• Advertise
  • Contact Us
  • About Us
  • Supplier Directory
  • Login
  • Subscribe
  • Logout
  • My Profile

  • CORONAVIRUS
  • LOGISTICS
    • Air Cargo
    • All Logistics
    • Express/Small Shipments
    • Facility Location Planning
    • Freight Forwarding/Customs Brokerage
    • Global Gateways
    • Global Logistics
    • Last Mile Delivery
    • Logistics Outsourcing
    • LTL/Truckload Services
    • Ocean Transportation
    • Rail & Intermodal
    • Reverse Logistics
    • Service Parts Management
    • Transportation & Distribution
  • TECHNOLOGY
    • All Technology
    • Artificial Intelligence
    • Cloud & On-Demand Systems
    • Data Management (Big Data/IoT/Blockchain)
    • ERP & Enterprise Systems
    • Forecasting & Demand Planning
    • Global Trade Management
    • Inventory Planning/ Optimization
    • Product Lifecycle Management
    • Sales & Operations Planning
    • SC Finance & Revenue Management
    • SC Planning & Optimization
    • Sourcing/Procurement/SRM
    • Supply Chain Visibility
    • Transportation Management
  • GENERAL SCM
    • Business Strategy Alignment
    • Education & Professional Development
    • Global Supply Chain Management
    • Global Trade & Economics
    • HR & Labor Management
    • Quality & Metrics
    • Regulation & Compliance
    • SC Security & Risk Mgmt
    • Sustainability & Corporate Social Responsibility
  • WAREHOUSING
    • All Warehouse Services
    • Conveyors & Sortation
    • Lift Trucks & AGVs
    • Order Fulfillment
    • Packaging
    • RFID, Barcode, Mobility & Voice
    • Robotics
    • Warehouse Management Systems
  • INDUSTRIES
    • Aerospace & Defense
    • Apparel
    • Automotive
    • Chemicals & Energy
    • Consumer Packaged Goods
    • E-Commerce/Omni-Channel
    • Food & Beverage
    • Healthcare
    • High-Tech/Electronics
    • Industrial Manufacturing
    • Pharmaceutical/Biotech
    • Retail
  • REGIONS
    • Asia Pacific
    • Canada
    • China
    • Europe
    • Latin America
    • Middle East/Africa
    • North America
  • THINK TANK
  • PODCASTS
  • VIDEOS
  • WHITEPAPERS
Home » Can Supply Networks Be Too Flexible?

Can Supply Networks Be Too Flexible?

December 14, 2009
Robert J. Bowman, SupplyChainBrain

"I will not tell you the obvious," says MIT professor David Simchi-Levi, and he means it. Take the issue of supply-chain flexibility. According to conventional wisdom, the more of it you have, the better off you are. But Simchi-Levi believes that companies can spend too much time and money on achieving total flexibility in their sourcing and fulfillment strategies. It's a question of diminishing returns.

He defines flexibility as the ability to react to unanticipated change in areas such as consumer demand, commodity prices, labor costs and exchange rates. Simchi-Levi doesn't discount the importance of possessing that trait, calling it "one of the most important capabilities a company can invest in." It's vital that a company be capable of reacting to changing conditions without incurring higher costs or slower delivery times, he said at a recent conference in San Francisco on the topic of smart supply chains, sponsored by IBM. (Simchi-Levi is also ILOG chief scientist within the IBM Software Group, http://www-01.ibm.com/software/websphere/ilog_migration.html.)

The question is, how flexible should a supply chain be? Should every plant make every product, to minimize the impact of a shutdown or line failure at any given facility? The cost of such a scheme could be prohibitive, and virtually the same benefits can be derived from a less drastic solution.

Take the case of a food and beverage manufacturer with five plants, each dedicated to making one of five product families. Simchi-Levi looked at five possible scenarios for reallocating production, where a single plant might make anywhere from two to five different products.

The company in question was having trouble devising accurate demand forecasts, so it needed a healthy measure of flexibility to adjust for real-world conditions. At the same time, its existing production strategy was resulting in unacceptably high transportation costs. Clearly, the answer lay in achieving a balance between operational and supply-chain considerations.

Not that much of a balance, it turned out. Simchi-Levi and his fellow researchers discovered that the client could realize 80 percent of the benefits of full flexibility by adding minimal flexibility to the line - that is, having each plant make just two different product families. The company could then juggle the production levels of each product according to need. Having what amounts to a long supply chain "essentially connects each plant with all the others, even though each plant doesn't make all of the products," Simchi-Levi explained. What's more, no single plant is isolated from the others because there isn't an exact match between any of them.

He cited another example of a bottling company that added a relatively small measure of sourcing flexibility, making available an additional 12.3 million cases of product thanks to a reduction in out-of-stocks at the warehouse. In essence, the company added one and a half production lines worth of capacity to its supply chain without any additional capital expenditure.

The same goes for determining the size and character of a supply network. A U.S.-based manufacturer of household goods needed to cut costs by closing some of its 40 production plants around the world. At the same time, it was acutely aware of the risk of having too few sources of finished product. So what was the right tradeoff between slashing overhead and managing supply-chain risk?

At the outset, the company saw that it could cut $40m out of total costs by closing 17 plants. Not a bad day in the executive suite: "Think of how much revenue you'd have to generate to achieve the same effect," said Simchi-Levi.

Think again. With so many plants out of commission, the company was facing longer lead times and a greater possibility of supply-chain disruptions. Furthermore, because nearly all the surviving plants were in Asia, it was likely to encounter problems in serving customers in North America and Europe.

