How Supply Chains Can Evolve From Stock Risk To Profit For All Parties

Jasper Zeelenberg
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What are Responsive Supply Chains?

Being well-adapted is an advantage – but becoming too fixed in that adaptation becomes an existential threat when conditions change. A Responsive Supply Chain (RSC) is able to provide both the advantage of being well adapted (efficient), while retaining the flexibility to change quickly to new realities, thereby also being effective.

Significant inertia prevents traditional supply chains from adopting responsive technologies, but the universal adoption of Responsive Supply Chain technologies is an evolutionary certainty. 

While tech-friendly businesses have already adopted RSC features, other sectors such as fashion face significant hurdles.

Difference between traditional supply chain and RSC

A traditional supply chain strives to be as efficient as possible while also being reasonably effective, and can lead to measurable cost savings when efficiencies of scale are factored in. This is why it persists to this day in some form or another. But cost savings are not always a useful measure.

Just because you can produce a lot of something cheaply, doesn’t mean that consumers will actually want to buy it, that it won’t go out of fashion, or become obsolete before all the stock is sold.

Despite trying to deliver a degree of efficiency, traditional supply chain presents a significant risk in the form of excessive buffer stock held across all nodes.

A traditional supply chain has limited effectiveness, as it is narrowly-focused on delivering key metrics. This often means that departments within a company, or other stakeholders participating in the same delivery chain, are working with objectives that are out of alignment.

An example of this would be a warehouse that meets efficiency targets by limiting stock risk via reduced excess inventory held on site.

While this is a ‘win’ for the warehouse based on narrow Key Performance Indicators (KPI’s), it is problematic for stakeholders further along they chain, who face limited replenishments in the face of unexpected demand.

While the stock risk has been limited for one stakeholder, the supply chain as a whole has failed to deliver. A simple ‘efficiency measure’ has deprived the entire chain of added value by the missed opportunity to sell more volume.

A Responsive Supply Chain (RSC) differs from the traditional supply model in several key areas. The primary focus of the RSC is a focus on being adaptable to customer needs. In this respect, the RSC strives to be maximally effective, while the traditional model seeks to be as efficient as possible.

Because our minds are focused on efficiency and profit margins, we often perceive a supply model as being effective if it is efficient and profitable relative to its throughput (sales), but it fails to be effective for the customer.

The RSC acknowledges the fact that the supply chain only exists because of the consumer demand and realises that being truly effective means meeting that demand perfectly.

Understanding the difference between efficiency and effectiveness

There are essentially two ways we can measure supply chain models: Efficiency and Effectiveness. These are distinct measures, and although often frequently mutually exclusive, it is quite possible to have an overlap of the two – and this is highly desirable.

An efficient supply chain is designed to achieve fiscal efficiency, producing and delivering stock as cheaply as possible. The intended favourable outcome in this scenario is mainly for the business – not the customer.

However, any apparent success with this method is in fact illusory because the measurement of ‘success’ here is narrowly-focused on cost-per-unit shipped, and does not reflect the cost-per-unit sold, or whether the customer is actually satisfied.

A maximally-efficient supply chain will have methods that:

  • Produce goods in mass, cheaply
  • Offer few product variations, to keep costs down
  • Prioritises low production cost over product quality
  • Accurately predict demand, and produce only that amount
  • Store minimal amounts of stock from a single, cheap production run
  • Consolidate logistics, meaning fewer but larger replenishments
  • Generate high margins (as a percent of sales)

This is the basis of the efficient production model pioneered by Henry Ford, who said of his model T, “Any customer can have a car painted any colour that he wants so long as it is black”. The rationale was that because black was the fastest-drying paint colour, it would yield efficiency savings over large production scales.

Although Ford was successful in efficiently producing a cheap car, it quickly became apparent that the consumer actually wanted choice, as Ford started to lose market share to other, more expensive, but colourful cars.

ford supply chain

An Effective supply chain however, is designed to provide the consumer with what they want, how they want it and when. It works in a flexible way to ensure the consumer is happy.

