How to Build an Agile Supply Chain

Overall, the pace of business has significantly accelerated. So being agile, i.e., being quick at sensing and responding to changes, is key for companies to be successful in this new environments. So what can we learn from agile companies?

The key insight is that agility is not just about being very fast in the execution – reacting faster than the competition as new market opportunities emerge or disruptions in the supply chain happen. Rather it is about better preparation as well as faster execution.

At the strategic level, where the time horizon is one year or more, agile companies design their supply chain with the required flexibility in mind. Zara’s well documented success as a fast fashion brand would not have been possible without the conscious decision to use local suppliers, allowing for the short replenishment lead-times required by such a business model. Zara gave up on the cheaper sourcing from Asia because putting firm orders with suppliers months in advance and waiting for the containers to arrive by sea from China was not going to work for them. In this context, it is interesting to note Adidas’ recent announcement that they were once again going to make shoes at home by building a new “Speedfactory” in Germany, with intelligent robots to assemble shoes at faster speed.

The design decisions that agile companies make at the strategic level are not only related to the physical design of the supply chain. They also cover how to handle the product proliferation and customization in the most efficient way. Nokia, when it was still a supply chain powerhouse, had a clear postponement strategy that defined how late – and therefore where in the supply chain – a generic mobile phone became market and customer specific.

This gave Nokia the flexibility to better respond to demand, even if it was hard to forecast. Today, companies go even further and use inventory optimization algorithms to place the optimal inventory of generic or semi-configured products along with key components to enable the last minute flexibility to build whatever configuration is required. This gives them a double advantage: higher product availability at lower supply chain costs.

At the operational level, companies have to deal with the fact that reality is always going to be different from the plan. Having a well-designed, agile supply chain is a good prerequisite but it is no guarantee that a company will always have the right product in the right quantity at the right location when the actual demand comes in. What distinguishes leaders from other companies is that they are better at sensing demand and supply changes and responding quickly and accurately. All companies can benefit by emulating what agile companies do well:

• Get a quicker and more accurate read on the actual demand and forecast. Leading consumer goods companies, who are particularly exposed to the uncertainties of the retail/consumer markets, have over the years invested in newer demand sensing technologies that provide them with a much more accurate picture of future demand. This allows them to more quickly and accurately react, increasing product availability and therefore capturing a higher market share.

• Connect electronically not only to retailers but also to all the other actors of their supply chain – suppliers, co-packers and other contract manufacturers, warehouses, logistics providers, etc. This is the foundation that gives companies a complete, end-to-end picture of the current status of the supply chain, the comprehensive visibility that they use to understand what is happening and react to it.

• Use state-of-the-art planning applications that give them rapid decision support with what-if scenario capabilities. These tools allow planners to evaluate the impact of this new information – be it a supply disruption or an unexpected order – and easily compare alternative courses of action. Beyond these simulation capabilities, these applications use algorithms to compute the best demand/supply plan given the company’s objectives, helping companies rapidly select the best course of action.

In summary, incorporating agility early in the design of the supply chain is an important element of a company’s supply chain strategy. But agility, probably today’s #1 mandate for supply chain organizations, requires more than an optimal supply chain design. Being able to quickly sense and respond is important when it comes to being able to fulfill customer demand. Preparation is also important but the true measure of success will come in the execution.

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