No matter what industry they are in, executives today are asking themselves, how can I help my company not only survive the recession but also prepare for the recovery? The answer may lie in building supply chain capabilities that support flexibility.
Flexibility is defined by the Collins English Dictionary as the ability to be "bent easily without breaking; pliable." In the context of supply chain management, it refers to the ability to change or react with little penalty in time, effort, cost, or performance. Flexibility can be proactively built into a supply chain to improve its ability to withstand shocks and fluctuations in markets. How, then, might companies make their operations bend without breaking during these difficult times? To answer that question, we draw on a four-year project investigating construction supply chains conducted by the Cardiff University Innovative Manufacturing Research Centre, located in Cardiff, Wales.
The construction industry has been particularly hard hit by the current recession. Data captured by the global consultancy and construction firm Mace Group suggests that contractors providing goods and services to the industry are experiencing reduced demand and are forecasting a significant reduction in their order books over the next six months. Many companies are resorting to redundancies (layoffs). Delivery lead times across different product groups have decreased over three consecutive quarters, and suppliers are also cutting capacity in response to reduced demand.1
In spite of these difficult conditions, some companies are successfully weathering the downturn by employing strategies that increase their flexibility. To help others become more flexible during the recession, we propose a four-part approach, which draws from our observations of strategies that have been used successfully in the construction industry. These are:
While this research uses case studies from the construction industry, the findings hold lessons for supply chains in other industries. In particular, those industries that are operating in, or are considering moving toward, a make-to-order rather than a make-to-stock environment will benefit from creating a flexible supply chain.
Each of these strategies responds to the uncertainty or risk found in four key areas of the supply chain: the demand side, the supply side, manufacturing operations, and the control structure. Figure 1 summarizes the different strategies outlined in this article and highlights the area of the supply chain that each strategy addresses.
Uncertainty and risk may originate from the demand side, through such developments as changing patterns of demand from customers and clients. It may also originate from operations, either on site in the case of construction or in factories or distribution centres in the case of manufacturers. The supply side may also be a source of uncertainty. For example, suppliers may file for bankruptcy or perform badly. Finally, the uncertainties may originate from, or be amplified by, the control structure. In this case uncertainty is increased by poor information flow and coordination through the supply chain.2
It is important to note that while each of these strategies focuses on a particular area of the supply chain, they are not meant to be implemented in isolation. All of the strategies build off of and support one another. A flexible strategy in one area of the supply chain requires flexibility in the others.
Strategy 1: Diversify or rethink market response
This strategy refers to actions taken on the demand side of the supply chain. This could signify a move into completely new profitable markets and/or a distinct move away from those that are unprofitable. Or it might involve slight modifications to existing offerings. Either way, it means being agile and flexible in order to respond to market changes.
A sign that many construction companies are employing this strategy can be found in data from Mace Group on bidding. Despite a workload reduction, many companies are reporting increased activity in the preconstruction or bidding phase of the project process; they are increasing the number of bids in an attempt to maintain their revenue. In many cases they are diversifying into new sectors or are pursuing opportunities they would have rejected in the past. For example, Denne Construction, a U.K. housebuilder involved in our study, has diversified its portfolio to include sustainable regeneration projects, which are becoming a more popular feature of U.K. government spending. Others are bidding for much smaller projects than they would have considered in the past. Both Denne Construction and Mace Group have maintained a healthy portfolio of projects by using this approach.
In addition to moving into new markets, companies can reconsider their approach to existing markets and customer relationships. Established partnership frameworks between construction firms and their suppliers as well as those between clients and construction firms are increasingly being undermined due to the belief that they cannot deliver the same value that can now be achieved in the open market. For that reason, now is the time for suppliers and contractors to challenge themselves to ensure that their clients receive greater value from those relationships than they would if they went out to the open market.
There appears to be a mixed response to this challenge. Some suppliers are now offering more valueadded services to their customers. Others are refocusing their efforts to compete on cost and shorter lead times. There also is evidence that some suppliers are scaling back the services they offer. These suppliers are focusing on what they know best in an effort to match the open market's price advantage while still offering the benefits of established, long-term relationships. A manufacturer of roofing elements in the study, for example, has stopped offering installation services for its products, reducing its services to a "supply only" contract. This means that it no longer assumes responsibility for coordinating the labor required to install its products. While credit conditions are tight, this strategy helps to reduce the pressure on its working cash flow. When the market picks up, the manufacturer may wish to resume installation activities.
While these approaches focus on the demand side, they require the entire supply chain to be flexible. Flexible manufacturing helps the supply chain respond to any changes to the product offering as a result of diversification. A flexible control structure will enable a supply chain to coordinate resources with changing market requirements, and a flexible supply base supports any transition into new sectors. The success of Strategy 1, therefore, requires careful consideration of the following three strategies.
