Creating the Agile Supply Chain

INTRODUCTION
One of the biggest challenges facing organizations today is the need to respond to ever-increasing volatility. For a variety of reasons product and technology lifecycles are shortening, competitive pressures force more frequent product changes and consumers demand greater variety than ever before.

To meet this challenge the organization needs to achieve 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 quickly to adjust output 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 processes and organizational structure as well as its supply chain relationships enable it to cope with whatever demands are placed upon it.

Characteristics of the Agile Supply Chain
Agility in the sense of the ability to match supply with demand is not necessarily synonymous with 'leanness'. Much has been written about lean manufacturing - often with reference to the automobile industry. The lean approach to manufacturing seeks to minimize inventory of components and work-in-progress and to move towards a 'just-in-time' environment wherever possible. However, whilst 'leanness' may be an element of 'agility' in certain circumstances, by itself it will not enable the organization to meet the precise needs of the customer more rapidly. It could be argued that the automobile industry for all its leanness is one of the least agile industries around. Webster's Dictionary makes the distinction clearly when if defines lean as 'containing little fat' whereas agile is defined as 'nimble'.

Figure 1.	The Agile Supply Chain

To be truly agile a supply chain must possess a number of distinguishing characteristics as Figure 1 suggests.

Firstly, the agile supply chain is market sensitive, i.e. is capable of reading and responding to real demand. Most organizations are forecast-driven rather than demand-driven. In other words, because they have little input from the marketplace by way of data on actual customer requirements they are forced to make forecasts based upon past sales or shipments and convert these forecasts into inventory. The breakthroughs of the last decade in the form of Efficient Consumer Response (ECR) and the use of information technology to capture data on demand direct from the point-of-sale or point-of-use are now transforming the organization's ability to hear the voice of the market and to respond directly to it.

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 formulae 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.

Figure 2.	Cash-to-Cash Cycle Time

Shared information between supply chain partners can only be fully leveraged through process integration, the collaborative working between buyers and suppliers, joint product development, common systems and shared information. This form of co-operation in the supply chain is increasingly 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 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. We are now entering the era of 'network competition' where the prizes will go to those organizations who can better structure, co-ordinate and manage the relationships with their partners in a network committed to better, closer and more agile relationships with their final customers. A premium will be placed on being able to leverage the respective strengths and competencies of network partners to achieve greater responsiveness to market needs.

Time compression holds the key
The analogy between the supply chain and an oil pipeline is a good one. Long pipelines, by definition, have more oil in them than shorter ones. Thus if demand at the far end should change - say a different grade of oil was required - the longer the pipeline, the longer the time needed to respond to that changed demand. Since agility is all about the ability to change rapidly, it can be seen that the total 'end-to-end' time in the supply chain directly impacts responsiveness.

Few organizations know the true length of their end-to-end pipeline. One useful measure is the cash-to-cash cycle time. This cycle begins when commitments are made for the sourcing and procurement of materials and components and continues through the manufacturing and assembly process to final distribution and finishes with the receipt of payment from the customer.

Figure 3.	The Lead-time Gap

This total pipeline time, which is often measured in months rather than weeks, is represented by the number of days of inventory in the pipeline, whether as raw materials, work-in-progress, goods in transit, or time taken to process orders, issue replenishment orders, as well as time spent in manufacturing, time in queues or at bottlenecks and so on. The control of this total pipeline is crucial if agility is to be achieved. Figure 2 illustrates the way in which cumulative lead-time builds up from procurement through to payment.

Most organizations face a fundamental problem: the time it takes to procure, make and deliver the finished product to a customer is longer than the time the customer is prepared to wait for it.

This difference in time is referred to as the lead-time gap. Figure 3 highlights the problem.

In the conventional organization the only way to close the gap between the logistics lead time (i.e. the time taken to complete the process from goods inwards to delivered product) and the customer's order cycle (i.e., the period they are prepared to wait for delivery) is by carrying inventory. This normally is based upon a forecast. Most companies address this problem by seeking to forecast the market's requirements and then to build inventory ahead of demand. Unfortunately, experience suggests that no matter how sophisticated the forecasting technique, its accuracy is usually less then perfect.

