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I t has become a classic example of the effects of supply chain disruption: the time when � re destroyed the premises of a sup- plier that provided Nokia and Eriksson with critical compo-

nents for mobile phones. The two companies had entirely different responses to the

event, resulting in a dramatic industry shift. Nokia was able to secure components quickly from other sources. By contrast, Eriksson struggled to respond. The disruption not only cost the company several hundred million dollars in lost sales; it essentially ended its position as a player in the growing wireless phone busi- ness. Poor business continuity planning by Eriksson, combined with a lack of supply chain � exibility, turned a hazard risk into a strategic risk.

As the search continues for new and improved ways to manage supply chain risk, senior managers will put more and more of a premium on operations that are as � exible as possible. The con- cept of � exibility is receiving increased attention in the popular press as well as from supply chain professionals. A global supply chain survey conducted by PwC and reported in Industry Week concluded that almost 65 percent of respondents plan to imple- ment greater � exibility to better respond to supply chain challeng- es, making � exibility a top supply chain priority.

Rethinking Traditional Definitions of Flexibility If those challenges are to be fully met, however, broader interpre- tations of supply chain � exibility are required. It is neither a static nor a monolithic concept. Yet many managers view it in terms of adjusting volumes in a manufacturing environment. Consider this de� nition from one business dictionary: “Flexibility is the ability of a system, such as a manufacturing process, to cost effectively vary its output within a certain range and given time frame.”

REEL IN RISK with a Broader View of

By Robert J. Trent

Robert J. Trent, Ph.D. is the Supply Chain Management Program Director at Lehigh University. He can be reached at [email protected].

In an era when supply chain risks are soaring, senior managers are putting more of a premium on supply chain flexibility. But they now need to view the concept as more than just adjusting manufacturing supply to demand—a narrow perspective that can lead to problems. Here’s how managers can take a much broader view of supply chain flexibility, with risk reduction foremost in mind.

S&OP FLEXIBILITY ROBOTICS 3D PRINTING MOBILITY

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Supply Chain

FLEXIBILITY

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Supply Chain Flexibility

In fact, supply chain flexibility involves much more than that, and managers need to view it broadly rather than narrowly. They have to think in terms of an orga- nization’s ability to be agile, adaptable, and responsive to change—particularly changes brought about by risk events. Flexibility should be an important supply chain objective—a characteristic that enables compa- nies to enhance the resilience of their supply chains. Resilient supply chains can adapt quickly to changes or risk events, according to authors Mark Stevenson and Martin Spring in the International Journal of Operations Management, including supply disruptions or changes in demand, while maintaining appropriate customer service levels.

The point here is that effective risk management requires the ability to respond quickly to a risk event with alternatives, sometimes with- in minutes. Nokia’s supply chain had that kind of in built flexibility; Eriksson’s didn’t.

To help foster a broader view of supply chain flexibility, this article presents a variety of interpretations of the concept. Experience, literature searches, and research with hundreds of com- panies enable us to identify more than a dozen dimen- sions of supply chain flexibility, along with possible ways to achieve that flexibility (See Exhibit 1). For practical purposes, though, this article focuses on three aspects where attention from senior management will pay the greatest dividends. We will also look closely at three approaches that facilitate the transition from a concep- tual understanding of supply chain flexibility to embed- ding it in the organization’s thinking and culture.

Supply Chain Design Flexibility. Supply chains are rarely as neat and tidy as those presented in aca- demic models. In fact, they often feature a multitude of forms as companies pursue a variety of customer seg- ments and work through different sourcing and distri- bution channels. Supply chain design flexibility means that an organization has designed or can adjust its supply chain to satisfy specific requirements.

Dell Computer, a company that faces strategic risk as customers shift from personal computers and laptops to tablets and other devices, realized that the supply chain it had established to support make-to-order online sales would not readily support its expansion into retail sales and other market segments. Dell has since developed four supply chains, as described by David Simich-Lefi in the Sloan Management Review. Each is dedicated to a differ- ent customer segment that provides much more flexibility to respond to a broader array of market opportunities. The build-to order supply chain supports Dell’s online custom- er segment; the build-to-plan supply chain supports the retail segment; the build-to-stock supports the company’s online/popular configurations segment; and the build-to-

spec supply chain supports its corporate segment.

Logistics Flexibility. Logistics flexibility means being able to adjust the route or mode of transportation taken to move goods, funds, and even information. This kind of flexibility allows shipments to be rerouted when natural hazards occur, roads are closed

due to accidents, a strike occurs at a port or a carrier, or a mode of transportation becomes less viable.

