FT.com / Financial Times
March 8, 2004
Many companies have honed their competitive edge by adopting the just-in-time philosophy that involves producing goods to meet demand exactly in time, quality and quantity.
But such highly-tuned systems leave manufacturers vulnerable to disruptions in any of the many links in their supply chain.
"More and more, companies are trying to walk that fine line between up-front investment in capabilities, product and inventories before they know what their customers' demand is going to be," says Ed Starr, partner in Accenture's supply chain management practice. "So we have an environment where there's less room for error." Disruptions in the supply chain can take many forms and range from those that affect single companies or sectors to the entire supply chain. The 2002 strike of dockworkers at US west coast ports paralysed transport of goods across the Pacific, leaving retailers and manufacturers short of goods and Asian producers with exports piling up.
Other incidents can have a dramatic impact. As well as killing more than 2,000 people, the 1999 earthquake in Taiwan revealed the dependency of the world's PC maker on the country's supply of vital components such as chips, memory and motherboards. Leading chipmakers lost several days' production, mainly because of power shortages, creating a knock-on effect throughout the industry.
At the other end of the scale, a single fire in a factory can have an equally disruptive effect on the business of a company.
As well as individual incidents, manufacturers and retailers must face an increasing volatility of demand - particularly in areas such as electronic equipment and fashion - as wider consumer choices turn buyers into ever more fickle customers. Set against these risks is an increasingly competitive business environment, which is driving companies to produce goods more quickly, cheaply and efficiently.
"But all the activities that we classify as reducing waste or creating more efficiency amount to eliminating buffers from the systems," says Eitan Zemel, professor of operations management at New York University's Stern School of Business. "We work with less inventory, less spare capacity, less lead time and that makes more elements of the systems critical, so that if something goes down the damage could propagate to a much wider area."
Mr Starr advocates an approach to supply chain operations whereby not all eggs are kept in one basket. This means, for example, not relying on a single supplier. "In business, hedging is the best long-term result," he says. "The challenge is that you can also prove it doesn't frequently turn out to be the best short-term move."
Nevertheless, when it comes to the volatility of demand, Mr Starr believes companies can profit from building the ability to react quickly into their business models. He cites the example of Zara, the Spanish fashion chain, which brought some of its manufacturing back in-house because lead times were proving too long to respond to the appetite for new fashions.
"They have also set up capabilities to have inputs from customers in their stores and they get that within the next day into what they build and distribute," he says. To deal with fluctuations in the supply of components for its computers, Dell Computer uses pricing as a fast and flexible tool via its online sales. "Dell may raise the price of the 60 megabyte hard drive price and lower the price of the 80 megabyte - or they'll offer free upgrades," says Yossi Sheffi, professor and head of MIT's Centre for Transportation Studies. "This is a sign that they have bought too much of one and not enough of the other, rather than that they have suddenly become generous."
Prof Sheffi and his colleagues at MIT have launched the Supply Chain Response to Terrorism, a research project that studies the impact of terrorism - as well as other incidents - on global supply chains.
"[Flexibility] can provide incredible competitive advantage," he says. "And companies that are building flexibility into their way of doing business can even create variability in the demand by, for example, offering more versions - different coloured phones, for example - and smaller quantities of each."
Prof Sheffi also believes that lean production techniques are not necessarily incompatible with building security into the supply chain. He cites the experience of Hewlett-Packard. Because in Europe it needs to produce printers for markets, each with its own language - requiring different instructions and software - and power supply, the company redesigned both the machines and its distribution network.
It now manufactures standardised printers that are sent to a centralised European distribution centre where the right language and power cords are fitted.
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