Whilst improving forecast accuracy will always be a desirable goal; the answer to the problem lies not in making further investments in improving the forecast, but rather in reducing the lead-time gap.

Figure 4.	Achieving Agility in the Supply Chain

The company that achieves a perfect match between the logistics lead-time and the customer's required delivery time has no need of forecasts and no need for inventory.

How then can the gap be closed?
It is helpful to consider three elements of total pipeline time: inbound logistics, internal operations and outbound logistics. Each of these will often yield significant opportunities for time reduction. Figure 4 highlights the areas where detailed analy sis of existing processes should be undertaken. Firstly the interface with suppliers, secondly the firm's internal processes and thirdly the interface with customers.

Let us briefly consider each of these in turn.
1. The Supplier Interface
One of the biggest barriers to improved agility is the long replenishment lead-times often encountered from suppliers. It is not unusual for in-bound lead-times to stretch into months. In complex products with many components or raw materials, the slowest moving element will determine the pipeline length. So even if ninety-nine out of a hundred component items may be available within days, if the hundredth is on a three month lead-time then that single item will define overall response time.

How can time be released from this critical interface?
The key word here is 'partnership'. Perhaps one of the most currently over-worked words in the management lexicon, partnership with suppliers is critical to the development of more responsive supply chains. One of the early lessons that companies as diverse as Nokia and Nissan have drawn is that to partner successfully there must be a significant rationalization of the supplier base. It is not possible to have closely integrated supply chain arrangements with thousands of suppliers. Instead the emphasis has to be on developing closer relationships with a smaller number of strategic suppliers. British retailer BhS has reduced its number of apparel suppliers from hundreds down to a handful. With its remaining suppliers it has a totally different relationship based upon transparency of information and synchronized operations.

Working more closely with suppliers should be the precursor to process integration whereby a 'seamless' information system and physical pipeline can be established. In other words there are no barriers to the continuous flow of information and product and as a result the systems are increasingly paperless and stockless.

There are clearly many implications for both parties in this new world of transparency and openness. One clear outcome is that mutual dependencies increase, but with it comes a recognition of the many benefits that flow from moving in-step with each other - not the least of which is enhanced agility.

2. Internal Processes
A major inhibitor of agility in the supply chain lies within the internal processes of the organization. Many of the firm's processes have been in place for many years and whilst there once may have been good reasons for the way things were done then, those procedures may be harder to justify today.

This is the reason why it is so important to take a long, hard look at the way we do things with a view to re-engineering them to achieve greater agility. A critical concept that underpins the search for logistics process re-engineering opportunities is the idea of 'value-adding time' as against 'non-value-adding' time.

Very simply, value-adding time is time spent doing something which creates a benefit for which the customer is prepared to pay. Thus we could classify manufacturing as a value-added activity as well as the physical movement of the product and the means of creating the exchange. The old adage ' the right product in the right place at the right time' summarizes the idea of customer value-adding activities. Thus any activity that contributes to the achievement of that goal could be classified as value-adding.

On the other hand, non-value-adding time is time spent on an activity whose elimination would lead to no reduction of benefit to the customer. Some non-value-adding activities are necessary because of the current design of our processes but they still represent a cost and should be minimized.

Flowcharting supply chain processes is the first step towards understanding the opportunities that exist for improvements in productivity through logistics process re-engineering.

Once processes have been flowcharted the debate can begin as to which elements of the process can truly be described as value-adding. The acid test of a value-adding activity is that its elimination would lead to a reduction in real customer benefit.

Much of the non-value-added time in the logistics pipeline is idle time. In other words the product is standing still as inventory. Often finished inventory is created too early in the process. If ways could be found to postpone the final finishing or configuration of the product then the total amount of pipeline inventory would be less and at the same time flexibility would be enhanced. Companies such as Hewlett Packard now design their products so that the final 'localization' can be delayed until the last possible moment. This means that inventory can be held in a generic form rather than as finished product.

