This is the third 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; the second addressed the initial challenges businesses face when considering agility. Download the white paper.
The second prominent challenge managers face when promoting agility is developing a convincing business case for internal stakeholders. In our discussions with supply chain leaders, we identified several components to this challenge.
In this section, we will cover each of the following:
- Building top leadership support for agility initiatives
- Prioritizing agility-related initiatives
- Overcoming the lack of incentives for agility work
- Focusing on lead time compression and SKU reduction
- Developing approaches for testing a market and then scaling up
- Expanding the tool kit for valuing agility investments
Building Top Leadership Support for Agility Initiatives
Boards and senior executives are responsible for ensuring that the supply chain develops capabilities for navigating unforeseen events. And supply chain executives have a responsibility to educate and present options to their leadership when it comes to investing in agility. A robust approach to building management support for agility investments is highlighting the experiences of agility leaders. Below are some real-world examples from benchmark companies that managers can use.
Segment Products
One senior leader described initiatives underway at his company. The company had previously operated a “one size fits all” global supply chain, with mega-factories focused on long runs and low unit costs. To become more agile, the company has shifted its focus to product segmentation.
The supply chain team has defined three product segments:
- Ruthlessly efficient: Production for this segment focuses on standard SKUs with large lot sizes. Production for these SKUs is allocated across locations based on a decision tree.
- Amazingly agile: Production for this segment comes at a higher cost but can change on a dime. A key enabler of this segment has been a focus on changeover efficiency rather than output, with investments creating single-minute changeovers.
- Groundbreaking: Production for this segment focuses on very small lot sizes of experimental SKUs. Uncertainty is high for these SKUs, but testing production enables innovation with a potential for high returns.
This company’s factories maintain a hybrid production system that can handle all three segments. Decisions on when and where to run SKUs are localized to the division level. The network operations team runs segmentation twice a year at a division level. The expectation is that products move across the three segments. Most importantly, product segments fit the company’s growth strategy based on incremental, strategic, and disruptive gains.
Focus on the Customer
A tech company recently formed separate teams for agility and resilience. They are investing in streamlined organization design as an agility enhancer to speed decision-making. The goal is to implement an end-to-end approach to managing critical business processes, including customer relationship management, sales forecasting, demand management, production, and operations management, purchasing and supply management, order fulfillment, and new product development. This includes better cross-functional training and more rotations to better round people. The emphasis is on fast cross-functional decision-making centered on the customer and ease of doing business, especially in crises.
Attract, Retain, and Develop Talent
One executive told us in frustration, “Who has time to worry about strategic, longer-range projects like agility when we are drowning in a tsunami of short-term problems?” Several supply chain professionals felt one of the root causes of this condition was a chronic shortage of human resources with critical skill sets. Having the right people in the right jobs is key. Leading companies excel in five areas of managing talent: assessment of needs, identification of qualified job candidates, hiring, training, developing, and retaining talent. Benchmark companies invest in training new employees and ongoing training of existing personnel. Leaders also find ways to retain good employees and minimize turnover; they pay a fair wage for the area, show appreciation, and foster an atmosphere of ownership by involving employees in improvements.
Ultimately, there are many strategies for building top leadership support. Managers must be creative and continue to make a passionate, well-supported case for investment.
Prioritizing Agility-Related Initiatives
Companies often suffer from too many initiatives. Inevitably, the initiatives that slip through the cracks are important but only sometimes urgent. Supply chain leaders need an effective project prioritization process to overcome this challenge. An effective process requires leaders to clarify their strategic goals. It also requires leaders to set an appropriate cadence for project objectives based on a strategic plan.
Here is a nine-step process for driving project prioritization in your company:
- Start with your customers; understand their needs
- Assess your internal capabilities versus best-in-class
- Evaluate the game changers
- Analyze your competition’s capabilities
- Plan for strategically incorporating digitization and new technologies
- Manage risk by taking the time to identify, prioritize, and mitigate the most significant threats
- Determine new capabilities needed, and develop a multi-year project plan to implement them
- Evaluate the organization, people, and metrics
- Develop the business case and generate buy-in
Once projects are identified through the process, managers need to develop a disciplined approach to reassessing projects on an ongoing basis. This involves assembling representatives from the areas affected, debating, and ultimately voting on the priorities. Projects falling “below the line” should be delayed or canceled and not consume scarce resources.