The benefit of logistics flexibility is increasingly evi- dent in the U.S. oil industry. A proposed $2 billion pipe- line (a fixed, inflexible mode of transportation) designed to take plentiful crude oil from West Texas to California has failed to generate interest among large California refiners because of the flexibility offered by rail cars. Relying on rail shipments to transport oil allows refin- ers to source from different locations around the U.S. and route the oil to their California refineries, something that is not feasible with a fixed pipeline. A growing sup- ply of North American crude oil is coming from locations where prices fluctuate, allowing refiners to use different routes and modes of transportation (such as rail cars) to make opportunistic purchases for their crude supply.

Material Flexibility. Material flexibility—allowing producers to shift from one material to another with rel- ative ease—is valuable to industries that rely extensively on raw materials. It is especially useful when commodity prices are volatile, as they are today. The size of fluctua- tions in commodity prices has more than tripled since 2005 compared to 1980-2005, based on International Monetary Fund data.

Some users of nickel have already come to appreciate this facet of flexibility. In the not too distant past, the price of nickel soared, making it prohibitively expensive for companies that rely on stainless steel 318, an indus- try standard material that contains nickel. Companies

Experience, literature searches, and research with hundreds of companies enable us to identify more than a dozen dimensions of supply chain flexibility, along with possible ways to achieve that flexibility.

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that manufacture vehicles to carry food products were hit especially hard. Fortunately, material engineers at some of those tank trailer manufacturers were able to shift quickly to lean duplex, a type of stainless steel that offers material properties that are 30 percent to 200 per-

cent better than traditional alloys with only a fraction of the nickel contained in other stainless steels. Lean duplex also offers higher yield strength, making it less susceptible to cracking and corrosion, Denise Rondini writes in Transport Topics.

EXHIBIT 1

Different Types of Supply Chain Flexibility

Source: Robert J. Trent, Ph.D.

Type of Flexibility The Ability to… Supply Chain Tactics

Volume Flexibility Adjust order volumes internally and with suppliers in response to changes

• Overtime and weekend production • Access to temporary labor • Contract manufacturers and secondary suppliers • Safety inventory

Order Lead Time Flexibility

Have variable rather than fixed lead times with suppliers as required by customer demands

• Ask for shorter lead times from suppliers • Negotiate variable lead time requirements with suppliers • Select suppliers that have lead-time flexibility capabilities

Product Configuration and Variety Flexibility

Modify the design of a base product, including adding new varieties or features

• Develop platform products that allow re-configurability and modification • Practice mass customization

Physical Flexibility Change the structure or layout of physical processes or sites

• Use modular facilities that can be modified for new uses • Build in future expansion and re-configurability capabilities during facility design

Design Flexibility Modify product designs quickly • Computer aided product designs • Virtual simulation and testing • Use standard components wherever possible

Logistics Flexibility Reroute or adjust movement through logistical networks; shift modes of transportation or carriers

• Pre-approved secondary carriers • Have multiple port options • Have pre-approved multiple modal choices • Control title to goods to enable rerouting

Source/Location Flexibility

Shift production from one internal or external supplier or site to another supplier or site

• Qualify multiple internal production sites • Qualify alternate suppliers • Use suppliers with multiple production sites

Workforce Flexibility Assign and reassign workers as needed • Simplify labor work rules and job classifications • Utilize temporary labor

Material Flexibility Shift from one material to another with relative ease

• Test and pre-approve material substitutes • Qualify substitute material suppliers or distributors

Energy Flexibility Shift seamlessly between energy sources • Purchase flex-fuel vehicles and equipment • Consider energy flexibility as a decision variable when specifying new equipment and facilities

Internal Routing Flexibility

Alter how a product flows through a facility • General rather than specialized workers and equipment • Preapproved alternate routing

Capacity Flexibility Modify the internal and external capacity levels of supply chain members

• Reconfigure work cells to shift according to product mix requirements • Use overtime and weekend production • Approve secondary supply sources and contract manufacturers • Reserved capacity slots with suppliers

Adjust or tailor supply chains to satisfy specific requirements

• Create multiple supply chains to match product and customer segment requirements

Supply Chain Design Flexibility

Scheduling Flexibility Adjust production and delivery dates internally and with suppliers as conditions change

• Real-time data visibility and dynamic scheduling • Work to secure preferential scheduling treatment from suppliers

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Supply Chain Flexibility

Embedding Flexibility in the Supply Chain Our discussion so far has opened up the view of what supply chain flexibility can mean. (Exhibit 1 provides other views that we don’t have time or space to explore in this article.) However, it’s one thing to develop a clearer conceptual understanding of the concept and another thing to make it an embedded part of the orga- nization’s thinking and culture. Where should supply chain managers start?

There are many ways to answer that question, but in our experience, the three most important areas where flex- ibility should be embedded are: during the development of business continuity plans; during the development of new products and services; and during the development of commodity strategies. Let’s examine each in turn.

