Beyond Risk Management – Agility is the Key: Part II

Editor’s Note: This is the second part of a two-part feature written by Shiv Shivaraman, Thomas Rings, Kish Khemani and David Qu of A.T. Kearney, and Dr. Marius Vaarkamp of BASF Mobile Emissions Catalysts. Authors can be contacted through [email protected].

Keys to Success of an Agile Value Chain

Unfortunately you can’t just declare that your supply chain will be agile and expect it to happen. You need to transform your supply chain management structure to promote that agility. An effective agile structure includes six components:

1. A capability assessment to capture network capabilities and competencies and develop a global network strategy with site-specific classifications and missions

2. Alignment of product segmentation with production scheduling to develop an agile inventory strategy

3. Process optimization to streamline supply chain processes with integrated planning across functional areas while identifying clear roles and responsibilities

4. IT support in the form of an integrated IT landscape that will promote agility

5. An organizational set-up including structure, global reporting schemes and cross-functional alignment, to ensure that everybody shares common goals for agility

6. Performance monitoring with strategic and tactical key performance indicators (KPIs) to measure agility performance, costs and benefits

Such a transformation also requires the application of lean manufacturing principles and tools. Lean principles inherently drive agility. The lean philosophy promotes an aligned culture, streamlined processes and an effectively deployed business strategy. It enables an optimized production planning process that minimizes manufacturing and working capital costs. Where execution of such transformation programs has failed, it has generally been because the objectives have not been deployed consistently—and the lean philosophy (often in partnership with Six Sigma best practice tools and methodologies) helps focus execution on strategic breakthrough objectives.

An executive’s first step in implementing an agile supply chain should be the capability assessment. You need to understand your current risks, risk management strategies and supply chain capabilities. From that baseline you can see how and where an agile supply chain can help.

Benefits of an Agile Value Chain

Agility increases speed and flexibility. With agility, companies can make decisions more quickly, and execute those decisions more quickly. With flexibility, companies have increased options for creating value to compete in the global market. An agile value chain will minimize working capital bottled up in inventory and allow companies to strategically leverage available inventory for additional value in a volatile market. Agility also minimizes leasing costs and recaptures value through minimizing shrinkage and wastes.

These benefits are especially important for companies with high-value, low-volume input materials. Effectively managing the entire value chain beyond commodity risk management is essential to maximize shareholder value in a high-price, high-volatility and high-risk market environment.

One Company’s Experience

A global supplier of automotive components with manufacturing sites in four continents had accumulated significant high-value raw materials in inventory. It faced volatile prices and increasing lease rates. Furthermore, a reduction in global demand for its products had produced a net sales decrease of about 40 percent, significantly impacting profits. Given an uncertain economic outlook, the company needed to cut costs through a restructuring program rather than panicked across-the-board cuts. It decided to address its high work-in-progress inventory, long lead times, weak capacity utilization and mis-aligned business units relationships.

The company designed and implemented an agile supply chain. Its goal was to improve its ability to make decisions quickly and to build flexibility into its processes across the value chain. Operationally, short-term enhancements made the supply chain leaner and faster. Tactically, improvements in management structure and processes increased collaboration, promoted frequent and open communication, and aligned incentives to achieve sustained improvements. Strategically, the company evaluated options to prepare for uncertain market conditions and deployed lean manufacturing principles to support agile long-term performance.

The company obtained immediate results. It reduced the time spent in inventory for high-value items by more than 30 to 60 percent in some components of the supply chain. It improved collaboration with suppliers and clients by deploying optimized S&OP processes and a common inventory model. It also realigned its organizational structure with clearly defined roles and responsibilities across business units.

The operational excellence initiatives alone saved the company more than 17 percent of its annual controllable operating expenses. The tactical and strategic initiatives, with a longer time horizon, promise even greater benefits. By improving its agility, the company is well prepared to compete in an uncertain economic environment.

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