From supplier to the end user, each link in the chain makes the costs higher. This increases the final price of the product and also reduces profitability. Aside from the financial costs, we also have to consider time and opportunity costs. Failure to match supply with demand (due to delays, insufficient capacity) can make us lose customers and thereby lose market share and growth opportunities.
In response to those challenges, different methodologies are being introduced. Two such popular methodologies are being lean and being agile. These two approaches and mindsets are also being used in manufacturing and other industries where waste elimination, efficiency optimisation, sustainability and responsiveness are priorities.
Having a lean supply chain
Let’s start with lean (agile supply chain will be discussed later). When we say lean, practitioners often refer to minimising waste. This can mean creating more value for customers while using fewer resources. It can also mean as a systematic approach to identifying and eliminating waste in each of the links of the supply chain.
The lean methodology is often associated with the Toyota Production System. Notice that it’s not a one-time approach but an ongoing and systematic approach towards waste elimination. The waste we mention here often refer to the following:
These forms of waste don’t contribute to value for the customers. These non-value added activities make the costs higher without benefiting the end users. As a result, it has been the goal of lean organisations to make sure that each activity contributes to value for the customers.
For example, transport in the supply chain often introduces waste and added costs. In warehouse settings, fast-moving goods should be placed near the entrance or where the products are being loaded and unloaded. In other words, the physical layout (and arrangement of racks and shelves) should reflect the demand and workflow. Aside from speeding up internal processes, this efficient internal transport can also help prevent collisions and accidents among the forklift vehicles (thereby minimising the number of downtimes as well).
This lean approach is also crucial to sustainability. After all, with more than 7 billion people right now, we have to implement lean approaches to minimising waste and the use of resources. It’s especially the case in the supply chain as well as in sectors such as agriculture and materials (e.g. for construction, packaging, manufacturing). Manufacturing and transporting agricultural products and raw materials can put a toll on our environment and compromise the future.
For example, eating locally grown foods can help reduce transport miles and fuel consumption. This is also good for the environment because of lower carbon emissions. However, there are challenges in reducing transport miles because of energy costs (and source of the energy) and other factors. This is the case with how bauxite is mined in Australia and yet the aluminium is made in New Zealand (bauxite is transported from Australia to New Zealand). The transport costs are high but the energy costs and source (hydro power instead of coal) are lower and more environment-friendly. The making of aluminium requires huge amounts of electricity and that requirement overshadows the transport costs.
Tradeoffs are always there, especially if we’re considering several different factors simultaneously. More often, distance will always be there since materials and products come from different parts of the globe. There are areas that only have those specific resources and capabilities that are needed somewhere else.
With the lean approach, much of the waste will be eliminated. We also have to consider both upstream and downstream (e.g. where and how the raw materials are being sourced, where the waste of the products end up or how the products are being used). We also have to forecast future changes and stay lean when those changes come. It’s a huge challenge which is why companies also apply another methodology.
Agile supply chain
Being agile means being able to move quickly and easily. In the context of supply chain management, it’s about fast assessment and adaptation. This can mean responding fast to changes, threats and opportunities. As a result, companies can better stay competitive and fully take advantage of emerging opportunities or prevent further waste from being incurred.
Agility in supply chain management is being emphasised because of the complex dynamics in the marketplace. The multi-channel and fickle marketplace makes the most adaptable and most responsive organisation the winner. However, the complexity and uncertainty in operations makes agility difficult to achieve.
Moreover, we also have to consider other factors that can drastically influence demand and supply. We can gain valuable insights by doing a PEST analysis (systematic examination and exploration of political, economic, social and technological environments and how these affect our business). For example, the US-China trade war has affected several sectors and industries in both countries. Cost is a huge player here which puts pressure on both countries to adopt strategies that will minimise the effect. One such strategy is that more and more China-based companies are moving their key operations to Malaysia, Vietnam, Cambodia and other countries so that the tariffs won’t eat much of the profits. Another strategy is by building domestic brands so that products are sold in the home country. This is similar to eating locally grown foods to reduce transport costs.
Political and economic climates can change in an instant which is why agility can mean the difference between surviving and shutting down. In the above example, China is both focusing (building domestic brands and local presence) and diversifying (building operations in other countries). With an agile approach, China-based companies can better respond to changes and better exploit opportunities within reach.
Lean and agile work hand in hand in helping companies stay profitable and competitive. We can see that being lean encourages being agile because fewer resources are being used (e.g. lower upfront investment, more financial resources to invest in setting up operations in other sites). On the other hand, being agile also encourages being lean because moving and responding rapidly requires the organisation to minimise its waste and make sure every part of the system contributes to value for the customers.
Therefore, a lean and agile supply chain is one that can respond rapidly to changes while minimising costs and waste. It’s a monumental task to achieve and requires ongoing work as the marketplace constantly evolves and political and economic pressures arise.
Contact us today if waste elimination, efficiency optimisation, sustainability and responsiveness are priorities for your business. With our technical expertise and long experience (40+ years history), damage prevention can certainly be part of your lean/agile strategy.