Companies Need to Rethink Their Supply Chains to Remain Agile

For many firms, the hardships that began in 2008 haven’t entirely lifted. Perhaps even more importantly, enterprises that came out of the gloom relatively unscathed or that have been noticing a marked uptick in activity over the past year can’t simply attribute their good fortunes to increase consumer confidence. Surely one of the central reasons such firms are enjoying regained success is that they were able to scale down when it became critical to do so, reducing costs where possible and reaping what margins they could during the period of difficulty.

While it’s true that the economic tide appears to be turning, that’s no reason to abandon the positive practices that kept firms afloat during the recession. It remains critical for enterprise to maintain operations that are as agile as possible. This is true not only because the recovery is still underway, but also due to how dynamic the contemporary consumer goods and retail sectors have become. Tech trends like cloud computing and big data are helping companies adapt to developments in their respective sectors, but it’s just as critical to develop a supply chain management strategy that allows for the greatest possible levels of enterprise responsiveness.

Why a wider supply chain may be an asset
Somewhat counterintuitively, slashing the number of suppliers with which a company does business isn’t necessarily a positive, financially viable strategy. Some executives may be of the mindset that the greater the number of production processes that are within the company’s direct control, the better. From a certain perspective, this position is easy to understand. Such a strategy would eliminate some of the problems with supplier visibility that companies face and would make sustainability efforts considerably simpler.

But in a column for ThomasNet’s Industry Market Trends blog, supply chain expert Joshua Kahn argued that this strategy is untenable in the contemporary marketplace.

“Where it used to be more advantageous for a manufacturer to make all facets of production proprietary, today’s climate makes that business model costly, impractical and inefficient,” Kahn wrote.

He noted four key drawbacks to a “vertically integrated” supply chain – that is, narrowly defined and to the furthest extent possible, in-house:

1. The business’s “core competencies” become compromised or diluted.

2. Efficiency is lessened.

3. Greater overhead tied up in infrastructure and bureaucracy makes the company less flexible.

4. Product variety decreases.

The need to avoid these setbacks is pushing many firms to widen their distribution networks, Kahn noted. But he also pointed to a study by Deloitte that found businesses were sacrificing flexibility in an effort to cut costs. Firms make this mistake in part because they don’t have access to the right data.

“Failure to optimize real-time forecast and inventory data puts pressure on planning, operating platforms and logistics,” Kahn noted.

How far is too far?
The kind of flexibility that Kahn called for can’t be achieved by shrinking the supply chain – in fact, this move is likely to produce the opposite effect and make operations more rigid. The only option is to foster the right supplier relationships and be able to access the real-time data necessary to understand them and maximize them for efficiency.

But companies need to strike a balance between relationships with overseas suppliers and in-house production in order to benefit from both of these techniques. In a column for The Boston Globe, MIT Sloan School of Management Senior Lecturer Donald Rosenfield discussed the trend among some U.S. companies to move a significant portion of their production and manufacturing processes back to domestic facilities. He pointed to the advantages that this strategy has offered footwear manufacturer and retailer New Balance. The company’s five U.S.-based plants produce roughly 25 percent of its total output.

“Being in the United States, close to its markets, enables the company to provide [inventory] support efficiently. Having plants here enables New Balance to replenish its stores quickly and gain a deeper understanding of customers’ wants and needs. The company also has access to U.S. innovation in flexible manufacturing systems and planning techniques,” Rosenfield wrote.

However, Rosenfield doesn’t take a limited view of the issue by suggesting that domestic production is the sole strategy worth pursuing.

“There’s a place for onshoring and there’s a place for offshoring. It makes sense for certain companies to make certain goods – such as chips and high-tech sneakers – in the United States, just as it makes sense for other companies to produce other goods – apparel and narrow product lines, for instance – elsewhere,” Rosenfield argued.

Companies will need to work out their own answers to the question of how far is too far when it comes to supplier relationships. What is likely to remain consistent across the board is the core criterion for making this decision: The supply chain has to be strategic, maximizing the firm’s ability to stay agile in an age of complex markets.