The Agile Supply Chain

The agile supply chain senses and responds to changes in demand quickly, easily, predictably, and with high quality.

By Debra Hofman and Lora Cecere -- Supply Chain Management Review, 11/1/2005

While it is easy to gain agreement on the need for supply chain agility, it is hard to agree on what it really means or how to measure it. The problem is threefold: the definitions of agility vary considerably, they are confusing and contradictory, and there is no tie to definitive measurements.

When you peel away the word and look closely, you often find that the discussion is really about production flexibility, or supply chain speed, or lean manufacturing, or any one of a number of other possibilities. Moreover, despite much being written on supply chain agility, companies still struggle with how to measure it efficiently. How can you know how agile your supply chain is? In this article, we define the concept and offer a structured framework for measurement.

To start, the dictionary definition of agility provides some interesting insights: moving quickly and easily; characterized by quickness, lightness, and ease of movement; nimble.
How do terms like “moving quickly and easily,” “lightness,” and “nimble” translate into supply chain management? Companies need to move quickly and easily in concert with changes in demand. Below we define four dimensions that together make up supply chain agility. Each by itself is not enough; it’s the combination that defines supply chain agility.

• Speed: First, it’s about speed—the speed with which you can sense routine and unanticipated demand at consumption and effectively broadcast the signal for an intelligent supply chain response. For example, how long does it take your company—not just your marketing organization but your supply chain organization—to see true (real-time) demand as it’s happening in the channel or at your end customer? How long does it then take your supply chain to respond?
• Ease: But, of course, it’s about more than speed. It’s also about how nimble you are when things don’t go as expected, how easy it is for you to sense the change and move in response to it. The most agile supply chains are designed to flexibly handle unexpected events and demand fluctuations. They have few constraints and are designed for pull-based replenishment.
• Predictability: The response of your supply chain has to be predictable, too. It’s no good if sometimes you can sense and respond quickly and easily and other times you can’t. In fact, predictability can be even more important than speed. The company that can respond quickly and easily in three days every time is a more desirable company to do business with than the one that sometimes responds in one day but other times takes six days. 
• Quality: And, of course, there has to be high quality. A supply chain that senses and responds quickly, easily, and predictably but with poor quality  does not qualify as agile.

Overall, we’ve described a supply chain that is able to sense and respond quickly, predictably, and with high quality, easily adapting to changes in demand. It’s a supply chain that is able to withstand disruption, and that displays resiliency or buoyancy in the face of uncertainty and massive variability. A good example of agility in the face of massive variability is Disney’s Buena Vista Home Entertainment unit. Disney manages DVD replenishment of new releases with a two-day cycle in a direct shipment model. Actual consumer demand is uncertain: up to 70 percent of a new title’s sales occur during the first 10 days following a product release. Addressing this unique demand is further complicated by the requirement to ship multiple formats in retailer-specific customized packaging and with targeted promotional offers. (For example, The Shark Tales DVD is different at Wal-Mart than at Target.) Disney uses a direct feed of point-of-sale consumption to plan delivery at the store planogram level. Using postponement principles, a network of six to eight suppliers then burns DVDs on demand to satisfy a two-day shipment direct to the stores.

Agility Metrics
How do you know if your supply chain is agile? What metrics can you consult on a regular basis to assess whether or not it can sense and respond to variable demand quickly, easily, predictably, and with high quality? Below is a proposed portfolio of metrics that corresponds to each dimension.

Speed and Predictability. A measure of the end-to-end cycle time—made up of the sequential sourcing, manufacturing, order/demand processing, and delivery/ distribution cycle times—can be used to measure speed and predictability. The mean or median cycle times describe how quickly the supply chain responds. The range and standard deviation of the cycle times reveal how predictable the speed of response is and, therefore, how predictable the process is. Consider two different scenarios: Company X has a mean order cycle time of four days, but the actual cycle time ranges from two to 12 days; Company Y has a mean order cycle time of five days, but the range is only four to six days. Clearly, Company Y has a more predictable response time, making it a more desirable trading partner despite the fact that its mean cycle time is one day longer than Company X.

Ease. The major impediments to ease or flexibility are the existence of complexity and too many constraints. One possibility is to measure the constraints at each point in the supply chain: for example, the number of labor, material, or capacity constraints in the master production schedule, the amount of fixed planning time, and the extent to which the product and manufacturing process design allow a postponement strategy.

Another possibility is to measure the result of a “hard” process. If it’s “hard,” there are constant interventions—expediting, schedule disruptions, changeovers-and that shows up in your costs. As such, cost can be a good indicator of the ease with which the supply chain responds. An agile supply chain shouldn’t necessarily have the lowest costs around, but the speed of response should not be accomplished through a massive, periodic infusion of resources. In conjunction with the other metrics, a clear measure of the variability of total supply chain costs will help ensure that the supply chain response is truly agile.

A third possibility, which combines the two above, is to look at a ratio of variable to fixed costs. Fixed costs represent constraints. A relatively higher ratio of variable to fixed costs indicates greater flexibility in changing an organization’s operations to meet unexpected changes in demand.

Quality. Here we can look at measures of quality at each major point in the supply chain: supplier quality, manufacturing quality, and quality of the order (and product) delivered to the customer.

The test is the response of these four variables to demand forecast error, by product category and by channel. Comparing the cycle time variance to the forecast variance—that is, the variance of demand—provides a key portion of a company’s supply chain agility picture. If a company can respond with a small variance (that is, a tight deviation) to a forecast that has high variability, its supply chain is responding quickly and predictably in the face of variable demand. And if it can combine that with reasonable costs and high quality, it has the makings of an agile supply chain. (Exhibit 1 illustrates how these metrics can be arrayed to help a company develop a more agile supply chain.) The beauty of these metrics is that they are standard supply chain metrics, just applied in a different way. Companies that are committed to continuous performance improvement and use of some level of supply chain metrics should already have access many of these numbers.

The ability of organizations to sense and respond quickly, easily, predictably, and with high quality will become increasingly critical as the complexity, volatility, and competitiveness of global markets continues to grow. As companies work to increase the supply chain agility of their own enterprises, however, they must also expand their horizons and look outward to their network of trading partners. The competitiveness of each company depends not only on its own agility but also on the agility of the partners on which it depends. The winners of tomorrow will be those who belong to the most agile networks.

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