistical inventory control which typically might rely upon reordering when inventory levels fall to a certain predetermined point – the so-called reorder point (ROP). Under this approach a reorder point or reorder level is predetermined based upon the expected length of the replenishment lead time (see Figure 5.6). The amount to be ordered may be based upon the economic order quantity (EOQ) for- mulation which balances the cost of holding inventory against the costs of placing replenishment orders. Alternative methods include the regular review of stock levels with fixed intervals between orders when the amount to be ordered is determined with reference to a predetermined replenishment level, as in Figure 5.7. LOGISTICS & SUPPLY CHAIN MANAGEMENT 104 Figure 5.5 ‘Push’ versus ‘pull’ in the logistics chain Demand Customers ‘pull’ Finished products (demand forecast D1 D2 D3 D4 level) Regional distribution Finished products RDC1 RDC2 centres Factory Finished products warehouse Factory Work-in-progress Sub-assemblies Components Product Vendors/suppliers ‘push’ There are numerous variations on these themes and the techniques have been well documented and practised for many years. However, they all tend to share one weakness, that is they frequently lead to stock levels being higher or lower than necessary, particularly in those cases where the rate of demand may change or occurs in discrete ‘lumps’. This latter situation frequently occurs when demand for an item is ‘dependent’ upon demand for another item, e.g. demand for a TV component is dependent upon the demand for TV sets; or where demand is ‘derived’, e.g. the demand for TV sets at the factory is determined by demand from the retailer, which is derived from ultimate demand in the marketplace. CREATING THE RESPONSIVE SUPPLY CHAIN 105 Figure 5.6 The reorder point method of stock control Reorder quantity Reorder point Average lead-time demand Safety Lead time stock Order Order Time placed arrives Figure 5.7 The review period method of stock control Replenishment level Review period The implications of dependent demand are illustrated in the example given in Figure 5.8, which shows how a regular off-take at the retail level can be converted into a much more ‘lumpy’ demand situation at the plant by the use of reorder points. A similar situation can occur in a multi-level distribution system where the com- bined demand from each level is aggregated at the next level in the system. Figure 5.9 demonstrates such an occurrence. The common feature of these examples is that demand at each level in the logistics system is dependent upon the demand at the next level in the system. Demand is termed ‘dependent’ when it is directly related to, or derives from, the demand for another inventory item or product. Conversely, the demand for a given item is termed ‘independent’ when such demand is unrelated to demand for other items – when it is not a function of demand for other items. This distinction is crucial because whilst independent demand may be forecast using traditional methods, dependent demand must be calculated, based upon the demand at the next level in the logistics chain. LOGISTICS & SUPPLY CHAIN MANAGEMENT 106 Stock level Stock levelFigure 5.8 Order point and dependent demand 1. Regional distribution centre (RDC) inventory: many small independent demands from customers Inventory Order point J F M A M J J A S O N 2. Central warehouse inventory: few large demands dependent on RDC demand Order point J F M A M J J A S O N 3. Plant inventory: irregular demand dependent on warehouse demand Order point J F M A M J J A S O N Whilst independent demand may be forecast using traditional methods, dependent demand must be calculated, based upon the demand at the next level in the logistics chain. Using the example in Figure 5.9 it would clearly be inappropriate to attempt to forecast demand at the factory using data based upon the pattern of combined demand from the regional centres. Rather it has to be calculated from the iden- tified requirements at each of the preceding levels. It is only at the point of final demand, in this case at the depots, where forecasts can sensibly be made – in fact in most cases demand at the depot would itself be dependent upon retailers’ or other intermediaries’ demand, but since this is obviously outside the supplier’s direct control it is necessary to produce a forecasted estimate of demand. CREATING THE RESPONSIVE SUPPLY CHAIN 107 Figure 5.9 Causes of uneven demand at the plant Combined demand at the factory Quantity Quantity The classic economic order quantity (EOQ) model has tended to channel our think- ing towards the idea that there is some ‘optimum’ amount to order (and hence to hold in stock). The EOQ model arrives at this optimum by balancing the holding cost of inventory against the cost of issuing replenishment orders and/or the costs of production set-ups (see Figure 5.10). Figure 5.10 Determining the economic order quantity Total cost Inventory carrying cost Ordering/set-up cost EOQ Quantity LOGISTICS & SUPPLY CHAIN MANAGEMENT 108 CostThe EOQ can be easily determined by the formula: 2AS EOQ = –––– i where, A = annual usage S = ordering cost/set-up cost i = inventory carrying cost So, for example, if we use 1,000 units of product X a year, each costing £40, and each order/set-up costs £100 and the carrying cost of inventory is 25 per cent then: 2 × 1000 × 100 EOQ = ––––––––––––––––– = 141 40 × 0.25 The problem is that this reorder quantity means that we will be carrying more inventory than is actually required per day over the complete order cycle (except on the last day). For example, if the EOQ were 100 units and daily usage was 10 units then on the first day of the cycle we will be overstocked by 90 units, on