Building Structural Flexibility into the Supply Chain

Flexibility has long been recognized as a positive attribute in business.

Thus, if the level of demand increases or decreases the factory can quickly adjust output to meet that change.

Flexibility in the factory can be achieved through focusing on set-up time reduction to achieve quicker change-overs, by eliminating bottlenecks to free up capacity and by multi-skilling on the shopfloor amongst other means.

Whilst this type of flexibility will always be desirable, we need to take a wider view.

In a world where supply chains are the source of competitive advantage, not just the factory, it is imperative that the concept of flexibility be extended throughout the entire supply/demand network.

Hence, the likelihood is that the network is no longer ‘optimal' for current conditions.

Indeed it can be argued that because today's highly interconnected global supply/demand networks are akin to complex systems they can never actually be ‘optimized'.

All that supply chain decision makers can hope to do is to create solutions that are flexible enough to provide ‘satisfactory' solutions in an ever-changing environment.

Companies that lack this vital capability find it difficult or impossible to cope with a fast-changing world.

Systems that are rigid and not open to change are susceptible to entropy, ie gradual decay and increasing disorder.

The laws of thermodynamics inform us that entropy is the inevitable outcome when a system is closed rather than open.

An open system can refresh itself by constantly drawing upon external inputs and resources from new sources.

What does this imply for the design or re-design of our supply chains?

An ideal basis for the creation of a structurally flexible supply chain is the adoption of a ‘real options' approach to decision making.

Whilst the idea of real options originated in financial planning, it applies also in supply chain decision making.

Put simply, it is based on the view that states that the best decisions are the decisions that keep the most options open.

So rather than choosing a course of action that leads to, say, the lowest cost outcome we should adopt a strategy which would lead to least regret if circumstances in the future were to change.

Almost certainly keeping the options open will not be the cheapest solution but longer term it will provide an insurance against the impact of uncertainty.

The journey to gaining structural flexibility in the supply chain should begin with a review of the assets that are needed across the supply chain to achieve the firm's strategic goals.

These assets are not only physical facilities such as factories or distribution centres but also knowledge, technology, data and management capabilities.

The question to be asked is ‘what assets are required to achieve our corporate goals?'

The second question is who should own these assets?

Conventionally organizations usually preferred to own the assets themselves.

They would own factories, warehouses and even retail outlets.

They would hire employees and perform most activities in-house.

Research and development and product innovation would be an internal activity.

Similarly all the functional activities such as procurement, distribution and information systems management would be conducted by internal departments.

However, such arrangements clearly limit flexibility and are often ‘set in concrete' and are difficult to change quickly.

The alternative is to see the issue not so much as being about owning the asset but rather as having access to it.

Having access to an asset when we need it, rather than owning it when it is not required, provides real flexibility.

Increasingly many consumers are becoming a part of what has been called the ‘sharing economy'.

Thus rather than own a car many people will rent one when they need it or use ride-sharing providers such as Uber.

This principle can be applied to the need for access to the assets that the business will need to successfully compete in its chosen markets.

So rather than owning a factory the business may choose to use a contract manufacturer.

Or rather than owning distribution centres they may choose to use a third-party logistics provider's facilities.

It could be argued that the only assets we might wish to own are those that give us some unique advantage over competitors.

This would be true not just for physical assets but for intangible assets too.