Supply Chain Strategies for a Volatile World
Daryl Pereira 270002AW8D firstname.lastname@example.org | | Tags:  supplychain ilogdialog
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(Guest post by Andrew K. Reese, editor of Supply & Demand Chain Executive magazine.)
David Simchi-Levi, chief scientist at ILOG and a professor at Massachusetts Institute of Technology, kicked off the Supply Chain Track at DIALOG with a talk on "Supply Chain Strategies for a Volatile World."
Joe Boissy, vice president of field marketing with ILOG, noted in discussing ILOG's supply chain management roadmap during the opening keynote session that global supply chains today are becoming longer and more complex. Supply chain executives face rising customer expectations, increasing labor costs in developing economies, and increasing transportation and logistics costs. In addition, new demands to "Green" the supply chain to meet corporate social responsibility – and efficiency – goals, along with unprecedented fuel cost volatility, are also adding complexity to supply chain management.
David reiterated these same challenges, noting, for example, that labor costs in many countries relative to U.S. costs have increased over the past five years to the point where offshoring decisions that made sense five years ago might not make sense today. He also pointed out that logistics costs fell steadily for 20 years up until 2003 and then saw a 15% increase over the next five years as rising energy prices, rail capacity pressure, the truck driver shortage and post-9/11 security requirements, among other factors, put pressure on transportation and inventory costs (up 47% and 62% in the past five years, respectively - inventory costs have increased at a faster rate as companies compensate for higher transportation costs by shipping larger quantities, resulting in higher inventory costs). On fuel cost volatility, David noted that the number of days the price of oil changed 5% or more was 39 days in 2008, the greatest level of volatility since 1990 (which saw 38 days of similar volatility). All these factors are creating significant challenges for the supply chain and complicate the decisions that companies make about where to produce different product lines across their manufacturing and supply networks.
In defining supply chain flexibility, David proposed that it's the ability to respond or react to change, such as demand volume and mix, commodity prices, labor costs, exchange rates, in the most cost-effective way. Three strategies for achieving flexibility are through product design (e.g., through modular product architecture, standardization, postponement, substitution); process design (e.g., flexible work force, Lean, dual sourcing, outsourcing); or system design (e.g., capacity redundancy, manufacturing strategy, distribution strategy). David spent the remainder of his presentation focusing on system design.
When considering flexibility from a system design perspective, the question is, how much flexibility do you need? David cited the example of a manufacturer in the food and beverage industry. To introduce manufacturing flexibility, the company had to consider the costs and benefits of various scenarios, ranging from full flexibility (all products can be produced in all plants) to minimal flexibility (each product produced in one plant). Looking at total cost, modeling using the ILOG tools showed that there is decreasing return as you invest in greater and greater of levels of flexibility, whereas you can achieve a large percent of the benefit in terms of lower total supply chain cost by introducing a minimal level of flexibility. A minimal level of flexibility also would provide the company with the ability to best meet demand at the lowest total supply chain cost.
David also cited an example of how flexibility can help a company optimize its supply chain in the face of volatile labor costs, as companies consider where best to produce different products. He noted that the model for labor costs also must take into account productivity to accurately compare production costs across countries, in addition to wage costs. Here again, introducing a minimal amount of flexibility can capture a large percentage of the potential cost reductions from a total supply chain cost perspective.
In summary, David reiterated that a small amount of supply chain flexibility can provide a large share of the potential benefits available from introducing flexibility into the supply chain. The key, he suggested, is ensuring that you have the technology in place to model the potential scenarios so that you can understand just how much flexibility you need to get the lion's share of flexibility's benefit. Investing in flexibility and investing in the changes necessary to introduce flexibility, David concluded, can pay for itself through reductions in total supply chain costs. Flexibility can also lay the groundwork for helping a company deal with volatility in transportation costs (due to fuel cost volatility) and also for meeting sustainability goals.