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April 16, 2012

Supply Chain Agility: Does it Matter?

A short Wikipedia article about agility states this:

"Agility or nimbleness is the ability to change the body's position efficiently, and requires the integration of isolated movement skills using a combination of balance, coordination, speed, reflexes, strength, endurance and stamina. In sports, agility is often defined in terms of an individual sport, due to it being an integration of many components each used differently (specific to all of sorts of different sports). Sheppard and Young defined agility as 'a rapid whole body movement with change of velocity or direction in response to a stimulus.' In business and software development, agility means the capability of rapidly and efficiently adapting to changes."

If you change that discussion a little to focus on supply chains, it might read: "Agility or nimbleness is the ability to change a company's direction efficiently, and requires the integration of isolated business processes using a combination of collaboration, speed, and alignment. Agility requires the integration of many components each used differently (specific to all of sorts supply chains). Agility is a rapid whole company movement in response to a stimulus." That's sounds like it may be true and a good thing; but Manish Kumar Garg asks, "Supply Chain Agility - Is it for Real?" [Supply Chain Management, 6 February 2012] He continues:

"Supply Chain Agility represents how fast a supply chain responds to the changes in environment, customer preferences, competitive forces etc. It doesn't talk about random variations in executing day-to-day supply chain operations. It rather specifies how a company's supply chain responds to changes, once business is aware of external changes which can negatively/positively affect the business in achieving its objectives. It is a measure of how companies adapt their supply chain to these changes and then how fast it is able to achieve it."

That sounds remarkably like the altered discussion of the term "agility" found above and it sounds like Garg, in answer to his question, thinks it is real. However, he doesn't necessarily believe that the pursuit of agility is always the right thing to do. He notes that agility "comes with a cost" and sometimes that cost is so high that it affects the bottom line. As a result, he recommends that companies ask themselves how agile they need to be and, more importantly, where that agility benefits the supply chain the most. If they can determine those two factors, companies will be able to determine if supply chain agility fits with the "overall strategy of the company." He continues:

"Sensing ... change much in advance gives lot of room for companies to respond to changes in business environment. That said, leveraging this knowledge to proactively respond to the change with the right velocity, differentiates winners from laggards. Companies aspiring to be agile should build flexible organization and design flexible processes. Organizational structure should encourage co-ordination among various departments/units within the same organization as well as partners (Vendors, Logistics Partners etc.)."

In other words, a company can't be agile if it isn't also collaborative. Collaboration increases supply chain visibility and increases the lead time available for decisions. It is the ability to make good decisions faster than one's competition that marks an organization as being more agile. Garg talks about this capability in terms of "velocity." He writes, "Velocity, in how information progresses across the supply chain and how fast the physical product moves down the supply chain, is a critical factor in being a leader among the pack." Garg claims there "are four pillars for achieving an Agile Supply Chain."

"Advanced Sensing + Flexibility + Co-ordination + Velocity = Agility"

He concludes, "IT systems can greatly help in strengthening all the four pillars of Agility." To be more precise, cloud computing systems can greatly help in strengthening agility. Only cloud computing can integrate the sensing and coordinated actions fast enough to be agile in any meaningful way. The discussion doesn't stop there, however; it only starts getting more interesting. Trevor Miles writes about a discussion he had with Lora Cecere on this topic. ["Supply Chain Agility: If you know it when you see it, do you need to define it?" The 21st Century Supply Chain, 15 March 2012] The discussion started when Miles "tweeted" Cecere "that 'agility' is a requirement for any modern supply chain." Miles indicates that "Lora challenged [that] statement by stating that there isn’t a standard definition for agility. More precisely, Lora's point was that there isn't a standard way of measuring agility, which of course relies on a standard definition." Miles continues:

"OK, I get Lora's point, but, like that famous statement by a U.S. Supreme Court judge when asked to define pornography, he replied that 'I know it when I see it.' So let us explore some of the terms, particularly agility, used to describe today's supply chains."

I could also point out that there isn't a standard definition of the term "supply chain" (see my post entitled Defining the Supply Chain); but, that doesn't stop anyone from talking about the supply chain and its importance. Nevertheless, let's get back to Miles' discussion of supply chain terms. He writes:

"As long ago as 2004, Hau Lee used 'Agile' as one of the cornerstones of his Triple-A Supply Chains, the other two being 'Adaptable' and 'Aligned.' Hau’s full definition is:

Agile: They respond quickly to sudden changes in supply or demand. They handle unexpected external disruptions smoothly and cost-efficiently. And they recover promptly from shocks such as natural disasters, epidemics, and computer viruses.

Adaptable: They evolve over time as economic progress, political shifts, demographic trends, and technological advances reshape markets.

Aligned: They align the interests of all participating firms in the supply chain with their own. As each player maximizes its own interests, it optimizes the chain’s performance as well.

"In a recent IndustryWeek article titled “The Dynamic Supply Chain,” Mark Pearson of Accenture makes the statement that:

… 70% of executives who responded to a recent Accenture survey expressed concern about their inability to predict future performance, and more than 80% worried about the overall resilience of their supply chains in the face of unrelenting market challenges.

"This is a great summary of the market drivers that are forcing manufacturers to adopt the concepts behind dynamic supply chains. But what are these concepts? From Mark's description of the market drivers, we now we have three terms: Dynamic, Agile, Resilient. Mark does not define these terms, although he adds other terms including Flexibility, Adaptability, and Responsiveness."