Overcoming the Lack of Incentives for Agility Work
Senior leaders establish the metrics-reward framework, so it is up to supply chain professionals to ensure that it reflects the organization’s long-term interests. Often, this takes educating senior leadership. As one senior supply chain executive noted, in every company he has joined, he has had to educate the CEO and board regarding how the supply chain is key to the firm’s overall performance. Supply chain professionals can’t escape the responsibility of managing upward.
To be effective in this role, supply chain managers must show up to work first as a total business leader, second as a provider of solutions for growth, and third as an outstanding leader in the supply chain.
Showing up as a business leader allows supply chain managers to have meaningful conversations about the company’s total performance with CFOs and other executives. These conversations are the building blocks for strong relationships at the top. As supply chain leaders build stronger relationships at the top, they should also begin framing discussions of supply chain agility regarding key financial metrics. Connecting supply chain performance to financial metrics helps managers provide a strategic view of where their supply chain is currently – and where it needs to be – to support the business. Moreover, connecting to financial metrics allows managers to discuss the bigger picture of company success.
Another piece of the incentives puzzle is developing an agility dashboard based on robust metrics. One major CPG company described its agility dashboard. Metrics included the “ability to respond to a greater than six sigma demand” and “lead time at every link in the supply chain.” “Lost sales due to lack of agility” can also be a powerful metric when justifying agility investments. Well-designed agility dashboards help managers to publicize strengths and weaknesses. Dashboard results can be tied to conference room simulations that respond to market changes.
Focusing on Lead Time Compression and SKU Reduction
In our experience, lead time reduction remains perhaps the most underutilized lever available to firms to improve customer service, cut costs, reduce inventory – and enhance agility. Managers we’ve spoken to point to a lack of incentives around lead time management. One way to overcome this lack of incentives is to quantify the gains that lead time reduction produces in customer service, market share, and cost structure. For instance, an approach might be to look at differences between pre-COVID and post-COVID numbers and then trace how crisis-driven changes have produced a more agile and better-performing supply chain.
Another critical lever of agility is SKU rationalization. As product and service offerings increase, each SKU’s total percent of sales shrinks, and the ability to predict demand lessens considerably. Such added complexity requires increased investment across the supply chain, including in raw materials, supplier management, manufacturing/conversion capacity, transportation, warehousing, safety stock, and packaging. Demand prediction for new product or service innovations is far more difficult and uncertain. Companies unable to make informed decisions about quantities or where and when to store products increase costs of lost sales from stockouts and slow or obsolete stock levels.
A final note relates to information. Rapid information flows are critical in lead time and SKU reduction by providing visibility and speeding decision-making. Amazon’s business model allows it to test innovations through its online platform and see the results immediately. Executives can then quickly decide to scale up or discontinue the test innovation. Data analytics and decision algorithms can also be used to automate product life cycle management.
Expanding the Tool Kit for Valuing Agility Investments
Managers hoping to make the business case for agility must present credible quantitative analyses supporting investment. A key challenge is that traditional budging techniques negatively bias project valuations when uncertainty is high. With traditional techniques – such as those based on payback period, internal rate of return, or net present value – high levels of uncertainty are typically translated into more aggressive discount rates, resulting in lower project valuations. Moreover, these techniques ignore managers’ ability to positively influence outcomes after an initial investment. The result is that traditional techniques paint an overly negative picture of projects when uncertainty is high, creating a significant barrier to much-needed investments.
The negative investment attitude promoted by traditional techniques starkly contrasts the actual needs of managers running today’s global supply networks.
Fortunately, broadly applicable, quantitative approaches exist to analyze agility projects that can help managers make a case for these investments. One such approach is based on real options valuation. Real options are that feature of a project that gives managers the ability, but not the obligation, to undertake an action in the future. Real options come in many forms and allow companies to acquire, expand, or abandon an asset moving forward. Although they take time to learn, real options analysis and similar approaches can help shift the thinking on agility investments.
In this blog post, we’ve looked at some of the challenges managers face when building the business case for supply chain agility projects. The key takeaway from this section is that supply chain managers must be passionate advocates for greater agility. When making their case, managers must look for creative ways to connect agility investments to top leadership priorities while simultaneously demonstrating agility’s value through supply chain fundamentals. In the fourth and final post, we will look at supporting agility through building relationships with external 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.