Implementing Flexibility in Supply Chain
In today’s competitive environment, markets are becoming more international, dynamic and customer-driven. Customers are demanding more variety, better quality and service, including both reliability and faster delivery. Technological developments are occurring at a faster pace, resulting in new product innovations and improvements in manufacturing processes. The resulting competitive environment requires low cost, high quality product in increasing varieties. The changes have instigated changes in business and manufacturing strategies (Duclos et al. , 2003).
The three main strategic imperatives that emerged in this century are low cost, high quality, and improved responsiveness (both delivery time and flexibility of product delivery) (Aquilano et al., 1995 cited in Duclos et al. ,2003). Cost efficiency was the driving force behind Henry Ford’s mass paradigm with large production volumes providing low per unit cost. Through the efforts in Japan, quality became the next strategic imperative. The marketplace valued efficiency and low prices, but began to emphasise the quality of products and services in product purchasing decisions. As a result of increased global competition in the 1970s, responsiveness emerged as the third strategic imperative. Buyers became more sophisticated, demanding more customisation and shorter product life cycles. Manufacturers found they could no longer maintain the large volumes of production and cost efficiency of their production and cost efficiency of their production processes with these higher levels of change and uncertainty. As a result, firms concentrated on the reduction of cycle time and solving the tradeoffs between efficiency and flexibility (Duclos et al., 2003).
By the 1990s, firms recognised the necessity of looking beyond the borders of their own firm to their suppliers, supplier’s suppliers and customer to improve overall customer value. This movement, titled supply chain management changed companies’ focus from internal management of business processes to managing across enterprises. Read which of the following is not a useful vehicle feature from a security perspective
In this work, the concepts of flexibility and agility in manufacturing and supply chain are introduced and then various dimensions of flexibility are demonstrated through a simple example. The discussion on flexibility and agility is the focus of a lot of researchers and this work by no means is considering all aspects of flexibility.
2. Flexibility and Supply Chain Management
2.1. Manufacturing Flexibility
Reviewing literature indicates that the definition of supply chain management flexibility have two major focuses. Most of the literature is focused on flexibility in internal manufacturing ((Duclos et al., 2003) in other words the internal ability of as firm to be flexible. Vokurka and O’Leary-Kelly (2000) provide a comprehensive review of manufacturing flexibility and an insight into the current state of research into manufacturing flexibility. They identify 15 dimensions of flexibility including: machine, material handling, operations, automation, labour, process, routing, product, new design, delivery, volume, expansion, program, production and market flexibility.
Koste and Malhorta (1999) proposed four elements of flexibility for measuring elements for measuring organisation’s flexibility including Range-Number (number of options in operations, tasks etc.), Range-heterogeneity (differences in options), Mobility or transition penalties such as time, cost and effort of transition and finally uniformity or similarity of performance outcome. D’Souza and Williams(2000) developed four dimensions of flexibility that is volume, variety, process and material handling flexibility. Koste and Malhotra (1999) developed a multi-level perspective of flexibility starting from strategic flexibility to shop floor and finally individual resource flexibility but still the focus remained with manufacturing flexibility. In these literatures while reviewing manufacturing flexibility, some elements of supply chain management such as marketing flexibility is also discussed.
2.2. Supply chain flexibility
In the literature, for defining supply chain management flexibility, agility and flexibility is used interchangeably. Prater et al.(2001) argues that an agile firm designs its organisation, processes and products such that it can respond to changes in a useful time frame. Christopher (1992) (cited in Christopher and Towill, 2001) argues that a key feature of present day business is the idea that it is supply chains that compete, not companies and the success or failure of supply chains is ultimately determined in the market place by the end consumer. Getting the right product, at the right price, at the right time to consumer is not only the linchpin to competitive success but also the key to survival (Christopher and Towill, 2001).
