The following article written by a student of Indian Institute of Management, Raipur has been adjudged the best article in the "Operations" category in an article writing event organised by Shailesh J Mehta School of Management, IIT Bombay.
The ability of an organisation to respond to uncertainty has always been important for success. Due to the increase in the number and the nature of threats that can affect our supply chain, the need to have a flexible supply chain has increased. It is no longer about managing the uncertainty but about managing it better than one’s competitors. In fact, companies should perceive it as an opportunity in disguise.
Here is a list of some practices that a company can adopt to win in diverse markets through supply chain flexibility:-
- COLLABORATIVE PLANNING, FORECASTING AND REPLENISHMENT (CPFR) – CPFR aims to enhance supply chain integration by supporting joint practices. Information is shared between the components of a supply chain to reduce the inventory and to respond to the changing demand. As Hitachi’s supply chain expanded globally, its value chain became more complex. To respond to this increase in complexity, Hitachi shares accurate and timely information on projected part sales with its vendors to be more able to adapt to the changes in customer demand.
It is not necessary to have expensive IT systems to improve collaboration. Simple moves such as establishing direct communication from planner to planner and running forecasting processes jointly with key suppliers can improve collaboration.
- RISK POOLING – It suggests that demand variability is reduced if a company aggregates demand across locations because as demand is aggregated across locations, it is more likely that the increase in demand at one location will be offset by reduction in demand for another location. This leads to reduction in uncertainty in demand which leads to reduction in safety stock and hence to reduction in average inventory.
- Managers should be able to make supply chain decisions quickly. They should be able to analyse the changes in demand if any and should be able to respond to it quickly. The managers should be able to make sense out of numbers and should know which data to rely on and which data to discard. Such a manager will be able to place frequent but small orders hence reducing average inventory as well. The structure of the system should be such as to allow the different departments to take the necessary decisions as and when required eg. Toyota gives its assembly line workers the authority to halt the production by pressing the emergency button.
- Use of concurrent processes instead of sequential processes – Use of concurrent processes reduces the dependence of processes on one another in a supply chain. This can speed up processes in case any emergency arises.
- Reducing risk due to cost fluctuations – Having a mix of short term and long term contracts with the suppliers will help in reducing the risk in supply chain due to cost fluctuations. Outsourcing can also come in handy in case the cost of production of the company increases at certain parts.
- Converting Stock outs to Back Orders – If it is possible to convert stock outs to back orders, it would take away a lot of pressure from the supply chain. However, it requires an effective supply chain which can ensure delivery of the committed quantity of the products at the committed quality at the committed time. Incentives can also be given to the customers in case they agree to commit to their orders well in advance.
- Vendor Management – Several companies develop a network of vendors who are able to supply inventory to them within the stipulated time. These companies work closely with their vendors to develop them and assist them in periodically improving their processes. Maruti develops close relations with its vendors through strategic relationships and providing incentives to them. This also helps in reducing the bargaining power of Maruti’s suppliers as the company maintains and develops a network of suppliers.
- Use of standardized and generic parts – This will reduce the dependence of production on certain specific parts. In case of any emergency demand, the parts can be bought from other suppliers or the production of these parts can be outsourced to other reliable suppliers who can supply these parts at the desired quality and quantity at the right place and time.
- Effective Communication between teams can help to respond to the varying market demand. This will help the procurement department to procure supplies in case of increased demand and will also intimate the sales department to reduce the prices and destock the less sold product. While changing production schedules, the opinion of all the departments need to be taken in consideration to avoid any last minute hassles.
- Increased Production and Purchasing in low-cost countries – As a company increases its production and purchasing in low-cost countries, it is able to adapt itself to changing prices eg. Husqvarna has a well-developed production base to handle variations in demand related to seasonality and weather conditions. A major reason being that the share of purchases from low cost countries is increasing steadily, and amounted to approximately 23% in 2009.
- Build models to evaluate the possible alternatives i.e. “What if Analysis”– The Company should build models that are expected to work in case of any deviations in the supply chain. This requires the managers to predict the various ways in which things may go wrong and be prepared for them.
- Role of Human Resource Department - The workers should be conditioned to be resilient and flexible. The HR department should ensure that the workers have enthusiasm for their work.
http://blogs.hbr.org/cs/2007/08/building_a_resilient_supply_ch.html (last accessed on 18 March’ 2011)
http://en.wikipedia.org/wiki/Collaborative_planning,_forecasting,_and_replenishment (last accessed on 18 March’ 2011)
http://www.scdigest.com/assets/newsviews/06-03-08-1.cfm (last accessed on 18 March’ 2011)