the second day by 80 units and so on. To compound the problem we have additional inventory in the form of ‘safety’ stock, which is carried in order to provide a safeguard against demand during the replenishment lead time being greater than expected and/or variation in the lead time itself. The result is that we end up with a lot of unproductive inventory, which repre- sents a continuing drain on working capital. The Japanese philosophy It has often been said that the scarcity of space in industrialised Japan has made the nation conscious of the need to make the most productive use of all physical resources, including inventory – whether this is true is of academic interest only – what is the case is that it is the widely held view in Japan that inventory is waste. An analogy that is frequently drawn in Japan is that an organisation’s invest- ment in inventory is like a large, deep lake (see Figure 5.11). Well below the surface of this lake are numerous jagged rocks, but because of the depth of the water, the captain of the ship need have no fear of striking one of them. The comparison with business is simple: the depth of the water in the lake represents inventory and the rocks represent problems. These problems might include such things as inaccurate forecasts, unreliable suppliers, quality problems, bottlenecks, industrial relations problems and so on. The Japanese philosophy is that inventory merely hides the problems. Their view is that the level of water in the lake should be reduced (say to level ‘B’ in Figure 5.11). Now the captain of the ship is forced to confront the problems – they cannot be avoided. In the same way if inventory is reduced then management must grasp the various nettles of forecast inaccuracy, unreliable suppliers and so on. CREATING THE RESPONSIVE SUPPLY CHAIN 109 Figure 5.11 Inventory hides the problems The Japanese developed the so-called Kanban concept as a way of lowering the water in the lake. Kanban originated in assembly-type operations but the principles can be extended across the supply chain and to all types of operations. The name Kanban comes from the Japanese for a type of card that was used in early sys- tems to signal to the upstream supply point that a certain quantity of material could be released. Kanban is a ‘pull’ system that is driven by the demand at the lowest point in the chain. In a production operation the aim would be to produce only that quantity needed for immediate demand. When parts are needed on the assembly line they are fed from the next stage up the chain in just the quantity needed at the time they are needed. Likewise this movement now triggers demand at the next work station in the chain and so on. By progressively reducing the Kanban quantity (i.e. the amount demanded from the supplying work station) bottlenecks will become apparent. Management will then focus attention on the bottleneck to remove it by the most cost-effective means possible. Again the Kanban quantity will be reduced until a further bot- tleneck is revealed. Hence the Kanban philosophy essentially seeks to achieve a balanced supply chain with minimal inventory at every stage and where the proc- ess and transit quantities of materials and stock are reduced to the lowest possible amount. The ultimate aim, say the Japanese, should be the ‘economic batch quantity of 1’ In fact this logic does not necessarily conflict with the traditional view of how the economic batch (or order) quantity is determined. All that is different is that the Japanese are seeking to minimise the batch quantity by shifting the curve that rep- resents the cost of ordering or the cost of set-ups to the left (see Figure 5.12). In other words, they focus on finding ways to reduce set-up costs and ordering costs. LOGISTICS & SUPPLY CHAIN MANAGEMENT 110 Figure 5.12 Reducing set-up costs/ordering costs Order/batch quantity The effect of moving the curve to the left on the economic batch/order quantity is seen in Figure 5.13. Figure 5.13 Reducing the economic batch/order quantity Total cost (1) Total cost (2) Inventory carrying cost Set-up cost (1) Set-up cost (2) Order/batch quantity CREATING THE RESPONSIVE SUPPLY CHAIN 111 Cost Cost EOQ (2) EOQ (1)The foundations of agility It will be apparent that agility is not a single company concept but rather it extends from one end of the supply chain to the other. The concept of agility has significant implications for how organisations within the supply/demand network relate to each other and how they can best work together on the basis of shared information. To bring these ideas together, a number of basic principles can be identified as the starting point for the creation of the agile supply chain. 1 Synchronise activities through shared information Synchronisation implies that all parties in the supply chain are ‘marching to the same drumbeat’. In other words, through shared information and process align- ment there is in effect one set of numbers and a single schedule for the entire supply chain. This somewhat Utopian vision is increasingly becoming reality as web-based technology enables different entities in a network to share information on real demand, inventory and capacity in a collaborative context. In the fast moving consumer goods (fmcg) sector there is a growing number of examples of supply chain synchronisation made possible by the retailers’ increas- ing willingness to share point-of-sale data with manufacturers. One such instance is the web-based system established by the UK’s biggest retailer, Tesco. The Tesco Information Exchange (TIE) is an extranet that enables Tesco’s suppliers to access their own sales data, item by item. This data is updated several times a day and potentially can provide manufacturers with the means to link their production schedules to Tesco’s replenishment requirements. In the automobile industry most of the volume car manufacturers have estab- lished ‘seamless’ processes with their first tier suppliers based upon providing immediate access to production plans and schedules. This enables just-in-time deliveries to be achieved without the need for major buffers of inventory at the first tier level. In the US the ‘quick response’ initiative in the apparel industry has linked retail- ers to garment manufacturers and also to the fabric producers through shared information. The impact of this collaboration has been a significant improvement in the competitiveness of that industry. 