3. The customer interface
A major problem for many organizations is that they do not have a clear view of the final marketplace. An upstream supplier of packaging materials selling to an original equipment manufacturer, for example, has little chance of knowing what the day-by-day level of demand is for the final product at retail level. Even the manufacturer of the product may not have visibility of final demand because their view of the market place is obscured by intervening inventories.

Being able to capture information on demand as close to the final point of consumption as possible is a major aid to agility. Those companies that have access to their customers' sales or usage data are able to plan and schedule capacity better and often can make to order. The real breakthrough of the last decade has been the linking of buyers' and suppliers' information systems through such initiatives as Efficient Consumer Response (ECR) and Quick Response.

A close connection with the marketplace through shared information enables a more responsive supply chain to be created. For example, at Cisco Systems - a fast-growing provider of network routing and switching equipment - orders are entered by customers directly through the Internet. Typically these orders are for uniquely configured products which are assembled to order. Because Cisco's suppliers are linked directly to the information system they are immediately alerted of the requirement for components. At the same time the third party logistics service provider is informed of the impending shipment requirements. As a result customized products can be delivered and installed in much shorter time-frames.

These information linkages need not be based upon advanced technology, although IT and electronic commerce have been significant enablers of shared information. The key requirement is the willingness of all parties in the supply chain to act as partners and to recognize the need for open communication. Some of the biggest improvements in supply chain agility have occurred through a change of attitude amongst the parties involved, away from an adversarial approach to a relationship that is based upon 'win-win' thinking.

Converting the supply chain into a demand chain
There is a fundamental difference between the traditional approach to supplying product to markets and the newly emerging model we have described here. The traditional approach is based upon optimizing production handling and transportation through the calculation of 'economic batch quantities'. It is essentially a 'push' type of system where product is produced ahead of demand, normally against a forecast and is then held in the market place awaiting orders. The model suggests that the supply chain should become a 'demand chain' - in other words, everything that is moved, handled or produced should ideally be in response to a known customer requirement. A supply chain tends to focus on creating efficiency in terms of the flow of material from source to user. A demand chain is focused on effectiveness in the sense that it seeks to be market-driven by responding to the needs of the market more rapidly.

The key to this transformation - from supply chain to demand chain - is agility.

Table 1 summarizes the major differences between the traditional model and the new approach to supply chain management.

CONCLUSION
The changed conditions in the global marketplace demand a much more agile response from the organization and its partners in the supply chain. In the past, marketing success was based upon strong brands and innovative technologies. Today brands and innovation are still critical but they are not enough. Instead the winning combination is strong brands and innovative technologies supported by an agile supply chain capable of responding more rapidly to volatile demand.

True competitive advantage is gained when the organization is able to consistently meet the needs of customers more precisely and in a more timely way than anyone else. As the realization grows that it is no longer company competing against company but rather supply chain against supply chain, then the prospect of market leadership will surely be enhanced.

About the Author
Professor Martin Christopher
Cranfield School of Management

Martin Christopher is Professor of Marketing and Logistics at Cranfield School of Management, one of Europe's leading Business Schools, which is itself a part of Cranfield University. His work in the field of logistics and supply chain management has gained international recognition. He has published widely and his recent books include Logistics and Supply Chain Management and Marketing Logistics. Martin Christopher is also co-editor of the International Journal of Logistics Management and is a regular contributor to conferences and workshops around the world.

At Cranfield, Martin Christopher chairs the Centre for Logistics and Transportation, the largest activity of its type in Europe. The work of the centre covers all aspects of transportation and logistics and offers both full-time and part-time Masters degree courses as well as extensive management development programs. Research plays a key role in the work of the Centre and contributes to its international standing.

Martin Christopher is an Emeritus Fellow of the Institute of Logistics on whose Council he sits. In 1988 he was awarded the Sir Robert Lawrence Gold Medal for his contribution to logistics education and in 1997 was given the USA Council of Logistics Management's Foundation Award.