You have to agree with Miles that it's impossible to read anything about supply chains without also reading a significant number of descriptors that may or may not have a standard definition. He continues:

"Nevertheless, Mark does a great job of describing the primary characteristics of a dynamic supply chain:

  • “Portfolio of supply chains”
  • Dynamic operating model
  • Sense, Shape and Respond
  • Flexible Product Strategy
  • Agile Execution
  • Operational Hedging

"For me, all of these terms come down to agility in the face of demand and supply volatility, the key point from the Accenture survey quoted by me above. The best definition of agility comes from Martin Christopher at the Cranfield School of Management in an article titled “The Agile Supply Chain: Competing in Volatile Markets”:

Agility is a business-wide capability that embraces organisational structures, information systems, logistics processes and, in particular, mindsets. A key characteristic of an agile organisation is flexibility. Indeed the origins of agility as a business concept lie in flexible manufacturing systems (FMS). Initially it was thought that the route to manufacturing flexibility was through automation to enable rapid change (i.e. reduced set-up times) and thus a greater responsiveness to changes in product mix or volume. Later this idea of manufacturing flexibility was extended into the wider business context (3) and the concept of agility as an organisational orientation was born.

Agility should not be confused with Lean. Lean is about doing more with less. The term is often used in connection with lean manufacturing to imply a zero inventory, just-in-time approach. Paradoxically, many companies that have adopted lean manufacturing as a business practice are anything but agile in their supply chain. The car industry in many ways illustrates this conundrum. The origins of lean manufacturing can be traced to the Toyota Production System (TPS), with its focus on the reduction and elimination of waste.

"What I love about this definition by Martin is the comparison and contrast between agility and lean. This contrast is brought out in a blog titled “Supply Chain Concept,” in which the author states that the difference between agile and lean supply chains is as follows:

Lean:

  • Forecast at generic level
  • Economic batch quantities
  • Maximize efficiencies

Agile:

  • Demand driven
  • Localized configuration
  • Maximize effectiveness

"What is not stated in the diagram above is that if an equivalent diagram were drawn with margin on the Y axis, it is likely that the 20% of the products that make up 80% of the total demand would only account for 50% or less of the profit. This is because many of the products in the 'agile' space have higher margin, often because they are new products."

I'm glad that Miles points out that lean and agile aren't the same. In past posts, I've noted that lean and resilient principles are often at odds and create a tension within an organization between those tasked with ensuring business continuity and those tasked with finding cost savings. Miles goes on to describe some "great work done by Matt Davis of Gartner" that "differentiates between 'agile response' and 'efficient response' at different stages of a product's life span." Miles further discusses Gartner's promotion of "the concept of Demand-Driven Value Networks (DDVN)." He concludes his post by referring back to Cecere's original challenge. He writes:

"Let me refer back to Lora’s challenge. I admit that, beyond characteristics described by Gartner, Cranfield, and Accenture, amongst others, I am not sure that I can define a dynamic or agile supply chain. But as sure as heck I know it when I see it, and I think we all do. But what about a standard way in which to measure agility/flexibility? To be honest, there isn’t even a standard way in which to measure forecast accuracy. ... While there isn’t a consensus on how to measure something as simple as forecast error, I am quite relaxed about not having a precise measure of something more complex like agility. Nevertheless, Lora has a point, because if you can’t measure it you can’t control it."

Miles is up to the challenge, however, and insists that while "there isn’t one key performance indicator (KPI) that can be used to measure agility" there may be a number of other KPIs that combined serve as a good substitute. Miles' list of KPIs, "in descending order of importance," is:

  • On-time delivery (OTD) to original customer request date and at standard cost
    • All too often we measure OTD to promise date
    • It is easy to expedite materials to meet a customer request, but doing so profitably is a true measure of agility
    • Most importantly, this KPI is consistent with the Gartner definition of Demand Translation
  • Inquiry-to-quote lead time
    • The time it takes a company to respond to a customer request with a promise date for either a new order or a change in an existing order
    • I’d like to suggest that this should be less than 10% of the order-to-delivery lead time
  • Cash-to-cash
    • This measures the efficiency or speed of converting cash to supplies and then into products that can be sold
    • Some people object to C2C because it also measures Days of Sales Outstanding (DSO), which is essentially the tie from when the customer gets an invoice to when they pay, and Days of Payables Outstanding (DPO), which is essentially the time between when materials are receive to when a supplier is paid. People object because DSO and DPO are not under the direct control of Supply Chain. This is true, but many companies try to hide channel inventory at dealers and distribution partners in DSO, and raw material inventory liability as DPO.

In his final remarks, Miles refers back to Mark Pearson's discussion of dynamic supply chains. He notes that Pearson "makes this statement about transitioning to a dynamic supply chain:

"Moving from the 'integrated' to 'dynamic' supply chain model enables companies to view their supply chains as adaptable ecosystems of processes, people, capital assets, technology and data. They strive for flexibility where it matters and focus their efforts on operational agility that drives profits, and not just short-term efficiencies."

Miles says that Pearson's description "sounds like an Enterprise Control Tower, ... especially when you consider that Stage 4 of the Gartner DDVN maturity model is called 'Orchestration'." I believe that most pundits would conclude that supply chain agility does exist and that it does matter -- even if it is hard to find and difficult to measure.

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