2 Work smarter, not harder Detailed examination of the processes that together constitute a supply chain inevitably highlights the fact that a large proportion of the end-to-end time is ‘non- value-adding’. In other words, time is being spent on activities that typically create cost but do not create a benefit for the customer. Time spent in inventory is a clas- sic example of non-value-adding time. Supply chain mapping can reveal where this idle time occurs; to attack it then requires a review of the processes that precede or follow that idle time. Process time is directly correlated with inventory, e.g. if it takes three weeks from raising a purchase order to receiving the goods, at least three weeks of inventory will be required to buffer ourselves during that lead time. LOGISTICS & SUPPLY CHAIN MANAGEMENT 112 Business process re-engineering (BPR) is the term frequently applied to the activity of simplifying and reshaping the organisational processes with the goal of achieving the desired outcomes in shorter time-frames at less cost. Many processes in the supply chain are lengthy because the constituent activities are performed in ‘series’, i.e. in a linear, ‘one after the other’ way. It is often possible to re-engineer the process so that those same activities can be performed ‘in paral- lel’, i.e. simultaneously. Time compression in a supply chain can be achieved not necessarily by speed- ing up activities, but rather by doing fewer things – i.e. eliminating where possible non-value-adding activities. Many existing practices in business are performed for historical reasons; there was once a justification for those practices but, with changed conditions, that justification may no longer exist. Supply chains can be transformed in terms of their agility by the rigorous appli- cation of process re-engineering principles. 3 Partner with suppliers to reduce in-bound lead times Conventionally, firms have maintained an arm’s-length relationship with suppliers. Suppliers have often been chosen on the basis of price rather than their respon- siveness. A major opportunity exists for reducing in-bound lead times through close working with key suppliers. Because in the past there was often a view that suppliers should be held at ‘arms length’, many opportunities for improving respon- siveness have been missed. Since supplier agility is one of the main requirements in the creation of a more responsive supply chain it is perhaps surprising that some businesses even now have few collaborative programmes with suppliers in place. Using joint supplier/customer teams to explore opportunities for re-aligning and re-engineering processes, on both sides of the interface, which impact over- all responsiveness can produce significant dividends. Because conventionally companies have designed processes in a vacuum, it is not surprising to find that those processes do not align easily with their supply chain partners’ processes. Many companies have gained real benefits, for instance, by allowing their suppli- ers to access their own information and planning systems, e.g. providing access to enterprise planning systems such as SAP. Often suppliers may well be able to transfer knowledge and best practice from their operation to their customers’ – and vice versa. In either case, the opportuni- ties to reduce in-bound lead times by closer partnership across the supply chain are considerable. 4 Seek to reduce complexity Complexity comes in many guises in supply chains. Complexity may be gen- erated by multiple variants of the same product, e.g. different pack sizes, or by each product in a family having greatly different Bills of Material, or by frequent product changes, and so on. Complexity can also be generated through cumber- some processes that involve many different stages and hand-offs. Simplification is an obvious remedy for complexity but one which may not always be available. CREATING THE RESPONSIVE SUPPLY CHAIN 113 However, there will often be opportunities to reduce complexity by questioning the reasons why things are the way they are. For example, is the level of product variety greater than the customer actually requires? Often product proliferation is driven by sales or marketing departments and may not actually achieve additional sales but spread the same total demand over a greater number of stock keeping units (SKUs). The greater the fragmenta- tion of demand the harder it becomes to manage availability in that the variability of demand at the individual item level will tend to be higher. Simplification can sometimes be achieved through seeking greater common- ality of components or sub-assembly across a family of products. For example, in automobile design these days it is increasingly the case that several different models of car are built on the same platform and ‘under the skin’ share common components and sub-assemblies. The point about complexity is that it provides a barrier to agility as well as gener- ating cost. Complexity in the supply chain is addressed in more detail in Chapter 8. 