Executive Briefings

Supply Chains Learn to Change, Then - They Change Again

Nothing is constant when the unpredictable customer rules. Companies must embrace variability, by working with channel partners to build agile supply chains.

There's no word more terrifying to a corporate executive than failure. Unless that word is change. Managers often seem more comfortable with building new organizational structures than deciding when the old ones must go. Least appealing of all is the prospect of continuous change, stemming from the belief that successful companies never sit still. That elegant solution to a sluggish production line that you installed last week? It's already obsolete.

Call it the "If It Ain't Broke, Break It" syndrome. In fact, that's the name of a popular management strategy book published nearly 10 years ago. More recently, the dreaded philosophy of non-stop change has begun to overwhelm the supply chain. Several key trends have combined to ensure that no supply chain can resist change. Companies are being subjected to higher levels of unpredictability as product lifecycles shorten and marketplaces grow more volatile. Reasons include the high cost of inventory, shrinking margins due to superstore discounters, software that allows trading partners to be bombarded by data, and the internet, which gives the consumer a dizzying array of choices. As a result, long-term forecasts of demand seem less and less able to match up with actual consumption, creating either a glut of inventory or a shortfall of popular product.

Demand is becoming more fragmented as companies pursue the Holy Grail of mass customization, says Stanley Elbaum, a partner with Benchmarking Partners in Cambridge, Mass. Manufacturers are catering to the distinct needs of ever-smaller groups of consumers. When buyers clamor for more variability of product, the traditional strategy of building up finished goods inventories proves ineffectual.

"The notion that the supply chain can anticipate large amounts of demand with buffer stock just doesn't work anymore," says Elbaum.

On the supplier side, companies are turning to outsourcing on a number of fronts, meaning that no one entity has direct control over the entire process. And that makes it harder for a supply chain to respond quickly to shifts in demand.

As companies cast about for new means of competitive advantage and faster response times, supply-chain managers find themselves on the hot seat. In particular, the logistics function is under heavy scrutiny. According to Janice H. Hammond, UPS Professor of Business Logistics at Harvard Business School, logistics is 10 to 15 years behind manufacturing in terms of process innovation.

Having addressed production inefficiencies, and installed next- generation software on the assembly line, companies are now looking to do the same with warehousing, delivery and order fulfillment.

Agility Is the Key
Fortunately for top executives, the answer doesn't lie in a corporate revolution every six months. The key to keeping pace with change is supply-chain agility, says Martin Christopher, professor of marketing and logistics at England's Cranfield School of Management. With roots in flexible manufacturing systems, the idea of agility calls for companies to react to the peaks and valleys of demand, along with changes in product configuration, as fast as possible. In the process, says Christopher, time becomes a competitive weapon.

An agile organization promotes the free flow of product data among trading partners, resulting in the so-called virtual supply chain, wherein inventory is at least partly replaced by information. Retail-industry programs such as Efficient Consumer Response (ECR) and Collaborative Planning, Forecasting and Replenishment (CPFR) have helped to speed point-of-sale data up the chain to manufacturers and their suppliers. Supply-chain partners can collaborate on short-term sales and promotions, which might otherwise be plagued by hazy guesses as to how much product is going to sell.

Similar projects are under way in the high-tech sector, although in a less organized fashion. Christopher cites San Jose, Calif.- based Cisco Systems Inc. as a company that shares information with its suppliers immediately upon receiving an order. Agile supply chains seek to operate less on the basis of forecasting and more on actual demand. In a perfect world, where information was instantly available and organizations designed for maximum efficiency, companies wouldn't need long-term demand forecasts for finished product at all. But such a scenario is far from becoming a reality, if it ever will. Customer tastes are far too fickle for that.

Instead, forecasting can be used to determine the rough number of needed goods, with "live" purchasing data filling in the details. Wherever possible, plants can hold back on production until they receive an order. "You forecast capacity," explains Christopher, "but you execute against demand."

David Caruso, a vice president with AMR Research in Boston, recommends long-term budgeting on an aggregate basis - allotting dollars to a particular area without specifying which applications will be needed until a later time. Lacking a calcified production plan, companies are free to meet the needs of the moment. And they are less likely to trust the established order. Caruso speaks of the need for "renewable competitive advantage," whereby new organizational visions are turned into reality in less than six months.

