Supply Chain Responsiveness and Efficiency
The research strives for a better understanding of these aspects: what are the structural consequences of implementing strategies striving for efficiency or responsiveness in the real world, and how can they be represented in a System Dynamics model? Furthermore, simulations will be used to assess the dynamic consequences of these different strategic alternatives. Future research will then focus on identifying policies to balance responsiveness and efficiency in a specific industry and by that resolve the trade-off between the two. Keywords:
Supply Chain Management, Supply Chain Responsiveness, Supply Chain Efficiency, System Dynamics 1. Introduction The responsiveness of supply chains to changing market requirements and their overall efficiency are important issues in supply chain design and management and therefore currently receive wide attention in the scientific community as well as in practice. Responsiveness can be defined as the “ability to react purposefully and within an appropriate time-scale to customer demand or changes in the marketplace, to bring about or maintain competitive advantage” (Holweg, 2005, p. 05). In contrast, a supply chain would be considered efficient if the focus is on cost reduction and no resources are wasted on non-value added activities (Naylor, Naim and Berry, 1999, p. 108).
Dennis Minnich, MSc, is Research and Teaching Associate at the Department of Operations Management at the International University in Germany, Bruchsal, and PhD student at the Industrieseminar of the University of Mannheim. 2 Prof. Dr. Frank Maier is Professor of Operations Management and Dean of the School of Business Administration at the International University in Germany, Bruchsal. 2 Companies have three principal means to buffer against changes in quantity demanded for specific products, namely inventory, capacity and time. Safety stocks, excess capacity and safety lead times all provide a time buffer to be able to react to demand variability (Hopp and Spearman, 2004, p. 145). One could argue that one sensible approach to increase responsiveness could be to raise the inventory levels of finished goods or components, which would allow more flexibility for reactions to changes in customer demand.
Increased inventory levels do, however, reduce the efficiency of the supply chain since they are costly, both in terms of storage cost and cost of capital. This suggests that such an increase in inventory may not be the optimal approach to increase responsiveness – or, as Hopp and Spearman phrased it: “inventory is the flower of all evil, and variability is its root” (2004, p. 146), i. e. high inventory levels are a sign that something is suboptimal in the supply chain, and other strategies such as variability reductions may be more beneficial than inventory increases.
In an efficient supply chain, suppliers, manufacturers and retailers manage – implicitly through independent ordering processes between tiers or through explicit coordination of ordering decisions of the different supply chain elements – their activities in order to meet predictable demand at the lowest cost. A responsive supply chain, in contrast, requires an information flow and policies from the market place to supply chain members in order to hedge inventory and available production capacity against uncertain demand (Fisher, 1997, p. 08). Improving responsiveness in a supply chain, however, incurs costs for two primary reasons: (1) excess buffer capacity and inventories need to be maintained, (2) investments to reduce lead times need to be made. Boeing, for example, at the end of the 1990s failed to achieve sufficient buffer capacity or inventory levels by pursuing a lean manufacturing strategy without considering the variability of demand in the aerospace industry (Naylor, Naim and Berry, 1999, p. 108 and p. 112).
Airplanes fulfil most of the criteria for functional products as identified by Fisher, except long-term demand predictability (1997, p. 106). If, as in this example, end-user demand is subject to sudden, unpredictable variations, it is not sensible to implement lean manufacturing at the interface with the end-user (Naylor, Naim and Berry, 1999, p. 112). In general, the cost resulting from investments in responsiveness needs to be compared to the opportunity cost of lost sales resulting from stockouts (Thonemann, Behrenbeck, Kupper and Magnus, 2005, p. 18).
These stockouts are most likely to occur with products that are subject to demand fluctuations. Responsive supply chains aim to avoid such stockouts and therefore prioritise the ability to react to changing customer requirements (Alicke, 2003, p. 145). Providing the right degree of responsiveness and having an efficient supply chain at the same time is a goal that is hard to achieve and that typically involves trade-off decisions by management, since increased responsiveness can be perceived to come at the expense of reduced efficiency, and vice versa.
However, there may be strategies, such as revised planning approaches, that restructure supply chain processes to achieve both goals at the same time and enable a supply chain to be responsive and efficient simultaneously. Identifying strategies that achieve responsiveness and efficiency simultaneously is the goal of the research presented in this paper. Many authors see responsiveness and efficiency as distinct strategies that are strongly linked to different types of products. Fisher, for example, distinguishes innovative products with short product life cycles and functional, more commodity-like products (1997, p. 06). It appears to be sensible to think of products as being positioned on a continuum between functionality and innovativeness. Functional products “satisfy 3 basic needs, which don’t change much over time…, have a stable, predictable demand and long life cycles” (p. 106). They are also characterised by relatively low contribution margins, low product variety and long order lead times (Childerhouse and Towill, 2000, p. 339). Innovative products, in contrast, are characterised by short product life cycles, high contribution margins, high product variety and unpredictable demand.