5 Postpone the final configuration/assembly/distribution of products Postponement refers to the process by which the commitment of a product to its final form or location is delayed for as long as possible. When decisions on the final configuration or pack have to be made ahead of demand there is the inevita- ble risk that the products that are available are not the ones the customer wants. For example, the customer may want a blue four-door car with air-conditioning but the dealer has a red, two-door with a sunroof. Or, again, there may be a blue four- door available but it is at a different dealer at the other end of the country. The philosophy of postponement ideally would begin on the drawing board so that products are designed with late configuration in mind. The longer that prod- ucts can remain as generic ‘work in progress’ then the more flexibility there will be to ensure the ‘right product in the right place at the right time’. An example of late configuration is provided by Hewlett Packard and its DeskJet printers. These products are designed so that they can be manufactured as generic, but incomplete, units. They are then localised at regional centres where the appropriate power pack, plug and cable, local packaging, etc., are added. In this way inventory is minimised but availability is enhanced. Postponement may not always be feasible in terms of late configuration but there may be scope for spatial postponement through holding inventory in just a few locations with the ability to ship the product rapidly to the location required when an order is received. 6 Manage processes not just functions For centuries organisations have followed an organisational logic based upon the ‘division of labour’ whereby activities take place within functions or departments. Whilst this functionally based organisational concept may ensure the efficient use of resources it is actually inwardly focused and tends to lead to a ‘silo’ type LOGISTICS & SUPPLY CHAIN MANAGEMENT 114 mentality. It also seems to be the case that these functionally based organisations are slow to respond to changes in the market or business environment. Because there are often multiple ‘hand-offs’ as things get passed from one function to another there is an inevitable lengthening in the time to respond. In functionally based businesses the new product development activity, for example, is often lengthy as it moves from R&D to product engineering to market research and eventually into production. On the other hand, those companies that are able to respond rapidly to chang- ing customer requirements tend to focus more upon managing ‘processes’. Processes are the horizontal, market-facing sequences of activities that create value for customers. They are cross-functional by definition and are usually best managed through the means of interdisciplinary teams. The critical business processes that cut across the organisation would include innovation, customer relationship management and supplier relationship management. The way businesses are organised can have a significant impact upon their agility; those companies with cumbersome, multi-level decision-making processes tend to be far slower to respond to market changes than their competitors who give autonomy to self-managed process teams. A further reason why process management is critical to agility across the wider supply chain is that process alignment between entities in that chain is clearly facil- itated if organisational structures are horizontal rather than vertical. 7 Utilise appropriate performance metrics It is a truism that performance measurement shapes behaviour. This is par- ticularly the case in business organisations where formal measurement systems drive the business. In functionally based organisations these measurements often are based upon departmental budgets and are underpinned by objectives such as cost minimisation, asset utilisation and efficiency, and productivity improve- ment. Whilst on the face of it these objectives may appear to be desirable, they will not necessarily encourage agile practices within the organisation. If, for exam- ple, a manufacturing facility is measured on, say, unit cost of production then the incentive will be to go for big batch sizes to take advantage of economies of scale. However, such actions will probably lead to a loss of flexibility and the crea- tion of additional inventory. If, on the other hand, time-based metrics were to be employed then the focus could be on cycle-time reduction, set-up time reduction and other measures that encourage agile practices. A further incentive to agility can be created by linking processes to customer- based metrics. One such widely used measure is ‘perfect order achievement’. A perfect order is one where the customer gets exactly what they want at the time and place they want it. It will also usually be the case that different customers may well have different requirements and expectations, so the definition of what con- stitutes a perfect order will have to be specific to each segment, channel or even individual key accounts. A fundamental tenet of agility is customer responsiveness, hence the need to ensure that the primary measures of business performance reflect this imperative. CREATING THE RESPONSIVE SUPPLY CHAIN 115 ‘Time to market’ and ‘time to volume’ are powerful metrics employed by com- panies such as Sony and Canon where short life cycles dictate a focus on rapid response to fast-changing technologies and volatile customer demand. In the past, the focus of many companies was primarily on efficiency, i.e. a con- tinuing search for lower costs, better use of capacity, reduced inventories and so on. These are still worthy goals today but the priority has shifted. Now the empha- sis must be on effectiveness. In