Incorporate Flexibility into Business Continuity Plans. The objective of a business continuity plan is to assure the availability, reliability, and recoverability of busi- ness processes that service a company’s customers, partners, and stakeholders. Business continuity formalizes a company’s overall approach to effective risk management, and should be aligned closely to its procedures for incident management, emergency response manage- ment, and information technology disaster recov- ery. Investor Warren Buffett once observed that risk comes from not knowing what you are doing. Business continuity planning helps ensure that we know what we are doing when bad things happen.

A key part of a business continuity plan involves the recovery strategies put in place to mitigate specific risks identified during a risk assessment. This is where various kinds of flex- ibility will come into play. Data gathered from business impact analysis and risk assessment (two important parts of continuity planning) will lay the groundwork for recovery strategies that mitigate potential risks. Recovery strategies and the associated estimated costs for imple- mentation are then developed and presented for review to a business continuity governance board (such as the executive management board). Increasingly, different kinds of flexibility should be considered when developing risk strategies.

Integrate Product Development and Risk Management. In typical new product development projects, particularly at technol- ogy companies, engineering teams work as fast as possible to develop new products or technologies. Then, at some later point, sup- ply chain professionals become involved and suppliers are selected to support the design.

This sequential approach limits a company’s ability to anticipate and perhaps even prevent supply chain risks. Unfortunately, this model is the norm; there are few com- panies that address product development and supply chain risk simultaneously. Although integrated product and pro- cess development is well understood, the integration of supply chain risk and new product development is not.

So what are the characteristics of a process that brings together product developers and supply chain risk managers? First, supplier selection must happen early in the design process, so that those responsible for sup- plier risk management have time to identify and address any supply concerns. Next, each cross-functional team involved in product development, with the help of supply chain managers, will have responsibility for identifying a set of supply chain risks, including logistical risks that may affect their part of the project. Those risks are then collected and categorized for easy access. Development team members will meet regularly to review product development progress and also the actions taken to address potential risks. Increasingly, these actions will

Here is a simplified five-part framework for a risk assessment plan that should become part of any commodity sourcing strategy. Section 1. This section includes an external intelligence report that describes in detail the supply market for the commodity/material. Who are the major suppliers and where are they located? Who are the major customers? What are the supply trends? Are there specif- ic supply and demand price drivers? What is the overall competitive environment of the market for this commodity?

Section 2. This section identifies and categorizes risk(s), including a detailed description of each risk (i.e., not a generalization such as “potential supply disruption” or “bad weather”).

Section 3. This section requires the development of a risk scenario map with each risk plotted on the map. The dimensions of the map can include the probability of a risk occurring and its expected impact if it were to occur.

Section 4. This section contains a comprehensive risk manage- ment plan that identifies risk management actions that describe how to manage the risks identified in Section 2. This section should also include a timeline that shows how and when to carry out risk management actions.

Section 5. This section includes a listing of objective references and information sources about the demand and supply market for that item and supplier(s). It should identify why each information source is valuable. Particular emphasis should be given to informa- tion sources that are updated on a regular basis.

A Basic Plan for Assessing Commodity Risk

focus on supply chain flexibility. Taking this a step further, a team will estimate the prob-

ability of each risk occurring and the impact on product launch if the risk occurs. Priority is then given to evaluating the higher risks to determine what action can be taken to reduce their probability and impact, including the develop- ment of approaches that support supply chain flexibility.

Make Risk Plans Part of Commodity Strategies. One indicator of an organization’s maturity is the pres- ence of well thought-out strategies, which in supply chain management includes commodity or category strategies. A purchase commodity or category is simply a grouping of like items or services. Something that should increasingly be required is for commodity or sourcing teams to include risk assessment plans as part of their formal commodity strategies. That will encourage com- modity teams to assume the responsibility for risk man- agement rather than shifting it to another party. It will also help embed risk management thinking into the cor- porate culture. A risk assessment plan is an extension of a risk analysis. The plan documents known risks and includes descriptions, causes, likelihood of risk occur- rences, costs, and proposed risk management responses. It can easily be included as part of a formal commodity

strategy. Again, many of the risk management responses proposed in the plan may relate directly to actions that enhance supply chain flexibility.

The sidebar, A Basic Plan for Assessing Commodity Risk, provides a template for developing a risk assess- ment plan. Section 4 of the template will include the flexible capabilities that help manage the risks identified in Section 2. Executive management should not accept a proposed commodity strategy unless it includes a fully developed risk assessment plan.

A Culture Attuned to Risk Companies that are effective at managing supply chain risk will have created a corporate culture that constantly considers risk implications. A culture that emphasizes risk will benefit from a set of action plans, capabilities, tools and techniques, skilled personnel, and the ability to quantify the value of risk management efforts. When these capabilities are present, a company can engage in thoughtful risk taking that is supported by supply chain flexibility rather than being paralyzed by an irrational fear of risk. Within the domain of risk management, supply chain flexibility might just be your next source of competitive advantage. jjj

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