A maximally-effective supply chain will, for example:

  • Deliver a shipment even when the container is half-full, if the stock is needed quickly
  • Maintain buffer stock at all nodes in the chain, to avoid stock-outs
  • Change product design part-way through the production run to adapt to changing consumer preferences (e.g. using modular design/production principles).
  • Manufacture smaller lots
  • Prioritise product quality over low cost
  • Make replenishments whenever new stock is needed
  • Generate more cash (hard currency)

Although an efficient supply chain model has survival advantages for the business, it sacrifices flexibility and responsiveness, and is at a distinct disadvantage when conditions suddenly change. An efficient supply chain relies on demand forecasting for survival, and so it is incredibly vulnerable when the business reality shifts.

The maximally-effective supply chain lacks efficiency, but is able to retain a market share (continuity) by guaranteeing what the consumer wants, when they want it. It is a less efficient supply-model in its core design, but it guarantees survival in changing situations.

How we got here: evolution of the TSC and a historical perspective for the traditional supply model

Traditional supply-chain models are largely based on the ‘Make-to-Stock’ (MTS) blueprint determined by the product source: the manufacturer.

MTS is a well-established production strategy which seeks to provide adequate stocks of product by accurately anticipating demand and making sufficient stock to cover this demand in advance, and as cheaply as possible.

It is the principle behind mass production, and the efficiencies gained from it. It is important to note that the supply chain is directly influenced by both manufacturer and consumer behaviours, so when a new method is adopted by a manufacturer, this naturally changes the way the supply chain works too.

When MTS is integrated into a supply chain, we see cascading stock ‘nodes’ from manufacturer to consumer (warehouse, wholesalers, distributors, etc.), each of whom are also trying to anticipate their required stock in order to fulfil demand.

To ensure stock doesn’t run completely dry, each node holds a stock ‘buffer’. This is an old supply model, but it has survived this long because it has basically worked fine until now. The earliest evidence of MTS can be seen from the earliest communal grain stores in the Jordan Valley which date from 9500BCE.

Cooperation among individual farmers resulted in the construction of large ‘warehouses’, intended to house sufficient ‘stock’, to ensure supply through the year or even to carry into lean years when production was lower.

Supply-chains evolved from this basic model, and this traditional model has also been adequate over the millennia to handle the influx of exotic spices and textiles carried on wagons on the Silk Road, fur and tobacco arriving on packed boats from the New World, or cargo ships carrying cheap goods from the far-east.

In a traditional supply chain, the balance is struck between manufacturing and procuring products on a large scale (cheaply), while trying to avoid excessive overstock by trying to guess what the demand will be, as accurately as possible. Value is added to the chain by making this as lean and efficient as possible, but it has drawbacks as we will see below.

Agility and responsiveness

Agility is often used interchangeably with Adaptability and Responsiveness; however these terms actually describe parts of the same ‘whole’.

Agility is the ability to change quickly, whereas Responsiveness is the capacity to be sensitive to changes and then adapt to them. Adaptability is where agility and responsiveness meet. It is the combination of sensing the requirement, determining the required change and then being able to execute the new function quickly.

Responsive Supply Chain is still efficient, just not paranoid

Although the focus of the RSC is not a tunnel-vision on bald efficiency, it still has cost saving built-in to its DNA. In their whitepaper, which highlights the value of RSC’s to the Fashion and Apparel industry, Infosys identifies the following three essential elements for an RSC that maximises profits:

  1. Collaboration in product development, planning, sourcing and distribution enables efficient processes and knowledge sharing.
  2. Decision postponement, synchronising supply flow with real-time demand signals
  3. Application of risk-management techniques to supply chain decision-making, to maximise profits.

Each of these elements relies on transparency between collaborators, and the free exchange of information to guarantee mutual success.

Why are so many firms stuck in traditional model?

Many companies have already adopted a Responsive Supply Chain, in at least parts of their operations. Early adopters of Responsive Supply Chain models tend to be businesses involved in the technology sector, or who invest substantially in technology as a part of their business model.

Since 2012, the industrial and consumer material goods giant, 3M adopted a responsive supply chain model which forged close cooperation with suppliers and retailers. For a vertically-integrated, tech-heavy company, this was a relatively easy process.