Strategy 2: Make manufacturing flexible
This strategy addresses the flexibility of the company's own operations. The potential advantages of a flexible manufacturing function are the ability to produce a wider product range (mix flexibility), the ability to respond effectively to fluctuations in the volume of products (volume flexibility), and the ability to change delivery dates with little penalty in time or cost (delivery flexibility). Finally, there is the ability to accommodate new products in the manufacturing process (new product flexibility). Combined, these flexibilities (mix, volume, delivery, and new product) represent the total flexibility offered by a manufacturing system to its customers. Together they are fundamental to allowing manufacturers to respond to the uncertainties of the downturn as well as to offer value to customers. Volume flexibility, for example, is particularly important for surviving the economic cycle, as it is an indication of the ability to cope with demand swings. New product and mix flexibilities, on the other hand, are crucial for switching between markets during a downturn.
Recently the concept of mass customization (customized goods using mass-produced components) has been introduced into the U.K. construction industry as a way to accomplish flexible manufacturing while maintaining some of the cost savings associated with standardization. For example, a manufacturer of modular bathrooms that we interviewed employs a modular product platform, which allows it to combine the cost savings of generic, standardized components with the service level of a customized finish. The company manufactures a modular base, made from steel frame and wood panelling. This base functions as the core of the bathroom unit, and the company gives careful thought to how this core interfaces with various bespoke (custom-made) components.
This modular approach helps provide mix flexibility. A manufacturer of passenger lifts (elevators) in our study uses modular components across a range of products to offer a seemingly wide variety of customizable elements, including colors, finishings, capacity, shaft dimensions, speeds, cabin layout, and doors. Much of this is delivered to the construction site, where installation teams integrate the lift with the rest of the project.
To be successful, flexible manufacturing requires the support of the rest of the supply chain. For example, the elevator manufacturer holds standardized, modular components in stock to meet demand. But it relies on suppliers to deliver most of the bespoke components directly to the site.
To support the different types of manufacturing flexibility (new product, mix, volume, and delivery), companies should take a close look at their process flexibility. This refers to the ability of a manufacturer to make the same parts in different ways with different cost and time implications. For example, one of the suppliers in our study had two different lines for making the same, or similar, roof trusses. One line is a low-cost, standardized, automated line; the other is a higher-cost, labor-intensive workshop. The automated line is used to manage base demand, while the workshop is used to cover surges in demand. The workshop line can be easily brought into use when demand requires and can be inexpensively stood down at times of low demand. Furthermore, the lowcost automated line is only low-cost on a per-unit basis when output is high. When output falls dramatically, it might be more economical to use the relatively less efficient, more labor-intensive workshop.
To be flexible, individual participants within the supply chain need to give careful consideration to their overhead structures. One strategy is to employ a minimal overhead strategy, whereby the fixed overheads are reduced so that they do not become a liability if there is a falloff in work. A protected core overhead is responsible for delivering the core value of the business, and flexible resources (such as temporary labor, contract manufacturing, or outsourced logistics) are then used to take on additional capacity as needed.
A small painting contractor we interviewed uses flexible labor (the flexible resource in this example) as a way of coping with uncertainty. The painting contractor has a core staff of around 80 employees. When demand is strong, it can increase its staff to 200 using self-employed, skilled labour. The same contractor has a consolidation center (the fixed overhead) on the outskirts of London, which holds and controls its stock of standard paints; it orders bespoke/custom paints for specific projects to be delivered directly to job sites. Another company in our study, a manufacturer of pre-cast concrete, uses a combination of in-house and outsourced logistics to build flexibility into its operations. The in-house vehicle fleet has the capacity to manage the minimum demand that the company expects, and the outsourced logistics services can be purchased in response to unpredictable increases in demand.
Strategy 3: Support flexibility through the control structure
The control structure is responsible for coordinating supply chain activities and directing the flow of materials, resources, and information between different organizations within the supply chain. It refers to the decision-making protocols and rules that govern the supply chains. It is often a combination of technology (IT systems and forecasting) and processes initiated by the lead organization in the supply chain (information-sharing rules and coordination strategies). A poor control system can lead to the wrong decision rules and outdated, excessively complicated, or incomplete information throughout the supply chain. The traditional approach is for construction companies to place orders during the course of the project while taking into account quoted lead times from suppliers. However, the delivery dates and requirements can change over the course of the project, which often leads to late deliveries or incorrect orders.
Through our research we have made a number of observations relating to effective control structures that support flexibility. First, flexibility can be facilitated by having an effective exchange of information throughout the supply chain. The key element here is real-time visibility of information. Mace, for example, uses a Web-based information management system to exchange information with its suppliers. Suppliers can log on at any time to see progress on the projects they are involved with as well as any outstanding requirements. The system also provides access to design information and performance-related metrics. This allows suppliers to be more responsive to project requirements. For example, if a project is ahead of schedule, a supplier could proactively respond by moving up its delivery date.