Other experts agree that supply-chain managers should practice a blend of long-term planning and reacting to the real world. Joseph Martha, vice president of Mercer Management Consulting in Cleveland, says it's easier to forecast at the level of raw or unfinished materials because the final product isn't set in stone. He cites the Spanish apparel retailer Zara as a company that furnishes rough forecasts to its suppliers but holds back on production until the last possible moment.

Information as Solder
None of this is possible without a high-quality information link to weld the supply chain together. Zara can go from preliminary sketches to having a new garment in stores within two weeks, Martha says. That's a critical competitive tool in the fast- changing world of fashion.

On the high-tech side, many companies have scored successes with postponement strategies, building a basic product then adding on customized features - keyboards, power units, manuals in the proper language - just before shipping to the end user. In the most extreme cases, customers can configure their own orders with the help of an automated "choiceboard" via the internet.

Speed of response is also determined by the complexity of a given product. The maker of an item with countless iterations will have a tough time responding to its customer base. And while some degree of product variability is inevitable, given the fragmentation of consumer tastes today, companies aspiring to agility would do well to minimize the possibilities to the greatest extent possible.

The Architectural Door Division of Weyerhaeuser Co., based in Federal Way, Wash., drastically reduced the various configurations of its product, says Martha. Restricting itself to the most popular choices, it was able to slash order turnaround time - while charging consumers a premium for the service. The equation of simplicity equals speed also applies to a manufacturer's relationships with its suppliers. Many have shrunk their supply base to a handful of trusted partners, an important step toward supply-chain efficiency. But Christopher says the need for agility rules out the use of a single, long-term supplier for any given product or component. Companies must be able to draw on a portfolio of vendors to meet immediate needs. And even those entities must be subject to continual review. Old- line organizations can be hobbled by partners whose competence hasn't been questioned for years.

Nor is exclusivity a desired goal in the modern-day supply chain. That notion went out the window with the advent of contract manufacturers, any one of whom might be turning out product for sworn rivals. "It's more about companies' ability to closely operate in a win-win situation," says Elbaum, "where your partners are not taking 100 percent of what you've got."

In an agile supply chain, no company stands alone. The mere existence of data isn't enough to ensure an efficient operation. Christopher says partners must collaborate on product development, information systems, and long-term strategy. In theory, they will create the kind of supply chain that can compete as a unit, not with other manufacturers, distributors or retailers, but with other supply chains. The popularity of outsourcing, as well as the growth of global commerce, demands that approach, he says.

Lean or Agile?
To some extent, the push for supply-chain agility represents a shift in managerial thinking. The last decade has seen a focus - some call it an obsession - with leanness. Companies have become fixated on driving out every last scrap of waste, with a particular emphasis on inventory. But at some point, that mission threatens to collide with the need for agility. If a manufacturer's inventories are stripped to the barest minimum, how can it respond quickly when sales of a given item unexpectedly surge? The lean approach makes sense where demand is predictable, product variety low and volumes high, says Christopher. Where the opposite is true, companies may run into trouble. The automotive industry in the western hemisphere, for example, is marked by unpredictability, high variety and low volumes at the individual SKU level. Yet automakers have touted leanness as a key business goal.

It could be necessary to back away from the lean model in order to achieve a measure of agility, Christopher says. Manufacturers might have to turn out product in smaller batches and resort to more changeovers.

"The flexibility gained more than pays for that," says Christopher. U.S. Steel built a series of "mini-mills" that were more expensive to maintain than the big integrated mills, yet better able to respond to the market. The total supply-chain cost was less.

Still, companies would be wrong to venture toward extremes. Frequently the solution will lie in a mix of leanness and agility. Zara competes head-to-head with fashion giants such as Benetton and The Gap through its ability to react quickly to new trends. Yet it skews slightly toward undersupply, with production kept just below the level of expected sales.

"Lean and agile are mutually supportive," says Elbaum. Companies will always encounter a degree of variability in their markets. Yet their response shouldn't be to build more inventory into the system. Instead, they should be utilizing the internet and other tools to build in early-warning signals, promoting quick response within shrinking lead times.