Simchi-Levi proposed a more conservative plan. By closing just 10 plants, and maintaining a redundancy of seven facilities, the company would incur costs that were $2.4m higher than those of the fully optimized strategy. That compared with a $50m penalty for doing nothing. At the same time, it would greatly reduce the risk of not meeting unexpected demand. Simchi-Levi's graph shows a sharp drop in costs with an initial reduction in plant locations; the line levels off and the decline becomes more gradual with each additional closure. The lesson, he said: "A small investment in flexibility can get you almost all the benefits."

Rising supply-chain costs are a constant concern of businesses, especially in today's poor economy. Total U.S. logistics costs as a percentage of gross domestic product have risen 52 percent over the last five years, Simchi-Levi noted. Factors include higher energy prices, pressures on rail capacity, a shortage of truck drivers, and new security requirements in the post 9/11 era.

The trend has prompted many executives to seek out "best practices" for streamlining their supply chains. One such maxim dictates that a company have just one supply chain for the entire organization, a strategy that Simchi-Levi believes isn't always viable for industries such as high-tech and retail. Companies need to look beyond obvious factors such as labor rates to determine the true cost of supporting a product throughout its natural lifecycle. Conventional thinking doesn't always embrace areas such as transportation, packaging and product design. Said Simchi-Levi: "There are times when companies are looking for more than best practices."

Comment on This Article

RELATED CONTENT

RELATED VIDEOS

Technology Forecasting & Demand Planning Global Trade Management Product Lifecycle Management SC Finance & Revenue Management SC Planning & Optimization Business Strategy Alignment Global Supply Chain Management Quality & Metrics SC Security & Risk Mgmt Order Fulfillment
KEYWORDS Business Strategy Alignment Forecasting & Demand Planning Global Supply Chain Management Global Trade Management order fulfillment Product Lifecycle Management Quality & Metrics SC Finance & Revenue Management SC Planning & Optimization SC Security & Risk Mgmt Supply Chain Analysis & Consulting Technology
  • Related Articles

    In Wake of Japanese Earthquake, Companies Ask if Supply Chains Can Be Too Lean, Study Finds

    The Definition of 'Supply Chain' Is Wide. It's Too Important Not to Be.

    Supply Chain Management Has to Be Flexible as Global Demographics Change

  • Related Events

    Building a hyperconnected supply chain: The three levers of transformation

Robert J. Bowman, SupplyChainBrain

Crafting a New Transportation Bill: The Battle Begins

More from this author

Wake up to Coronavirus Updates and the latest Supply Chain News!

Subscribe to our Daily Newsletter

Timely, incisive articles delivered directly to your inbox.

Popular Stories

  • Coronavirus-watch-Armada

    Virus Update: Biden Unveils National Strategy; Pfizer Says It’s Willing to Sell Vaccine to States

    Coronavirus
  • Car Industry

    A Year of Poor Planning Led to Carmakers’ Massive Chip Shortage

    Technology
  • Can Employers Require Employees to Get the COVID-19 Vaccine? Part 1

    Watch: Can Employers Require Employees to Get the COVID-19 Vaccine? Part 1

    Coronavirus
  • U.S. Vaccine Rollout Hindered by Faulty Coordination, Messaging

    WHO Fumes at Western Drugmakers As China Fills Vaccine Void

    Coronavirus
  • COVID-19 Vaccine

    Vaccine Disparities Raise Alarm as COVID-19 Variants Multiply

    Coronavirus

Digital Edition

Scb home issue 27

2020 Supply Chain Innovator of the Year

VIEW THE LATEST ISSUE

Case Studies

  • LSP Saves Customer $1.5 Million a Year With MPO Global Inbound Management

  • Auto Supplier Wows Key Client Using riskmethods Supply Chain Savvy

  • Integrating Shipping and Compliance Saves Conglomerate Millions

  • How a Consumer Goods Giant Upped Its On-Time Delivery Performance

  • LSP Wows Global Client, Quickly Advances to Become End-to-End Provider

Visit Our Sponsors

6 River Systems ArcBest Armada
aThingz BluJay Burris Logistics
DSC Logistics DCSA (Digital Container Shipping Association) DHL Resilience360
Genpact GEP Honeywell Intelligrated
Infor Logility Magnitude Software
MPO Old Dominion Oliver Wight
OpenSky Ports America Purolator
QAD Precision Red Classic Riskmethods
TGW Systems Transportation Insights Watson Land Company
Westfalia Technologies Workjam Yang Ming
  • More From SCB
    • Featured Content
    • Video Library
    • Think Tank Blog
    • SupplyChainBrain Podcast
    • Whitepapers
    • Webinars
  • Digital Offerings
    • Digital Issue
    • Subscribe
    • Manage Your Subscription
    • Newsletters
  • Resources
    • Events Calendar
    • SCB's Great Supply Chain Partners
    • Supplier Directory
    • Case Study Showcase
    • Supply Chain Innovation Awards
    • 100 Great Partners Form
  • SCB Corporate
    • Advertise on SCB.COM
    • About Us
    • Privacy Policy
    • Contact Us
    • Data Sharing Opt-Out

All content copyright © 2016 - 2018 Keller International Publishing Corp All rights reserved. No reproduction, transmission or display is permitted without the written permissions of Keller International Publishing Corp

Design, CMS, Hosting & Web Development :: ePublishing