Three of the suppliers in our study used customized information systems to better manage information and provide visibility of material requirements to their own suppliers. This kind of information visibility helps to reduce the "bullwhip effect" in make-tostock supply chains, in which order quantities amplify and become increasingly variable as orders move through different stages in the supply chain. The effect is reduced because manufacturers can make purchasing decisions based on undistorted demand data rather than on inaccurate forecasts. It also provides better information about customer requirements in build-to-order supply chains. All of these initiatives help the whole supply chain to become more responsive and flexible. For example, delivery flexibility is facilitated through better visibility of due dates, and volume flexibility is facilitated through better access to demand data.
Strategy 4: Enable flexible supply
Flexibility within the supply base is crucial to delivering the strategies outlined in this article. The buying organization may derive flexibility from two different sources: vendor flexibility and sourcing flexibility.
Vendor flexibility is the extent to which suppliers of goods and services can respond to uncertainty and support the flexibility requirements of the buying organization and the wider supply chain. One way in which suppliers can support the supply chain is by offering new product flexibility, or being able to accommodate production of new products. Some of the suppliers in our research were able to provide significant design support to construction firms that are bidding for new projects (essentially a "new product"). For example, the manufacturer of passenger lifts works closely with construction firms to develop designs for the lift elements of a project. This may include support for the design of unique layouts (such as those that may be found in sports stadiums or large commercial towers in downtown areas), and also for the information systems that manage the lifts. If customer requirements change as a result of a recession or upturn, this kind of flexibility in suppliers becomes much more important.
Another way suppliers can support flexibility in the supply chain is by offering delivery flexibility, or the ability to offer a range of delivery dates and to change them. For example, one manufacturer of windows that is supported by a third-party logistics company is able to push through rush orders, or if a delivery date is too early for a project, hold the orders either centrally in northern Europe or locally at facilities in the U.K. Such a high degree of delivery flexibility from suppliers helps construction firms respond to changing project requirements. During an upturn, the ability to make deliveries earlier than planned in order to complete a project ahead of time can be crucial. During a downturn, a supplier's ability to be flexible with deliveries helps construction firms and clients who wish to postpone or delay projects in response to a slowing market.
Lead companies in the supply chain may wish to help long-term, strategic suppliers develop their flexibility. Mace Group, for example, has created a series of training modules for its key suppliers, which are delivered by the "Mace Business School." These training programs ensure that those suppliers are conversant with leading practices in project management as well as with Mace's processes and procedures. Once suppliers become a formal part of the business school, they are given early visibility of projects in the pipeline, more consistent workflow, and greater involvement in tender development. These formal training initiatives promote better information exchange, better integration of processes, and best practices within suppliers — all of which support responsiveness and vendor flexibility.
Sourcing flexibility is the ability of the buying organization to reconfigure its supply chain according to new requirements with little penalty in time, cost, or performance. One way that Mace has improved its ability to quickly and easily reconfigure its supply chain is by dividing its supply base into three tiers: approved, preferred, and recommended. Recommended suppliers are part of the Mace Business School. They are used for core activities that are consistently demanded across different construction projects, such as mechanical and electrical work packages. Unique or less common requirements for different projects might then be procured from approved or preferred suppliers. The whole supply chain is reconfigured from the three different tiers according to the needs of each project. Mace is able to switch effectively between approved and preferred suppliers while also developing and leveraging the flexibility of its top tier of suppliers.
The power of flexibility
This article has described a four-part approach to achieving flexibility throughout the supply chain. It has also argued that capabilities that support flexibility allow companies to downscale effectively during the recession and easily upscale when the recovery eventually comes around. Figure 2 summarizes the value of different strategies during good and bad times.
The starting point for a comprehensive flexibility strategy for the whole supply chain is to consider the four-part approach described in this article. While doing so, firms should ask themselves the following questions:
As we have shown, it is important to develop flexibility throughout the supply chain. We have discussed flexibility in relation to strategies associated with the demand side, the manufacturing process, the supply side, and the control structure. An integrated approach has been proposed. All of the companies mentioned in this article have, at the time of writing, weathered the recession admirably and look to be in a good position for taking advantage of the signs of recovery that are beginning to appear. Through our observations, we have noted that the organizations that prosper, whether they are suppliers, construction firms, or clients, are those that are agile, responsive, and realign themselves quickly with changing markets. Flexibility is the enabler for this. It gives organizations the capabilities to mitigate the uncertainties that are present in the current economic climate.
1. This information is drawn from the Mace Group's ForeSite system, which collects data relating to different elements of lead time across a range of product groups.
2. This approach to classifying sources of supply chain uncertainty and risk is adapted from R. Mason-Jones and D. R. Towill, "Shrinking the supply chain uncertainty circle," IOM Control 24, no. 7 (1998): 17?22.