The trick, says Elbaum, is to build a supply chain that's less of a linear process and more of a web, where an event that occurs at one place is felt by all. Information must be made available to every partner simultaneously. In addition, participants must share a set of metrics that track performance throughout the chain, says Judy Stimson, associate partner with Andersen Consulting in Tampa, Fla.

Lacking such a structure, serious misalignments can occur, causing a decline in customer service. "To make the wrong component with tremendous efficiency is not the answer," Elbaum says.

The Human Equation
As with any new organizational structure, the chief obstacle isn't technology; it's the human factor. Getting people to change when a crisis isn't evident can be a daunting task, says Stimson. Often workers and managers need a "burning platform" before moving decisively to reengineer the business.

Even Jack Welch, the legendary chief executive officer of General Electric, has spent 10 years pushing that corporate giant in the direction of change. Says Stimson: "You have to have the resolve to see it through."

Continuous change can take place incrementally, not just in huge leaps, says Steve Banker, director of supply-chain research with ARC Advisory Group, Inc. in Dedham, Mass. The key is to keep moving. To manage systems and run simulations, he recommends the appointment of a "power user," a high-level executive who is an expert on the application of information technology to the supply chain.

There is the slight danger of moving too fast, says Hammond. Executives who pore over the latest bestsellers on management technique may become so enchanted by the notion of change that they discard systems or structures that are working well. Already some companies that spent millions on new enterprise software at the turn of the millennium are bemoaning the loss of perfectly good legacy systems.

Hammond cautions against creating artificial crises at a time when companies are already dealing with authentic ones. "There's no reason to drop a bomb in the middle of it," she says. "The bombs are already dropping."

Don't expect a cease-fire anytime soon. The pressure for change will grow more relentless over the next few years, says Caruso. Companies will continue to scramble for new solutions based around the internet and electronic commerce, both of which are in their infancy. AMR predicts that business-to-business activity over the internet will hit $5.7tr in 2004, accounting for 36 percent of U.S. manufacturing. That compares with only 2 percent today.

Technology aside, it's the customer who will dictate how a company goes to market. And the winning supply chains will be those that can constantly reinvent themselves. Says Hammond: "I don't see an end in sight to competitive pressures."

There's no word more terrifying to a corporate executive than failure. Unless that word is change. Managers often seem more comfortable with building new organizational structures than deciding when the old ones must go. Least appealing of all is the prospect of continuous change, stemming from the belief that successful companies never sit still. That elegant solution to a sluggish production line that you installed last week? It's already obsolete.

Call it the "If It Ain't Broke, Break It" syndrome. In fact, that's the name of a popular management strategy book published nearly 10 years ago. More recently, the dreaded philosophy of non-stop change has begun to overwhelm the supply chain. Several key trends have combined to ensure that no supply chain can resist change. Companies are being subjected to higher levels of unpredictability as product lifecycles shorten and marketplaces grow more volatile. Reasons include the high cost of inventory, shrinking margins due to superstore discounters, software that allows trading partners to be bombarded by data, and the internet, which gives the consumer a dizzying array of choices. As a result, long-term forecasts of demand seem less and less able to match up with actual consumption, creating either a glut of inventory or a shortfall of popular product.

Demand is becoming more fragmented as companies pursue the Holy Grail of mass customization, says Stanley Elbaum, a partner with Benchmarking Partners in Cambridge, Mass. Manufacturers are catering to the distinct needs of ever-smaller groups of consumers. When buyers clamor for more variability of product, the traditional strategy of building up finished goods inventories proves ineffectual.

"The notion that the supply chain can anticipate large amounts of demand with buffer stock just doesn't work anymore," says Elbaum.

On the supplier side, companies are turning to outsourcing on a number of fronts, meaning that no one entity has direct control over the entire process. And that makes it harder for a supply chain to respond quickly to shifts in demand.

As companies cast about for new means of competitive advantage and faster response times, supply-chain managers find themselves on the hot seat. In particular, the logistics function is under heavy scrutiny. According to Janice H. Hammond, UPS Professor of Business Logistics at Harvard Business School, logistics is 10 to 15 years behind manufacturing in terms of process innovation.