Naylor et al. (1999) defines agility as using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace. Christopher and Towill, (2001) argued the differences of lean (Toyota Production Systems concept as argued by Ohno, 1988) and agile supply chain and showed how they might be combined for greater effect. In developing the idea of achieving agility McCullen and Towill (2001) focus on supply aspect of supply chain and demonstrate how lean supply can be achieved through agile manufacturing. Therefore develops a link between supply chain and manufacturing flexibility as one dimension of multidimensional supply chain flexibility. They provide steps to providing effective damping of bullwhip effect called material flow principles which includes control system principle, time compression principle, information transparency principle and echelon elimination principle and then they discuss lean and agile paradigms and apply the concept to motor vehicle industry that have high volumes and relatively long product life-cycles. They ultimately argue that an agile manufacturing can be achieved through an agile supply chain which in their case was achieved through lean supply.
Sommer (2003) argues that the global competition has forced many organisations to search for increasingly smaller and more sophisticated sources of competitive advantage and they have redefined competitive advantage as a function of how well their organisational culture initiate and/or adapt to change, e.g. change in market conditions, competition, new product development etc. In order to realise such change, organisational processes and the technology that enables them must be continually re-evaluated and modified to reflect the needs of new integrated customer/supplier relationships. He argues that the need for flexibility has made the organisations to focus on their core competencies and use outsourcing as a mean to increase their flexibility and have implemented flexible portal/exchange solutions as well as relying on Application Server Provider (ASP) and Secure Data Centre (ADC) to host their solutions.
Vokurka et al. (2002) argue that Supply Chain Management (SCM) offers a strategic choice for achieving manufacturing capabilities without the same level of capital investment. Tully (1994) (Cited in Vokurka et al. (2002)) provides evidence to support the theory that firms are achieving needed flexibility through the use of SCM practices. They iterate the fact that certain supply chain practices directly impacts operational flexibility and supply chain management practices should be used to excel in agile manufacturing. They also argue that conventional theories of capability trade-offs espoused by Skinner (1969) (cited in Vokurka et al. (2002)) such cost , quality and customer satisfaction, have proven to have diminished due to the introduction of Total Quality Management, Just In Time management, cellular manufacturing and other strategic manufacturing strategies which sometimes makes capability trade-offs not necessary.
Ferdows and De Meyers (1990) (cited in Vokurka et al. (2002)) argue that capabilities can be attained and sustained in a cumulative manner, depending on the firm’s sequence of pursued objectives related to these capabilities. Ferdows and De Meyers (1990) propose a cumulative model (sand cone model) based on Nakane(1986) (cited in Vokurka et al. (2002)) model where a definite order exists for the pursuit and sustainability of the competitive priorities of quality, dependability, speed and cost efficiency. So they argue that cost efficiency does not lead to improved quality but is rather a possible consequence of higher quality levels (see Figure 1).
Figure 1- Ferdows and De Meyer (1990) Sand Cone model
As emphasised above, companies will no longer compete against companies but rather supply chains will compete against supply chains. Therefore cost effectiveness is a goal that must be achieved not only through internal improvements but also the supply chain must improve its overall operations to achieve this strategic capability. Therefore Vokurka and Flienner (1998) extended Ferdows and De Meyer (1990) manufacturing sand cone model to broader supply chain as is seen in Figure 2. Therefore contrary to previous literature, they have differentiated between flexibility and agility. Vokurka et al. (2002) define flexibility as the ability of the firm and its management to change rapidly in responses to changes taking place in the market place. But they argue that while flexibility is the ability to switch between tasks using established procedures for changeover, agility has as its main difference the ability to respond to unanticipated market changes where there is not necessarily a predefined procedure. But in order to have agility fist one should focus on developing high levels of flexibility.
Figure 2- Vokurka and Fliendner (1998) modified sand cone model
3. Application of Supply Chain Flexibility
As was mentioned before in general flexibility reflects an organisation’s ability to effectively adapt or respond to change. While there are many ways to characterise such ability (for example, manufacturing flexibility, marketing flexibility etc.) flexibility should be viewed from the perspective of the entire value-adding system i.e. total system flexibility (Vickery et al. (1999). This viewpoint suggests that supply chain flexibility should be examined from an integrative, customer-oriented perspective.
