"Lean" vs. "Agile" Considerations Shape Supply Chain Strategies

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"Lean" vs. "Agile" Considerations Shape Supply Chain Strategies

By Sachit Bhatia, Technopak Advisors - 01/01/2004
"The customer can have any color he wants so long as it's black," is a statement that has become a familiar, humorous footnote in automotive history: When Henry Ford said this a century ago, he would hardly know that a time would come when people would refuse to buy a particular car model if their first choice color was not available (as per a recent survey if a first choice of color is not available on a particular model, 34 percent of customers will choose a different vehicle model altogether).

With the development of the Model-T, Ford Motors discovered the assembly line (Company executive William C. Klann, recognizing the efficiency of a slaughterhouse, where animals were butchered along a conveyor, brought the concept to Ford Motors; ultimately Henry Ford became respected for his "lean" thinking, which made Model T a lot cheaper by increasing the plant's productivity seven-fold.)

Time and Toyota took the lean concept further, seeking efficiencies in other functions of the firm beyond the manufacturing realm. The concept of "lean" sought to make all processes more efficient - productivity shot up, costs came down.

Eventually many companies progressed toward that ideal and in late eighties, lean became the term du jour. Key players were now at a level playing field and sought new ways to cut costs. The next decade was characterized by management gurus taking the lean concept out of the organization and extending it externally to suppliers. Accordingly, the concept of "lean supply-chains" gained momentum: efficiency no longer was relegated to just the four walls of the organization.

While all this transpired, a greater challenge loomed around the corner. As the consumer became spoiled with decreasing prices, demands for new products at an accelerated pace emerged. The tone was set by ever-rapid speeds of information dissemination. Emphasis on the consumer became the focal point. Soon thereafter, the single-focused "lean" supply chain model appeared incomplete, as "agility" became coveted. Which leads us to today.

Agility's heightened prominence

The dictionary definition for agile is presented simply enough:

ag-ile (aj-uh l, -ahyl) \ adj - quick in movement, nimble

With the increase in competition and companies wooing the customer, agile supply chain emerged as the new mantra. Those who could get the product on shelf when the customer wanted it could sell more. With consumer preferences changing fast it became even more important to bring in new products at a pace that would put a supersonic to shame.

But doesn't this pace fly in the face of global supply chains that thrive on "best price" sourcing?

To some extent yes. No longer is the customer willing to wait three months to wear her favorite burgundy Zara blouse that is made and exported from a country thousands of miles away. Fashion considerations now rule the day: if burgundy has to be worn, its time is now, before everyone else is wearing it. (No wonder Zara has established production close to its Spain offices.)

And what about factories that have been specifically built to achieve economies of scale? Are they helping their cause? Every single factory wanting to maximize economies of scale will find itself struggling when that customer comes knocking to place orders and wants quick response when it comes to that burgundy blouse.

When to have agility? Typical products that qualify for this consideration are electronics and fashion items. These products are sold for their "distinctive" appeal and not really for the function they perform. They have short life cycles and shorter shelf lives.

Demand for these products is difficult to forecast and stock-out rates can be astronomic (think 25 percent). But the profit margins of 20 percent to 60 percent on these products more than compensate.

In today's global marketplace there is a rush to make everything distinct, from biscuits to Barbie dolls. Commoditization is diminishing with each passing day. Markets are reorganizing from mass markets into highly fragmented niche markets.

So is lean dead?

Hardly. It still exists for "functional" products, those used for our basic needs (such as food). These products have predictable demand and hence are easier to forecast. The stock-out rates are negligible.

The below offers an easier explanation of the differences between lean and agile:

Attributes

Lean

Agile

Products

Functional

Innovative

Demand

Predictable

Volatile

Product life cycle

Long

Short

Product variety

Low

High

Customer drivers

Cost

Assortment

Profit margin

5% - 15%

20% - 60%

Average forecast error

5% - 10%

30% - 40%

Forecast approach

Calculative

Consultative


Attributes Lean Agile Products Functional Innovative Demand Predictable Volatile Product life cycle Long Short Product variety Low High Customer drivers Cost Assortment Profit margin 5% - 15% 20% - 60% Average forecast error 5% - 10% 30% - 40% Forecast approach Calculative Consultative The predictable demand of lean supply chain makes the tasks easier for companies as they can focus on one prime goal: Cost reduction. Sophisticated systems and processes ensure that technology plays the required role in meeting this goal. Inventory is minimized and efficiency throughout the supply chain is maximized to get the desired results. All upstream and downstream functions collaborate to make sure that the predicted demand numbers are met at the minimum cost possible.

So do I select a lean or agile approach for my supply chain?

The answer can be complex. Intelligent supply chains throughout the world use both lean and agile for their benefit. And there is no escaping the truth that in today's global economy, consumers and producers are often separated by thousands of miles, often in different continents.

Benetton: A Case Study

The apparel brand Benetton adapted a unique strategy in addressing the lean vs. agile dilemma. It decided that it would not use colored fabric to make garments - rather it would make all the garments in one natural color and then dye all of them in the color that was selling.

This innovation was called "tinto in capo" i.e. dye upon the garment. With that, it became possible for Benetton to produce large volumes of garments to exploit economies of scale at the manufacturing level, yet respond quickly to the color that customer wanted to wear by quickly dyeing the garments in the preferred color (and thus in line with the agile concept).

So what Benetton did in the last century we should be in a better position to understand and benefit from. It is referred to today as moving the "decoupling point" toward the point of sale.

We all understand that if the goods are produced on demand rather than on forecast they will all sell. Still, with the realization that we cannot wait until demand materializes, we must depend on forecasts.

So what are our choices given those circumstances. How about reducing the time between when the forecast is made and when the item is sold?

It is anybody's guess if the forecast will be more accurate in that case. This is where the decoupling point comes into play. It is the point where product differentiation happens, or in other words where products take their final shape. It is that final point beyond which no changes can be made and it will go to the customer in the shape, size. and color that has been determined at the decoupling point.

In the case of milk, for instance, your decoupling point is where milk is packed and is differentiated into half gallon and one gallon containers. In case of furniture it is where one chair is painted white and the other is painted black.

What Benetton did was that it moved the decoupling point much closer to the point-of-sale. Product differentiation was postponed to the very last stage. The garments were dyed in various colors upon receiving information from the point of sale as to what was selling. Forecasting error was reduced to a minimum.

It is not always prudent to characterize yourself as strictly lean or agile. Different strategies have to be employed for different products at different times. But the best strategy in any supply chain seems to be a prudent mix of both lean and agile: Lean before the decoupling point, agile after the decoupling point.

This will ensure you always are busy selling blouses to your end consumer - regardless of the color she wants.

Sachit Bhatia is a senior consultant at Technopak Advisors (India), and consults clients on apparel retail supply chain issues.

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