Having addressed production inefficiencies, and installed next- generation software on the assembly line, companies are now looking to do the same with warehousing, delivery and order fulfillment.

Agility Is the Key
Fortunately for top executives, the answer doesn't lie in a corporate revolution every six months. The key to keeping pace with change is supply-chain agility, says Martin Christopher, professor of marketing and logistics at England's Cranfield School of Management. With roots in flexible manufacturing systems, the idea of agility calls for companies to react to the peaks and valleys of demand, along with changes in product configuration, as fast as possible. In the process, says Christopher, time becomes a competitive weapon.

An agile organization promotes the free flow of product data among trading partners, resulting in the so-called virtual supply chain, wherein inventory is at least partly replaced by information. Retail-industry programs such as Efficient Consumer Response (ECR) and Collaborative Planning, Forecasting and Replenishment (CPFR) have helped to speed point-of-sale data up the chain to manufacturers and their suppliers. Supply-chain partners can collaborate on short-term sales and promotions, which might otherwise be plagued by hazy guesses as to how much product is going to sell.

Similar projects are under way in the high-tech sector, although in a less organized fashion. Christopher cites San Jose, Calif.- based Cisco Systems Inc. as a company that shares information with its suppliers immediately upon receiving an order. Agile supply chains seek to operate less on the basis of forecasting and more on actual demand. In a perfect world, where information was instantly available and organizations designed for maximum efficiency, companies wouldn't need long-term demand forecasts for finished product at all. But such a scenario is far from becoming a reality, if it ever will. Customer tastes are far too fickle for that.

Instead, forecasting can be used to determine the rough number of needed goods, with "live" purchasing data filling in the details. Wherever possible, plants can hold back on production until they receive an order. "You forecast capacity," explains Christopher, "but you execute against demand."

David Caruso, a vice president with AMR Research in Boston, recommends long-term budgeting on an aggregate basis - allotting dollars to a particular area without specifying which applications will be needed until a later time. Lacking a calcified production plan, companies are free to meet the needs of the moment. And they are less likely to trust the established order. Caruso speaks of the need for "renewable competitive advantage," whereby new organizational visions are turned into reality in less than six months.

Other experts agree that supply-chain managers should practice a blend of long-term planning and reacting to the real world. Joseph Martha, vice president of Mercer Management Consulting in Cleveland, says it's easier to forecast at the level of raw or unfinished materials because the final product isn't set in stone. He cites the Spanish apparel retailer Zara as a company that furnishes rough forecasts to its suppliers but holds back on production until the last possible moment.

Information as Solder
None of this is possible without a high-quality information link to weld the supply chain together. Zara can go from preliminary sketches to having a new garment in stores within two weeks, Martha says. That's a critical competitive tool in the fast- changing world of fashion.

On the high-tech side, many companies have scored successes with postponement strategies, building a basic product then adding on customized features - keyboards, power units, manuals in the proper language - just before shipping to the end user. In the most extreme cases, customers can configure their own orders with the help of an automated "choiceboard" via the internet.

Speed of response is also determined by the complexity of a given product. The maker of an item with countless iterations will have a tough time responding to its customer base. And while some degree of product variability is inevitable, given the fragmentation of consumer tastes today, companies aspiring to agility would do well to minimize the possibilities to the greatest extent possible.

The Architectural Door Division of Weyerhaeuser Co., based in Federal Way, Wash., drastically reduced the various configurations of its product, says Martha. Restricting itself to the most popular choices, it was able to slash order turnaround time - while charging consumers a premium for the service. The equation of simplicity equals speed also applies to a manufacturer's relationships with its suppliers. Many have shrunk their supply base to a handful of trusted partners, an important step toward supply-chain efficiency. But Christopher says the need for agility rules out the use of a single, long-term supplier for any given product or component. Companies must be able to draw on a portfolio of vendors to meet immediate needs. And even those entities must be subject to continual review. Old- line organizations can be hobbled by partners whose competence hasn't been questioned for years.

Nor is exclusivity a desired goal in the modern-day supply chain. That notion went out the window with the advent of contract manufacturers, any one of whom might be turning out product for sworn rivals. "It's more about companies' ability to closely operate in a win-win situation," says Elbaum, "where your partners are not taking 100 percent of what you've got."