3.1. Applying Flexibility Concept
In order to apply the concept of flexibility, one must look at the whole supply chain and such an investigation is out of the scope of this work. To help in demonstrating some aspects of supply chain, one might consider a Pizza shop franchise and apply some of the aspects of the flexibility across part of the supply chain. A Pizza franchise is part of the supply chain as it requires supplying pizza ingredients from suppliers and processing them to a condition suitable for distribution across its various shops using distribution network. In many cases, suppliers are spread across various countries to enable the franchise in reducing costs. The supply chain is not limited to food ingredients but also boxes, tools and equipment etc.
The franchise then makes the product and distributes it directly to customers or alternatively uses a distribution network (drivers) to distribute them to the customers. In this section, various aspects of flexibility will be applied to this simple example and then the impact of changes to one part of supply chain to other parts will be demonstrated. Figure 3 shows a simple diagram of supply chain for this example. If only one ingredient of pizza is considered such as processed meat, the supply chain includes farmers, distributors, manufacturer of processed meat and intermediate processing such as cutting to the right size, packaging and preparation for distribution to various pizza outlets and ultimately distribution to pizza shops and then to customers directly or via designated drivers. But supply chain also includes other components such as the chain for providing floor for dough, meat, sauce, spices, soft drink boxes and etc. The initial focus of this assignment will be on the franchise itself and distribution of pizza to customers.
Figure 3- Supply Chain under study
3.2. Dimensions of flexibility
Beamon (1999) identified the use of resources, the desired output and flexibility as vital components to supply chain success and argues that flexibility measures are distinctly different from resource and output measures and does not have to be demonstrated by the system to exists as flexibility is a measure of potential and has multiple dimensions (range and response). Beamon then provides volume flexibility, delivery flexibility, Mix flexibility (process flexibility) and new product flexibility. Scannell et al. (2000) used cost performance, quality performance, innovation performance and flexibility performance to measure the success of supply chain of car manufacturing companies in US. They used four dimensions: mix flexibility, volume flexibility, change over flexibility and modification flexibility for measuring performance of these supply chains.
Vickery et al. (1999) defines five dimensions of flexibility. The first of these are product flexibility or “the ability to handle difficult, non-standard orders, to meet special customer specifications and to produce products characterised by numerous features, options, sizes and colours. While product flexibility is a key competitive priority in the operations literature, it requires the effective collaboration of other functional players, including marketing, product design and development and engineering.
A second type of flexibility mentioned in literature is volume flexibility or the ability to effectively increase or decrease aggregate production in response to customer demand (Miller and Roth (1990), Vickery et al. (1999)). Volume flexibility directly impacts customers’ perceptions by preventing out-of-stock conditions for products that are suddenly in high demand. This dimension becomes a lot more important in a highly cyclical industry such as furniture in order to enable the manufacturer to accelerate or decelerate production very quickly and juggle orders so as to meet demands and unusually rapid delivery (Hayes and Wheelwright (1979) cited in Vickery et al. (1999)).
During the last few decades it has been proven that companies can gain a variety of competitive advantages by being first to the market. These advantages include pioneering performance, where early market entry is related to higher market share or profitability, quality image perception advantage, where early entrant has the first opportunity to build and nurture a long-term relationship with the buyer and search costs would induce the buyer to remain with the early entrant, innovation leadership advantage, which leads to consumer perception of technology superiority and scale and experience economy advantage, where early entrant can gain production efficiencies from early build-ups of experience and size advantages (Vickery et al. (1999)). The ability to rapidly introduce many new products and product varieties is a strategically important flexibility that requires integration of numerous value activities across entire supply chain.
Another critical supply chain flexibility with high customer impact is distribution or access flexibility, the ability to provide widespread or intensive distribution coverage. This flexibility captures a company’s proficiency at getting the product close to the customer (Vickery et al. (1999)). Access flexibility is facilitated by close coordination of downstream activities in the supply chain whether performed internally or externally to the firm (Stern and El-Ansary, 1996 cited in Vickery et al. (1999)).
Finally, the last dimension of flexibility is “responsiveness to target markets” ((Vickery et al. (1999)). This flexibility captures the overall ability of the firm to respond to the needs of its target markets. Responsibility for this flexibility is spread throughout the supply chain; effective performance on this dimension hinges on a firm’s ability to leverage the capabilities of its supply chain to meet or exceed customer requirements (Vickery et al. (1999)).
