Written by Dan Pellathy
This is the first in a series of blog posts based on the applied research report “Meeting the Challenge of Supply Chain Agility” by the research team of Bruce Behn, Pradeep Charath, Paul Ditmann, and Dan Pellathy. The first article introduced the concept and its benefits for businesses. Download the white paper.
The first step toward building a more agile supply chain is addressing how people think about agility and its related concepts. We’ve identified four key challenges that managers face when promoting an agility mindset:
- Combating jargon fatigue with clear definitions
- Countering short-term orientation
- Creating an agility mindset
Combating Jargon Fatigue with Clear Definitions
Clear definitions have the power to cut through the jargon. Expressing core ideas in ways that are easy to understand helps managers drive the conversation. The definition below is based on pioneering work by researchers from the University of Tennessee in supply chain agility. It provides a foundation for managers seeking to clarify the concept to colleagues and top management.
Supply chain agility reflects how quickly a company can adjust operations to avoid disruptions while capitalizing on opportunities. Supply chain agility focuses on preemptively building cognitive and physical capabilities that enable a company to quickly detect changes, opportunities, and threats (alertness); access relevant data (accessibility); make resolute decisions on how to act (decisiveness); rapidly implement decisions (swiftness); and modify its range of supply chain tactics and operations to the extent needed to implement the firm’s strategy (flexibility).
Based on this definition, supply chain managers must emphasize several key points related to agility with their teams and senior leadership.
Supply chain agility is fundamentally about a company’s ability to prepare for and quickly adjust to environmental opportunities and threats. Discussions should be less about accurately predicting a particular risk event and more about the response.
Supply chain agility bundles capabilities such as alertness, accessibility, decisiveness, swiftness, and flexibility. These capabilities relate to how a company thinks about its operating environment and proactively invests to meet environmental changes. Agile capabilities require investments that enhance supply chain visibility, improve technical decision support, speed process cycle times, and grow the talent needed to manage a dynamic environment.
Investments in agility are strategic. Like all strategic decisions, they impose opportunity costs and have payoff probabilities, including potential upside payoffs. Focusing strictly on project costs misses the strategic nature of agility initiatives and pushes the discussion toward who will bear the cost. Instead, discussions about agility should be future-oriented, emphasizing positioning the supply chain to support growth, cash flows, cost management, and risk mitigation in an uncertain environment.
Agility is Not Risk Management
Many managers report that when they raise the issue of agility, they’re asked, “Isn’t agility just a part of our current risk management process?”
Risk management is fundamentally reactive. It concerns the steps taken after an adverse event to mitigate negative outcomes. Typically, it does not focus on designing a supply chain that can respond to change more generally. It also can ignore the upside opportunities from changes in the operating environment. This is not to say that risk management is unimportant. Some of the most vocal supply chain agility champions have risk backgrounds and want to see the discipline evolve.
The point is simple: protecting against adverse events is different from making proactive investments that set the stage for business success in a dynamic operating environment.
Countering a Short-Term Orientation
Below are signs that your company may suffer from short-term orientation:
- It puts a strong emphasis on stock fluctuations or meeting quarterly results
- It runs factories on overtime to build supply chain inventory, then lays people off because too much product is in the system
- It incentivizes short-term heroics over long-term strategic planning
- It has an overly optimistic or overly pessimistic attitude toward future events, preventing honest discussion on proactively preparing for the future
You rarely get a clearer statement of the challenge supply chain leaders face than what a CEO recently told an executive we work with. “You completed an agility project—that’s nice,” he said. “But are we going to make the month?”
In our interviews, we uncovered steps managers can take to break through short-term orientation and generate a sense of urgency around agility projects:
- Make it real. Conference room simulations are one effective strategy for driving home the need for change. Simulations bring leaders together and allow them to visualize the real effects of a change in the environment. They should focus on more than just potential adverse events but also emphasize market opportunities that come with greater agility.
- Don’t let a good crisis go to waste. Move beyond generalized examples of disruptions and point to specific experiences in your company. The pandemic is perhaps the most significant disruption of our lifetimes. Managers should view today’s disruptions as a rare opportunity to make fundamental changes to their operating model. And once changes have been made, managers must put in place structures to prevent backsliding once the crisis has faded.
- Develop a compelling vision of the future. Managers must use “proof of concept” examples to support their case for investing in agility. One supply chain leader told us that they had been working on building agility throughout their supplier network. When the pandemic struck, they were prepared to avoid supply disruptions; company revenue and profits soared as competitors stumbled. The leader leveraged this experience to create an appetite for additional agility investments.
- Get down to the nitty-gritty. For one manager, the 2019-20 fiscal year included significant product recalls and a disastrous SAP implementation, topped off by COVID-19. In the face of these crises, leaders prioritized specific changes they needed to make to create a more agile system: functional silos largely disappeared, SKUs were cut drastically, and decision-making took place at warp speed. These changes created a step-change in their firm’s agility.
- Change the incentives. Many firms partially compensate their executives through long-term incentive programs (LTIPs), generally three years in duration. Yet we spoke with one executive whose compensation was tied to a seven-year plan. This forces a focus on longer-term improvements and strategic thinking.
- Beware of “getting back to normal.” If dramatic changes allowed your company to survive a crisis, why return to old ways? Senior leaders must look in the mirror. Fundamental change comes from courageous leadership. We heard examples of supply chains retaining many beneficial changes born in the crisis. As one supply chain executive told us, “We achieved lasting, permanent, positive change, albeit with a gun to our head.”
It’s never easy to drive change, especially lasting change. Many companies cut SKUs during the pandemic. But SKUs are now beginning to grow again. Others reported that as initial pandemic disruptions eased, a short-term orientation reasserted itself, with accounting and finance leading the retreat. In the face of these challenges, managers must continue championing greater agility for their company’s long-term success.
Creating an Agility Mindset
Enhancing agility requires companies to devote resources to the supply chain without understanding how or when the environment will change. Making these types of investments requires an agility mindset.
An agility mindset requires companies to recalibrate their supply chains to better accept change. Agility is about benefiting from a rapidly changing external environment. Rather than defending against perceived risks from outside, it allows companies to thrive on the changes inherent in a dynamic environment.
With an agility mindset, the central questions become: To what extent should our supply chain welcome change? And what are the costs and benefits of creating such a change-welcoming system? These are strategic questions. To answer them, companies need to continuously scan their environment, making seed investments and building flexible networks. Supply chain leaders must bake these activities into their regular planning cycles, leaning into emergent trends with contingent investments that position their company to take advantage of potential changes.
Supply chain agility is fundamentally about preparing for and adjusting to environmental opportunities and threats. Agility allows companies to thrive on the changes inherent in a dynamic environment. In our next blog post, we’ll tackle some challenges managers face when making the business case for agility to internal stakeholders.
To learn more about how your company can partner with us to explore advanced concepts in supply chain management, visit ASCC.
Download the white paper by filling out the form below to read more about meeting the challenge of supply chain agility.