The survivors of economic slumps have almost always been better able to change course more quickly than their peers. They benefit from more responsive and agile supply chains, allowing them to quickly cut back on manufacturing operations, close plants, sell assets, and reduce inventory in the pipeline. Here are eight proven practices to help you increase supply chain flexibility and reduce risk.
By Pierre Mercier, Harold Sirkin, and Jennifer Bratton -- Supply Chain Management Review, 1/1/2010
As the recent global recession deepened, some industries saw sales decline by 40 percent or more. Cash-strapped companies struggled with order cancellations, inventory pile-ups and underused assets. The business headlines showed that many organizations were unable to survive those pressures.
Yet many have survived, and are on course to do well as the global economy picks up. The survivors were almost always better able to change course more quickly than their more sluggish peers, minimize losses and generate much-needed cash. On the whole, they benefited from more responsive, more agile supply chains, allowing them to quickly cut back on manufacturing shifts, change batch sizes, stop and start entire production lines, close plants, sell assets, and sharply reduce inventory coming through the pipeline.
Although global recessions are rare, uncertainty and unpredictability are facts of life in today's business environment. Nobody can truly predict the future, no matter how complex or accurate a company's forecasting model is. And as supply chains become longer—reaching into low-cost countries for sourcing or manufacturing—it becomes increasingly clear that greater flexibility and the ability to react rapidly to changing market conditions are at least as important as forecasting skills when it comes to optimizing end-to-end operations.
These days, the prices of fuel and other commodities can shift overnight, customers demand increasing speed and customization, and port and road congestion add unwelcome variables to the supply chain. Other variability is self-inflicted—the result of needless complexity in products, portfolios and processes. This blend of complexity and unpredictability exacts a high cost. That's why it's critical for companies to create an agile, flexible supply chain that can react quickly to changes in conditions or demand and minimize the negative impact of uncertainty.
But flexibility often comes at an additional cost. Business leaders must wrestle with a range of strategic trade-offs: Should I build one massive manufacturing plant to optimize scale, or diversify my risk by staying closer to the customer and producing in multiple locations? Should I keep more warehouses in my network to make sure I can deliver products to my customers profitably even if diesel prices hit $10 per gallon? How much buffer inventory should I keep on hand?
Flexibility will be more critical in some areas than in others—when profit margins are high, for instance, or to gain access to strategic markets or customer accounts, or where unpredictability imposes particularly high costs. So it's important to know why you're making the decisions you're making, and to make them strategically and mindfully.
This article brings together eight proven practices for increasing flexibility and reducing risk. Although some of the themes are well understood by experienced supply chain professionals, it's likely that those leaders will not previously have been able to review or share all of the themes in an easily accessible form—a kind of “flexibility checklist,” if you will.
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