3M works primarily with one major supplier (BASF) as a chemical supplier, and a number of key distributors, which made it easier to extend the responsive chain to other stakeholders. Their system shares communication freely so suppliers can see what is needed and ensure adequate buffer stock is on hand.

Looking towards the fashion sector, the Responsive Supply Chain model has not yet been so widely embraced. A notable exception to this would be H&M, Mango, and Zara, who have built agility and responsiveness into every link in their supply chains. During the 1990s this group of companies experienced annual growth in excess of 20%.

For Mango, they lost their market position when they turned away from a focus on quality and attempted to lure customers during the economic crisis with cheap prices gained from a traditional ‘efficient’ supply model. It was only when the firm returned to delivering quality, and by differentiating the brand with design, that customers returned.

How to implement a Responsive Supply Chain

Implementing a Responsive Supply Chain might seem quite daunting. For each enterprise there are unique pain-points in the supply chain process that will need to be identified, and a methodical deconstruction and rationalisation of these processes would need to be conducted.

There are significant barriers to be overcome including competing priorities among stakeholders and departments within a company, and deeply ingrained routines and systems.

This last part is the most significant. The inertia of a large (or medium-sized) company, and the many overlapping systems it relies on, is hard to overcome, and with our minds so focused on efficiency and reducing cost, how do we start to justify investing time and money in a project that undermines efficiency principles.

There is still a fear of failure, if KPI’s are not met.

However, there are now modular SaaS products that can plug right into your existing systems. This means that, like a coronary bypass, your business can start to see measureable benefits from a responsive approach, with minimal interruption or investment.

How to overcome lack of accurate data

Data is the life-blood of the Responsive Supply Chain. Dr Angappa Gunasekaran (who developed the theory behind the RSC) identified that because the RSC relies on automation and IT for successful virtual enterprise operations, the RSC would lean heavily on having sufficient data, and the IT to process it, and turn it into supply-chain responses.

So the simple solution is that the gaps in data need to be filled. The following steps should be taken:

  • Clearly identify your company’s objectives
  • Identify partner core-competencies (the requirements you company has from suppliers, in alignment with your company performance objectives
  • Select partners based on the core competencies using a suitable ranking system
  • Link all the partners together as a virtual enterprise with the help of automation and IT

Once all partners are working together using a virtual enterprise, the flow of data is a natural consequence.

How to overcome a lack of transparency

There is a natural tendency for businesses to be ‘cagey’ about their internal workings. The words ‘Industrial Espionage’ should provide sufficient explanation as to why.

But trust is the underpinning of a transparent working relationship, and transparency is necessary for RSC to work. It relies on the flow of real-time information for it to be responsive.

Seven-Eleven Japan became a dominant force in convenience shopping by switching to a more flexible and responsive supply model.

Its attitude was tough, and they penalized suppliers who delivered late with a fine. However, there was also trust in their model which enabled smoother interworking, and efficiency gains. So when delivery drivers bring replenishments, the truck contents are not checked, leading to time and money saved on all sides.

The reality is that we can expect trading partners to be reluctant to participate at first, but if they ultimately refuse to be transparent, they are not working in alignment with your supply chain.

This becomes an easy way to screen out ‘weak links’. 

How to encourage other stakeholders to adopt RSC

To encourage partners to adopt a Responsive Supply Chain, it is necessary to set an example, to be the leader that says, ‘this is what we’re doing now’. The onus rests firmly upon the biggest players to make the change, but the tail can wag the dog too.

Convincing partners to adopt a Responsive Supply Chain model will be easier that you might expect, and the more widely it is utilized the more it will become a ‘norm’.

The reality is that the RSC is inevitable, and late adopters will be penalized by losing market share. Maybe your trading partners are waiting for you to make the first move.

As the world is already shifting toward more interworking, greater utilization of information, and a flexible supply model that incorporates drop-shipping, marketplaces and platforms, it is a certainty that the RSC will become the most viable and competitive supply chain.

Jasper Zeelenberg
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