flexibility

The Power of Flexibility for Mitigating Supply Chain Risks

Daniel Dumke — Wed, 26 Oct 2011 13:31:00 +0000

This article sheds light on the question of how much flexibility is necessary to secure the supply chain against disruption risks.
The paper reviewed today takes a closer look at three supply chain risks: supply, process and demand risks (figure 1).

Figure 1: Selected Risks for further Analysis (Tang and Tomlin, 2008)

Strategies

The authors focus on the short term agility to reduce risk and chose five strategies, which are analyzed in depth (figure 2).

Figure 2: Strategies for risk reduction using Flexibility (Tang and Tomlin, 2008)

The strategies are backed by several case studies each.
For all five strategies the authors build a different model. First stands the description of the scenario, second is the development of the model which fits the scenario and is able to deploy the strategy. The last step is the description of the results.

Supply risks

Flexibility via multiple suppliers
Multiple alternative suppliers can reduce the supply cost risks, since the company gains the flexibility to purchase from the company with the lowest prices.
The first model is based on a case by Intercon Japan and Li and Fung. One ordering company is confronted with supply cost risk. The price of the identical goods is random and can vary between $5 and $15. The authors calculate the profit for the single up to a five (optional) supplier case and conclude that profits rise with increasing number of suppliers, whereas the marginal increase declines (figure 3).

Figure 3: Profit vs. Number of Supplier to reduce Supply Cost Risks (Tang and Tomlin, 2008)

Flexibility via a flexible supply contract
Flexible supply contracts allow the ordering firm to adjust its predetermined order at short notice usually within a limited quantity range.
This model is based on a case with Canon, HP and Best Buy. Demand is random, the purchasing contracts between buyer and seller are negotiated in the beginning of a period. But the actual ordered quantity can be adjusted between u% less or more than the originally agreed quantity. Calculating the profits for increasing flexibility u% gives the results shown in figure 4.

Figure 4: Profit vs. Contract Flexibility (Tang and Tomlin, 2008)

Process risks

Flexibility via flexible manufacturing processes
Flexible manufacturing requires a plant to be adaptable to produce a multitude of different products.
In this model process flexibility is modeled by the number of products (h) which can be produced by one plant. Different forms are shown in figure 5.

Figure 5: Different Flexibility Systems (Tang and Tomlin, 2008)

The calculations shows that increased process flexibility can also increase profits in an uncertain scenario (figure 6).

Figure 6: Profit vs. Degree of Process Flexibility (Tang and Tomlin, 2008)

Demand risks

Flexibility via postponement
Further flexibility is gained by postponing product differentiation decisions until the latest possible point during the production process.
In this model two products are sold at a market, demand for them is uncertain. Postponing product differentiation (shown in figure 7). Calculating profits for two different random processes (Independent and Identically Distributed (IID) and Random Walk (RW) Model), shows that also increase in postponement leads to increasing profits (figure 8).

Figure 7: Scheme for Product Postponement (Tang and Tomlin, 2008)

Figure 8: Profit vs. Postponement Flexibility (Tang and Tomlin, 2008)

Flexibility via responsive pricing
Case studies show the value of price adaptability to steer customer demand.
In this model the company is able to postpone the pricing decision for the selling season until the time t. Up to this point in time the company is therefore able to observe demand. Timing flexibility increases as t increases. From this it can also be shown that increasing flexibility leads to better profits with uncertain demand. Figure 9 has the results.

Figure 9: Profits vs. Pricing Flexibility (Tang and Tomlin, 2008)

Conclusion

The authors took some effort to generate five different models to analyze the flexibility cases. Nonetheless, I would judge the models to be quite specific for the cases, which is good for the research, but also poses the question: Will these results hold true in any case? For any company and supply chain?
There are other results (e.g. by Tomlin und Wang, 2005, which indicate that flexibility might not be the right choice for risk averse companies, which might be better of by choosing a dedicated strategy instead)

But if you keep this caveat in mind this work is a strong proponent of flexibility as a tool to increase resilience in an uncertain environment.

Reference:

Tang, C., & Tomlin, B. (2008). The power of flexibility for mitigating supply chain risks International Journal of Production Economics, 116 (1), 12-27 DOI: 10.1016/j.ijpe.2008.07.008

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The Supply Chain Flexibility Concept

Daniel Dumke — Wed, 07 Sep 2011 13:24:00 +0000

Today’s article finally closes a gap in the blog that I wanted to close for a while now.

Flexibility can be seen as a key basis for some companies and supply chains as a business strategy and for most companies as an approach for risk mitigation. The article by Duclos et al. presents a flexibility concept from a supply chain point of view and can be used as a foundation for further decisions on the supply chain strategy.

Methods and literature

The authors stand on the shoulders of giants and therefore start by presenting existing classification schemes and flexibility typologies. The authors locate the trend to integrate more responsive manufacturing strategies in the 1970s, when companies realized, that

they could no longer maintain the large volumes of production and cost efficiency of their production processes with these higher levels of change and uncertainty.

