Thursday, September 13, 2012

Building in Flexibility

In the first week’s readings, David Simchi-Levi introduced new trends (globalization, changing logistics costs, changing level of risks, changing labor costs, sustainability, and volatile commodity prices) that demand greater risk management, visibility, new approaches to globalization, and above all, flexibility.[1] His insights were echoed in the McKinsey article “Building a flexible supply chain for uncertain times,” which also addressed the uncertainty created by multiple tiers in a supply chain trying to reduce inventory.[2] Flexibility, the McKinsey consultants suggest, must be built into the inventory planning and entire supply chain process. Some strategies for flexibility include greater collaboration amongst members of the same supply chain (for instance, more frequent smaller orders to clarify true demand decrease versus demand shortages created by stocking shortages), cross-functional collaborative planning teams, and even “shifting manufacturing based on cost.”
            This last recommendation surprised me. How flexible can companies be in planning for uncertainties created by manufacturing locations? Of course major manufacturers, like in the automobile industry, may have multiple plants capable of producing an array of models, and can chose to build certain products in each plant or adjust capacity use at each plant.[3] But even these companies have to plan long term when choosing a new manufacturing location, and can’t necessarily relocate if costs change quickly. Moreover, a small company having capital for just one plant, may have to make a greater commitment to one location. For example, for many years, the trend was to move American manufacturing overseas, primarily to take advantage of cheaper labor. Somewhat suddenly, some manufacturers are considering moving back the US, citing “desire to get products to market faster and respond rapidly to customer orders; savings from reduced transportation and warehousing; improved quality and protection of intellectual property.[4] We saw from the Simchi-Levin interview that another reason is that labor costs in developing countries are rising. What sort of overseas investments are being abandoned in this move? Relative to the lifespan of facilities constructed and other capital investments made abroad, has the cost of labor increased rapidly and unexpectedly? Researching flexible manufacturing approaches didn’t yield much. On the delivery end, a flexible option that has been popular in recent years for restaurants, retailers, and even health care providers are pop up stores.[5] Pop up stores are often utilized to create buzz about a new line of products, or test out the profitability of a physical space before making a long term real estate investment. Could the manufacturing end have an equivalent and what would this look like in different industries?

[1] Your Next Supply Chain (Interview with Fine and Simchi-Levi, MIT Sloan
Management Review, January 2010)
[2] Building a Flexible Supply Chain for Uncertain Times (Glatzel, Helmcke, and
Wine, McKinsey Quarterly, March 2009)

[3]Ex-Saturn Plant to Reopen, And G.M. to Add 700 Jobs”

[4]Some Firms Opt to Bring Manufacturing Back to U.S.”

Hagerty, James RWall Street Journal (Online) [New York, N.Y] 18 July 2012:
[5] “Stores that Can’t Stay”

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