To apply these dimensions on the case study, one needs to consider the following facts:
* Pizza outlets have a menu set that customer can choose from and is able to ask for extra ingredients by paying extra and remove some ingredients. Obviously this can be categorised as limited product flexibility.
* Pizza outlet provides pizza to the customer at the shop or delivers pizza to their desired location with a variable lead time and with an extra charge. The dual delivery method can not cope with variable demand in home delivery in peak times or split between in shop sales and delivery. Therefore during busy period, either the customers in the shop will need to wait a long time or the delivery has go long lead time due to unavailability of driver which will lead to drop in the quality of the pizza delivered.
* Pizza will be baked based on order received from customers (pull system) but the shop will require keeping an inventory of ingredients, therefore the shop has limited volume flexibility
* There is no obvious flexibility in responsiveness to target market or new product introduction. Probably this dimension of the flexibility has been detrimental to reputation of other fast food outlets such as McDonald. McDonald failed to recognise the trend in the market for less fatty foods and healthier diet on time and therefore was forced to spend a lot of money in advertisement and introduction of new menu items to repair the tarnished image of the franchise.
In order to increase the flexibility in the operation of the imaginary pizza franchise under study with hundreds of outlets, one might look at means of introducing flexibility in baking various types of Pizza (analogous to increasing manufacturing flexibility as discussed in previous sections) by suggesting the following:
In addition to menu set that is currently provided to the customers, customers can make their own pizza by choosing the ingredients rather than a pizza from menu set. To increase this flexibility, customers can choose the makeup of the cheese that is used on the pizza as well (Product flexibility).
Adding this flexibility, will require adapting the standard means of baking pizza to a more flexible process to accommodate the customer requirements. The introduction of this flexibility will make quality control more difficult and in order to maintain the same quality of the product, employees will also require to be extensively trained.
The introduction of this flexibility in the product will not only affect the pizza shop and their staff, but also will have impact on the suppliers as well. While previously a forecast of the sale of various types of pizza would have given suppliers an indication of ingredients needs of pizza shops, now the forecast will need to be based on the ingredients rather than pizza units themselves. Therefore while previously SKUs were pizza items, now SKUs are the ingredients used in the pizza.
Masket (2001) argues that the swift trend towards a multiplicity of finished products with short development and production lead times has lead many companies into problems with inventories, overheads and efficiencies. He argues that they are trying to apply the traditional mass-production approach without realising that the whole environment has changed. Mass production does not apply to products where the customers require small quantities of highly customised, design-to-order products, and where additional services and value-added benefits like product upgrades and future reconfigurations are as important as the product itself.
He also argues that even world class manufacturing and best practice approaches are based upon the time-honoured concepts of mass production of standard products. The famed Toyota Production System has two kinds of products; type A and type B. Type A is a standard product and type B is custom product. Practitioners of TPS strive hard to eliminate type B parts and products because they do not fit the concepts of one piece part flow and rate-based schedules (heijunka) (Masket (2001)). An agile approach to manufacturing faces the reality that we must serve customers with small quantities of custom designed parts with perfect quality, 100 percent on-time delivery and at very low cost (best pizza, to be ready on time and without any extra cost).
A perfect example of a flexible product is Honda motor cycle in Japan. Honda has developed a range of machines that have credit-card sized electronic key. This key does not serve as a security devise to unlock the steering mechanism, the electronic fuel pump and other major components, it also contains information that changes the performance of the machine by changing the fuel injection, the timing, the ignition settings and other parameters.
The rider can choose between fast, high performance, economy, town or mountainous driving and so forth. The addition of electronic configurability allows the rider to easily reconfigure the machine to meet his or her needs. This flexibility and customer responsiveness was created because Honda has an understanding of the customers’ varying needs and saw an information-based method of providing a wide-ranging solution. Increasingly it becomes the company’s information and the skill of the people that becomes premium. The company ceases to sell products but is selling the ability to fulfil the customer’s need (Masket (2001)).