Electronic products and fashion goods are examples for this category (p. 344). Linked to this Fisher then provides recommendations for the strategic alignment of supply chains and suggests that functional products require a focus on efficient processes, while innovative products require a focus on responsive processes (p. 109). The requirements for supply chain management are different for these distinguished types of products – for products that are innovative and reflect new trends, demand is less predictable than for products that fulfil basic needs, such as sugar3 (Fisher, 1997, p. 106).
The uncertainty of demand for innovative products makes supply chain responsiveness a critical capability, since stockouts should be avoided in particular if the products have high contribution margins. For functional products aspects of efficiency, i. e. focusing on the elimination of waste or non-value added activities across the chain, prevail management’s attention (Huang, Uppal and Shi, 2002, p. 193). Some functional products may, however, also have quick response requirements of the supply chain – for example, milk and other dairy products are perishables with relatively stable demand patterns but limited shelf life.
Also, companies often carry out promotions that can drastically change the otherwise stable and predictable demand patterns of products such as generic food. In such cases, pipeline stock is often “drained to no-one’s real advantage” (Childerhouse and Towill, 2000, p. 338; Fuller, O’Conor and Rawlinson, 1993, p. 91). Demand uncertainty is an important aspect that is linked to the classification of innovative or functional products. Innovative products are often characterized by a high degree of unpredictable demand uncertainty, whereas functional, commodity-like products face a high degree of demand stability.
This point needs to be seen critically, since many commodities are confronted with the typical bullwhip effects – one of the major concerns in supply chain management – upstream in the supply chain, with order batching, speculative buying, delays and suboptimal planning being the major reasons. Therefore, upstream supply chain members can be confronted with rather unpredictable demand, even for commodities. Consequently, the required responsiveness in a supply chain depends on the anticipated uncertainty of demand. This means hat the required responsiveness depends on both the inherent deviations in demand and on the planning capabilities of the company (Baiker, 2002, p. 64). This relates not only to estimating the quantities demanded of certain products, but more generally to using market knowledge to exploit profitable opportunities in a volatile market place (Naylor, Naim and Berry, 1999, p. 108). A company’s ability to forecast and serve the demand for its products changes during a product’s life cycle – during ramp-up and phase-out, demand is less predictable than during maturity (Alicke, 2003, p. 46). This means that the supply chain requirements also change over the product life cycle, which is a factor many companies do not consider. A survey of consumer packaged goods companies in 2005 indicates that of the companies that tailor their supply chain approach to the product, those that consider changes in volatility of demand over time for the segmentation of their product portfolio are 3 Note that every product initially is innovative – even sugar was at one point in time an innovation. 4 ore successful – 50 percent of the best performing companies in supply chain management4 used volatility as a segmentation criterion, compared to only 27 percent of the other companies, which use simpler criteria such as volume (Alldredge, Allen, Howe and Kelly, 2005, p. 21). This indicates that many companies do not realise the importance of tailoring the supply chain to the requirements a particular product has during the various stages of its life cycle. Criteria used to segment product portfolio Percent of respondents 55 50 50 33 27 17 9
Winners Others 14 Volatility/ variability Customer volume Replenishment/ order frequency Order-fulfillment lead-time requirements Figure 1 – Criteria used to segment product portfolio (adapted from Alldredge et al, 2005, p. 21) Management of supply chain responsiveness is particularly important when operating in a competitive market where short lead times might be critical and inventory – which can allow fast response – is risky (e. g. , due to product obsolescence), costly and therefore reduces efficiency.
These aspects become even more important for innovative products with short product life cycles, where management of supply chain responsiveness is seen as a crucial capability. At the same time, more commodity-like, functional products generally require more efficient supply chains, combined with minimisation of the bullwhip effect. When supply chains are more able to react to changing market requirements than necessary – i. e. , having achieved a higher than necessary degree of responsiveness – customers will have to carry the additional cost, which is also problematic (Fisher, 1997, p. 10). The goal is to design the supply chain such that the “products may flow as required by the customer throughout the life cycle” (Aitken, Childerhouse and Towill, 2003, p. 127). Clearly, there is no “one fits all” approach for successful management of the supply chain, but different strategies are appropriate for different products at different stages of their product life cycles. 2. Feedback Structure Linking Responsiveness and Efficiency In this paper, responsiveness and efficiency are seen as interrelated, which is visualised in Figure 2.
Responsiveness and efficiency are directly and indirectly linked and even involve feedback. In supply chains, the interrelationships between key parts of the Winners for the Supply Chain Management area of the survey are defined based on a combination of ACNielsen data and P&L results (Alldredge, Allen, Howe and Kelly, 2005, p. 5). 4 5 system are complex. There are various players in the supply chain, and each of them addresses aspects of demand, production, and supply management, distribution, planning etc. Each of these aspects also interacts with the others.