other words the challenge is to create strategies and procedures that will enable organisations to become the supplier of choice and to sustain that position through higher levels of customer responsiveness. This is the logic that underpins the concept of the agile supply chain. A routemap to responsiveness The shift in the balance of power in the distribution channel has highlighted the need for the business to be driven by the market rather than by its own internal goals. However, for organisations to become truly market-driven, there has to be a sustained focus on responsiveness across the business and its wider supply chain. There are many prerequisites for responsiveness and Figure 5.14 summa- rises the key elements. The responsive business will have agile suppliers and will work very closely with them to align processes across the extended enterprise. It will also be very close to its customers, capturing information on real demand and sharing that information with its partners across the network. Internally the business will also be focused on agility through the way it organises – breaking through functional silos to create process teams. In terms of its manufacturing and sourcing strategy, the responsive business will seek to marry the lean and agile paradigm through de-coupling its upstream and downstream processes, utilising the principles of postponement wherever possible. Those companies that can follow this routemap will be more likely to be the leaders in their field. More often than not, when we look at the successful compa- nies in any market, they tend to be the ones that have demonstrated their ability to respond more rapidly to the changing needs of their customers. The case study that concludes this chapter underlines the challenges that organisations must con- front as they seek to become more responsive to customer needs. LOGISTICS & SUPPLY CHAIN MANAGEMENT 116 CREATING THE RESPONSIVE SUPPLY CHAIN 117 Figure 5.14 Routemap to the responsive business Standardisation/ modularisation Vendor Economies Waste Synchronised managed of scale reduction production inventory Lean Agile Capacity production supply management Process management The De-couple the Organisational Flexible responsive supply chain agility response business Cross-functional Set-up time Quick Demand teams reduction response driven Continuous Process Visibility of Non-value-adding replenishment re-engineering real deand time reduction programmesWorld Duty Free World Duty Free (WDF) is the UK’s biggest airport duty free goods retailer, accounting for 90 per cent of all UK airport duty free sales. WDF is wholly owned by the Italian group Autogrill in which Benetton have a 40 per cent stake. Even though WDF has experienced significant growth in recent years (partly organic and partly through merger – in particularly the merger in 2009 with Spanish duty free retailer, Alpha), it has been faced with an increasing degree of market turbulence and volatility of late. At the macro level the world recession has had a big impact on passenger numbers generally, particularly at regional airports which have a higher proportion of leisure passengers. Sources of volatility at the micro level include the security arrangements at airports, where the length of time taken to process passengers will vary according to daily changes in procedures (e.g. requesting passengers to remove their shoes), which itself directly impacts the amount of time individual passengers will have available for duty free shopping. Further sources of volatility at the micro level can be airlines changing their departure times – for example, passengers leaving the UK for non-EU destinations can generally buy goods at a lower price and if the time of the flight changes or the plane is delayed there can be a significant change in demand patterns. A further impact on sales is created when airlines either withdraw a service or change airports – Ryanair moving some of its services from one airport to another because of lower landing charges is a case in point. Against this background of uncertainty and increasingly unpredictable demand, WDF is seeking to make the transition from a forecast-driven to a demand-driven business. One of the strategies that it has adopted is to focus on its single distribution centre (based near London Heathrow Airport) to find ways in which its existing capacity can be used more flexibly. Using what are in effect six sigma method- ologies, WDF has been able to improve the utilisation of capacity and to improve flow-through so that it can cope better with the peaks and troughs in demand. So successful has this strategy been that WDF was able to cope with the opening of Terminal 5 without additional warehousing capacity. A further degree of flexibility in the Heathrow distribution centre is through the use of agency staff. Becoming demand-driven requires a ‘just-in-time’ delivery philosophy based upon more frequent deliveries to their air-side outlets based on more frequent demand signals, i.e. point-of-sale data polls. The intention is, wherever possible, to move to a ‘continuous replenishment’ philosophy where products are rapidly replenished after they are sold. WDF has recognised that demand-driven supply chains require suppliers to be highly responsive. The company is actively examining ways in which suppliers’ in- bound lead times can be reduced – particularly through a greater level of shared information and the introduction of vendor managed inventory (VMI) arrangements. With a product range of approximately 15,000 SKUs there is inevitably a ‘long- tail’ on the sales pareto curve – for example 88 per cent of WDF’s SKUs sell less LOGISTICS & SUPPLY CHAIN MANAGEMENT 118

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