Later in the 90s supply chain management emerged with the goal to integrate suppliers and customers within the strategies as well. But the roots of flexibility still can be found in the early manufacturing optimizations.

In general flexibility can be seen as a multi dimensional construct, but the number and content of these is more than controversial. Some of them are:

Machine flexibility

Material handling

Volume flexibility

Process flexibility

But there are more aspects to flexibility, since it can be argued that it cannot be enough to establish flexible processes, but flexible organizations.

So the goal should be strategic flexibility, which can be described by:

1) Resource flexibility: the extent to which a resource can be applied to a range of alternative uses, the costs and difficulties associated with the switching from one resource to another, and the time required for the switch.

2) Coordination flexibility: flexibility in those processes that redefine product strategies, reconfigure chain of resources to produce product, and re-deploy those resources needed to produce the product.

Supply chain flexibility

Based on these considerations the authors develop their model for supply chain related flexibility (figure 1).

Figure 1: Supply Chain Flexibility Concept (Duclos et al, 2003)

It consists of six core units of flexibility which aggregate and extend the existing concepts.

1) Operations system flexibility (both manufacturing and service): ability to configure assets and operations to react to emerging customer trends (product changes, volume, mix) at each node of the supply chain.

2) Market flexibility: ability to mass customize and build close relationships with customers, including designing and modifying new and existing products.

3) Logistics flexibility: ability to cost effectively receive and deliver product as sources of supply and customers change (customer location changes, globalization, postponement).

4) Supply flexibility: ability to reconfigure the supply chain, altering the supply of product in line with customer demand.

5) Organizational flexibility: the ability to align labor force skills to the needs of the supply chain to meet customer service/demand requirements.

6) Information systems flexibility: the ability to align information system architectures and systems with the changing information needs of the organization as it responds to changing customer demand.

Conclusion

The authors conclude with the following argument: If competition is shifting from a firm-to-firm basis to a chain-to-chain competition, also the concepts like flexibility necessarily have to be adjusted towards a supply chain view. So in a supply chain context, the flexibility of one company can only be part of a larger supply chain flexibility strategy.

And I totally agree here. What do you think?

Reference:

Duclos, L., Vokurka, R., & Lummus, R. (2003). A conceptual model of supply chain flexibility Industrial Management & Data Systems, 103 (6), 446-456 DOI: 10.1108/02635570310480015

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Supply Chain Design: Capacity, Flexibility and Wholesale Price Strategies

Daniel Dumke — Wed, 24 Nov 2010 16:49:00 +0000

This is the forth contribution to my series on doctoral dissertations on Supply Chain Risk Management. An immense effort and dedication is spent on these works only to find the results hidden in the libraries. So the goal is raise interest in the research of my peers.

Author / Topic

This dissertation was written by Brian Tomlin in 1999 as his doctoral thesis at the Massachusetts Institute of Technology, Cambridge, USA. It can be downloaded here at his homepage at his current employer (Tuck School of Business at Dartmouth). The title is:

Supply Chain Design: Capacity, Flexibility and Wholesale Price Strategies

Summary

Tomlin cumulates three distinct topics and analyzes them in depth in his dissertation. His core question is always the supply chain design, with demand uncertainty as the dominant risk.

Wholesale Pricing Strategies
Using a game theoretic model with two actors (supplier and manufacturer) he explores the best strategies for setting the wholesale price. The objective is to maximize the supply chain profit (think of it as a return on investment in the supply chain). He shows, that no matter if quantity-discount or quantity-premium pricing schedules are used, non-linear pricing schedules outperform linear pricing schedules.
Process Flexibility Strategies
He then tackles flexibility strategies in a multi-product, multi-stage supply chain environment. He first identifies two inefficiencies which only occur in a multi-stage environment, namely stage-spanning bottlenecks and floating bottlenecks. He develops a mathematical supply chain optimization model and based on the results he concludes, that “in supply chains with a large number of products or stages, additional flexibility is advisable, especially for stages in which the capacity is not much greater than the expected demand.”
Capacity Decision
With this chapter on capacity decision making in multi-product, multi-stage supply chains he walks on new grounds, since up to then only single-stage models have been analyzed. He uses two criterion for his analysis: service level and expected shortfall. The results of his analysis show that under optimal capacity allocation: for every stage must hold true: for a small increase in a stage’s capacity, the decrease in shortfall divided by the capacity cost should be the same for all stages.

Conclusion

I have to admit that I do not really like the segregated design of the thesis itself, analyzing one topic in depth usually should be sufficient for one dissertation. On the other hand the work by Tomlin on the three topics would probably also have sufficed for two or three separate dissertations as well.

Compared to other dissertations I read it was refreshing to see, that he did not spend (too) much time on making an in depth literature review beforehand but focussed very much on his own works.

Reference:

Brian T. Tomlin (2000). Supply Chain Design: Capacity, Flexibility and Wholesale Price Strategies Massachusetts Institute of Technology, Dissertation

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