Flexible Supply Chain

source: tomfishburne.com(Marketoonist)

By Vivian Cheung

Feb 13, 2012

In order to survive in the competitive market, the flexibility of a company’s supply chain has become an important differentiator. In McKinsey’s business journal article “Building a Flexible Supply Chain for Uncertain Times” [1], discussed about the importance of agility in a supply chain. They used the classic bullwhip metaphor to capture the trend that can be seen commonly in today’s manufacturing industries, which describes how rapid demand fluctuations can exhibit a magnifying influence in other parts of the supply chain. In mature markets, the ability dodging the bullwhip effect increases a company’s chance of the survival.

The bullwhip effect has been widely studied and research in order to discover countermeasures to incorporate into good supply chain designs. Other than demand forecasting errors, Bullwhip effect also can be triggered in a lot of different ways. Overreaction to unmet demand, miscommunication upstream and downstream of supply chain, lead time variability, trade promotion and forward buying, shortage anticipations… etc, all can contribute to generating negative impacts on operating performances. As a result, schedule variability increases, lead time lengthens and customer satisfaction decreases. These are all signs of a unhealthy supply chain.[2]

Flexibility seems to be the key to dodging the bullet. For the short term, flexibility means responding to changes in demand or supply quickly and handle external disruptions effectively. For the longer term, it means meeting structural shifts in markets, modify supply network strategies, products and technologies.[3] To achieve flexibility, a company should reduce the size of their order and increase their replenishment frequencies. When entities orders more frequently, its required safety stock will decrease, and the uncertainty and variance due to demand fluctuations will also be reduced. Collaboration with key suppliers is very important as well. A true flexibly buyer-supplier relationship can allow a company to accommodate a large product variety and change in volumes in production. This partnership can be achieved by continuous information sharing, creating the sense of trust between the supplier and the buyer, and allow both parties to make informed decisions. This also enables the possibility to respond quickly on demand volatility since suppliers are willing to corporate. Other recommendations include maintaining a stable prices for products since price fluctuations encourage customers to over-purchase when prices are low and cut back on orders when prices are high, leading to large demand fluctuations. Moreover, a company should allocate demand among customers based on past orders, not present orders to reduce hoarding behavior when shortages occur.[4]

McKinsey’s article had emphasized on the importance for companies to make supply chain decisions more quickly in respond to the unprecedented volatile demand. The way I see it, companies do need to make decision more quickly, but on committing to improving their supply chain flexibility to survive in this competitive market.

References

[1] Glatzel, Christoph, Stefan Helmcke, and Joshua Wine. "Building a Flexible Supply Chain for Uncertain times - McKinsey Quarterly - Operations - Supply Chain & Logistics."Articles by McKinsey Quarterly: Online Business Journal of McKinsey & Company. Business Management Strategy - Corporate Strategy - Global Business Strategy. Mar. 2009. Web. 12 Feb. 2012. .

[2] "The Bullwhip Effect." QuickMBA: Accounting, Business Law, Economics, Entrepreneurship, Finance, Management, Marketing, Operations, Statistics, Strategy. Web. 12 Feb. 2012. .

[3] Donovan, Michael. "Supply Chain Management - Cracking the Bullwhip Effect." SCM Community - Toolbox for IT. Performance Improvement. Web. 12 Feb. 2012. .

[4] Bean, Michael. "Bullwhips and Beer: Why Supply Chain Management Is so Difficult « Forio Business Simulations." Forio Online Simulations. 2006. Web. 12 Feb. 2012. .