Flexibility or Cost Efficiency? It’s Getting Harder to Have Both

If you ask supply chain executives to name their most important targets, two themes likely would dominate: increasing flexibility and efficiently driving down costs.

While it’s possible — and likely obligatory — to have aspects of both integrated into overall supply chain processes and fine-tuned to meet specific channel or market needs, companies ought to be clearer on the goal most directly aligned with their executive agendas. What objective takes precedence ultimately influences which supply chain strategies are implemented, what initiatives are funded, and what results are delivered to the bottom line and the supply chain ecosystem, according to a joint study from the Massachusetts Institute of Technology (MIT) and Netherlands-based TruEconomy Consulting.

For example, the study found that companies aiming for flexible-response supply chains emphasize the fulfillment function; satisfying customer demand and reducing lead times rank as top priorities. Additionally, these companies often engage in postponement strategies, invest in planning-related IT tools, and encourage collaboration up and down the chain.

On the other hand, companies with an eye on cost efficiency generally steer their efforts towards operational visibility, with inventory management and lean supply chain practices being primary focus areas. They also put more attention on design for supply chain activities, total landed costs, and working capital reductions, the study indicates.

Back in the day, when companies started to definitively view supply chain as a core business operation, I don’t think these corporate-agenda disparities were considered in any significant way. Initiatives were randomly lumped together and collectively referred to as supply chain improvements.

In hindsight, it’s easy to see how distinctions have emerged and what kind of impact different models have on supply chain relationships. You just have to look at how OEMs and suppliers operate to get a sense of the disconnect in the system. OEMs, for instance, require a high degree of flexibility and responsiveness since they frequently introduce new products and services to fickle end-consumer markets.

Chipmakers and contract manufacturers, though, are hard-pressed to keep inventory and prices down, so their actions are filtered through the cost-sensitivity screen. While minimizing total supply chain costs is important to all companies, as the MIT-TruEconomy report notes, flexibility and cost efficiency don’t always work in parallel.

Even internally, companies are struggling with this crossover. The high-tech value chain is moving decisively towards a flexible-response strategy. However, many of the fundamental practices still being used are closely linked to cost-efficient business models.

How are companies reconciling these diverging goals; Where is the balance being struck between flexibility and cost efficiency and; How do supply chain organizations align senior management and customer priorities? These are the questions that never seem to go away.

4 comments on “Flexibility or Cost Efficiency? It’s Getting Harder to Have Both

  1. DataCrunch
    November 19, 2010

    Hi Jenn, Great post! It all comes down to ROI and those projects that can show with the most certainty quicker ROIs are the ones that get funded.  Now enhancing the customer experience and assuming that this will lead to more sales and repeat business are more speculative in terms of ROI, but just as important in a competitive market.

    Wouldn’t Wal-Mart be a good example of a company that has found a way to balance flexibility and cost efficiency?  Wal-Mart has turned supply chain management into a competitive advantage, a main strategy responsible for the company’s success.  They have managed to offer products to customers at prices below other retailers and at the same time reduce their internal costs by prudently managing their suppliers and distribution & logistics processes.  Thoughts?

  2. saranyatil
    November 21, 2010

    most of the people nowadays are concentrating on improving their supply chain system, by improving efficiency in each and every process. according to the requirements of companies they alter the lead time for the process and also developement charges are different. Its not mandatory that both have to be combined few companies go in for flexibility.

  3. eemom
    November 21, 2010

    Stricking the balance to ensure ongoing profit while keeping the fickle consumer interested is key.  From the chip designers to the board designers to the end product designers to the final retail sellers, that chain is long and riddled with potential roadbumps.  If when the product is released, the consumer feedback dictates a design change or upgrade, the process must be flexible yet cost effective enough for a quick re-design to please the consumer in the next generation.  I can't say that one precludes the other, but they are both interdependent and that manufacturers at all levels need to be prepared to provide quick, cost effective re-designs that are able to hit the market before they are squeezed out by their competition.

  4. Barbara Jorgensen
    November 22, 2010

    I think the main issues in the tech supply chain are risk management and proprietary technology. While Wal-Mart might be willing to hold inventory of the products it sells in exchange for the lowest possible price, OEMs and EMS want the low price without the inventory risk. Distributors can help minimize the risk, but adding a “middleman” usually means adding cost, so in theory you are trading cost for this flexibility.

    Also, as chip products move more and more toward application specific/proprietary, inventory risk increases. I think Wal-Mart's inventory would be considered 100% commodity (coffee makers vs. Keurigs) –in other words, there's very little risk they won't be able to sell the coffee maker at some point (along with a can of Folger's). With Keurigs, you have to buy the single-serve coffees as well. In the electronics supply chain, a wost case scenarios is having those Keurigs but not having those single-serve coffees in stock. (That's my personal worst case scenario as well.)

    Needless to say, I own a Mr. Coffee.




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