Lean, Agile and Demand-driven Strategies for Supply Chain Performance

Supply chain management is an organizational function that is critically important for organizational performance in today’s global business environment. Organizations are formulating various strategies to enhance supply chain performance and are continually seeking ways to gain a competitive advantage. This paper explores three widely acclaimed strategies: Lean, Agile and Demand-Driven approaches for supply chain management. Main benefits and suitable environments will be discussed for each of the three strategies. Introduction The complex and competitive nature of today’s global business environment is characterized by shorter product life cycles, more demanding customer requirements and a variety of supply chain risks. In this environment, organizations seek new competitive approaches to achieve an advantage and formulate adaptations of strategies to enhance their supply chain performance. In the supply chain many exchanges occur in the overall process of planning, sourcing, making and delivering products, services and the related supply chain information. As these exchanges occur and the material moves through a series of providers and ultimately reaches consumers, the efforts of several parties need to be aligned – this is referred to as the supply chain [26]. The following definition for “supply chain management” offers further clarification: “Supply chain management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders” [10]. The important fact to take away from this description is the need to coordinate across the entire network of companies in the supply chain. Superior supply chain performance cannot be achieved without superior performance along each link of the supply chain. Superior performance requires integrated strategies to achieve the high degree of coordination. In the next sections we discuss the three main approaches: Lean, Agile and Demand-Driven, as leading strategies for enhancing supply chain performance. Lean Lean is a manufacturing management philosophy that has been well documented through the publications by Womack, Jones and Roos [28] and Womack and Jones [29], [30], [31]. Among the publications by these authors there are several company examples that describe some of the early successes that were achieved by applying lean principles to improve their businesses (e.g. LanTech and Danaher) [31]. “Lean is about doing more with less” [4]. Lean principles are based on the Toyota Production System (TPS) [28][30][31]. The primary aim of Lean is to eliminate waste of all kinds throughout a production process or in this case all supply chain processes. The Japanese word for waste is muda. Lean thinking is a “powerful antidote for muda” [31]. When companies apply Lean techniques, they “specify value, line up value-creating actions in the best sequence, conduct these activities without interruption ... and perform them more and more effectively” [31, p. 15]. In order to accomplish those objectives, companies apply the following five major principles of Lean: • Specify value (i.e. what is value for the customer); • Identify the value stream; • Flow (make the value-creating steps flow); • Pull (let the customer “pull” for the product); and • Perfection (waste of effort, waste of space, and waste of all types of resources can be reduced in an ongoing fashion by pursuing “perfection”) [31]. Due to the complex, multiple tier nature of supply chains a complete value stream map is a major undertaking. For this reason, value stream maps focus on internal processes and then extend only to a few suppliers of critical items rather than every supplier. Another supply chain approach is the Supply Chain Operations Reference (SCOR®) model from the Supply Chain Council [27]. Utilizing the SCOR® model, the “Configuration Level” provides an excellent opportunity to employ the waste reduction techniques of Lean. This level is where core process strategies are established and where companies align their supply chain with their overall operations strategy. In the terminology of SCOR®, this is where the process can be “configured-to-order” [27]. Lean bases the configuration on eliminating waste. So the choice of “make-to-order” or “engineer-to-order” is based on eliminating the waste of finished goods inventory that is not needed to satisfy current demand. These choices are also based on the market and they are “demand-driven” [20]. “Make-to-stock” is a possible option under the scope of SCOR® but it is not a viable option under Lean [20]. A summary of benefits and environments will compare the three strategies later in the paper. Agile Flexibility is a key element for agility. What began as manufacturing flexibility has been extended broadly into the business context including organizational structure, information systems, logistics processes and organizational mindsets [4]. The Agility Forum is credited with the extension and spread of the agile concepts in the early 1990s [22]. Agility in the supply chain is described as being able to “respond to sudden and unexpected changes in markets. Agility is critical, because in most industries, both demand and supply fluctuate more rapidly and widely than they used to. Most supply chains cope by playing speed against costs, but agile ones respond both quickly and cost-efficiently” [16]. Clearly, a one dimensional response by an organization is not acceptable and does not constitute agility. The concept of Design for Supply Chain Management (DFSCM) and its use by Hewlett-Packard (HP) was first introduced by Lee and Billington [11] and further explained by Lee [12]. Based on these references, the idea of DFSCM was well-established at HP in the early 1990s. The primary issues that were addressed dealt with inventory issues and were based on a global supply chain inventory model [11][13][14]. Embedded within DFSCM at Hewlett-Packard were many different supply chain strategies aimed at various supply chain issues that HP was attempting to address. Included among the list of supply chain strategies are: • Delayed product differentiation • Commonality • Standardization • Process steps switching • And Postponement [11][12][13][14][15][7]. Many of these strategies or principles are aimed at flexibility, agility and logistics cost reduction. First among the issues addressed by HP were the combined factors of product design, inventory placement and design for localized markets [13]. While the intent of many of these supply chain initiatives at HP has been to provide flexibility and to move towards being more agile, the success of agility tends to be exposed when there is an adverse condition related to either supply or demand. There are several excellent examples of supply chain agility where the agile firm succeeded while the firm that lacked agility failed. Nokia and Ericsson were faced with a supply chain disruption due to a fire at a facility a radio frequency (RF) chip in New Mexico in March 2000 [16]. Nokia executed design changes, quickly worked with alternate suppliers and implemented their contingency plan within a five day period after the fire [16]. Ericsson was caught without a plan and was in the midst of eliminating alternate suppliers [16]. They lacked a coherent contingency plan, experienced drastically reduced production levels for months and delayed a new product introduction [16]. Nokia gained market share through their agile response and at the expense of Ericsson [16]. In 1999, an earthquake in Taiwan disrupted the supply of computer components to the United States and significantly impacted major computer makers including Apple, Gateway and Compaq [16]. While those companies were unable to make computers, Dell changed prices and altered their offerings to promote those computer configurations that could be made without the components sourced from Taiwan [16]. This agile response to the disruption by Dell also led to an increase in market share at the expense of the competitors who were not agile [16]. Lee offers the following list of characteristics or “six rules of thumb” for designing agility into the supply chain: • “Provide data on changes in supply and demand to partners continuously so they can respond quickly. ... Ensuring that there are no information delays is the first step in creating an agile supply chain. • Develop collaborative relationships with suppliers and customers so that companies work together to design or redesign processes, components, and products as well as to prepare backup plans. • Design products so that they share common parts and processes initially and differ substantially only by the end of the production process. I call this strategy “postponement.” ... This is often the best way to respond quickly to demand fluctuations because it allows firms to finish products only when they have accurate information on consumer preferences. • Keep a small inventory of inexpensive, non-bulky components that are often the cause of bottlenecks. • Build a dependable logistics system that can enable your company to regroup quickly in response to unexpected needs. (this can be accomplished through an alliance with a third-party logistics provider). • Put together a team that knows how to invoke backup plans” [16]. These elements have been utilized successfully by such companies as Hewlett Packard [11] [14] [15] and Dell Computer [19]. Several characteristics are present in the “agile supply chain” [4]. “The agile supply chain is market sensitive. ... The use of information technology to share data between buyers and suppliers is ... creating a virtual supply chain. ... Shared information between supply chain partners can only be fully leveraged through process integration. ... The idea of the supply chain as a confederation of partners linked together as a network provides the fourth ingredient of agility” [4]. To summarize briefly, the four elements are market sensitivity, the virtual nature of the supply chain, process integration and the network based arrangement of supply chain partners. The summary later in the paper will compare Agile with the other two strategies.