In an agile supply chain, no company stands alone. The mere existence of data isn't enough to ensure an efficient operation. Christopher says partners must collaborate on product development, information systems, and long-term strategy. In theory, they will create the kind of supply chain that can compete as a unit, not with other manufacturers, distributors or retailers, but with other supply chains. The popularity of outsourcing, as well as the growth of global commerce, demands that approach, he says.

Lean or Agile?
To some extent, the push for supply-chain agility represents a shift in managerial thinking. The last decade has seen a focus - some call it an obsession - with leanness. Companies have become fixated on driving out every last scrap of waste, with a particular emphasis on inventory. But at some point, that mission threatens to collide with the need for agility. If a manufacturer's inventories are stripped to the barest minimum, how can it respond quickly when sales of a given item unexpectedly surge? The lean approach makes sense where demand is predictable, product variety low and volumes high, says Christopher. Where the opposite is true, companies may run into trouble. The automotive industry in the western hemisphere, for example, is marked by unpredictability, high variety and low volumes at the individual SKU level. Yet automakers have touted leanness as a key business goal.

It could be necessary to back away from the lean model in order to achieve a measure of agility, Christopher says. Manufacturers might have to turn out product in smaller batches and resort to more changeovers.

"The flexibility gained more than pays for that," says Christopher. U.S. Steel built a series of "mini-mills" that were more expensive to maintain than the big integrated mills, yet better able to respond to the market. The total supply-chain cost was less.

Still, companies would be wrong to venture toward extremes. Frequently the solution will lie in a mix of leanness and agility. Zara competes head-to-head with fashion giants such as Benetton and The Gap through its ability to react quickly to new trends. Yet it skews slightly toward undersupply, with production kept just below the level of expected sales.

"Lean and agile are mutually supportive," says Elbaum. Companies will always encounter a degree of variability in their markets. Yet their response shouldn't be to build more inventory into the system. Instead, they should be utilizing the internet and other tools to build in early-warning signals, promoting quick response within shrinking lead times.

The trick, says Elbaum, is to build a supply chain that's less of a linear process and more of a web, where an event that occurs at one place is felt by all. Information must be made available to every partner simultaneously. In addition, participants must share a set of metrics that track performance throughout the chain, says Judy Stimson, associate partner with Andersen Consulting in Tampa, Fla.

Lacking such a structure, serious misalignments can occur, causing a decline in customer service. "To make the wrong component with tremendous efficiency is not the answer," Elbaum says.

The Human Equation
As with any new organizational structure, the chief obstacle isn't technology; it's the human factor. Getting people to change when a crisis isn't evident can be a daunting task, says Stimson. Often workers and managers need a "burning platform" before moving decisively to reengineer the business.

Even Jack Welch, the legendary chief executive officer of General Electric, has spent 10 years pushing that corporate giant in the direction of change. Says Stimson: "You have to have the resolve to see it through."

Continuous change can take place incrementally, not just in huge leaps, says Steve Banker, director of supply-chain research with ARC Advisory Group, Inc. in Dedham, Mass. The key is to keep moving. To manage systems and run simulations, he recommends the appointment of a "power user," a high-level executive who is an expert on the application of information technology to the supply chain.

There is the slight danger of moving too fast, says Hammond. Executives who pore over the latest bestsellers on management technique may become so enchanted by the notion of change that they discard systems or structures that are working well. Already some companies that spent millions on new enterprise software at the turn of the millennium are bemoaning the loss of perfectly good legacy systems.

Hammond cautions against creating artificial crises at a time when companies are already dealing with authentic ones. "There's no reason to drop a bomb in the middle of it," she says. "The bombs are already dropping."

Don't expect a cease-fire anytime soon. The pressure for change will grow more relentless over the next few years, says Caruso. Companies will continue to scramble for new solutions based around the internet and electronic commerce, both of which are in their infancy. AMR predicts that business-to-business activity over the internet will hit $5.7tr in 2004, accounting for 36 percent of U.S. manufacturing. That compares with only 2 percent today.

Technology aside, it's the customer who will dictate how a company goes to market. And the winning supply chains will be those that can constantly reinvent themselves. Says Hammond: "I don't see an end in sight to competitive pressures."