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Management Series: operations

Supply Chain Agility - The missing link - Operational flexibility

In part III in this series of articles on supply chain agility, Dr. Canan Kocabasoglu-Hillmer explores how companies invest in strategic sourcing to improve their operational competencies, which tends to have an impact on how agile they become.

Author(s): Dr Canan Kocabasoglu-Hillmer - Cass Business School;

In the next two parts of the blog we will start examining the relationship between strategic sourcing and supply chain agility. We will examine how strategic sourcing can directly increase supply chain agility in part IV of the blog. In this part, we will explore how companies invest in strategic sourcing to improve their operational competencies, which also tends to impact how agile they become.

Part III: The missing link? Operational flexibility.
With respect to their operations, companies can invest in several competencies; such as those that reduce total product costs, or that enable flexible operations or that ensure consistent product/service quality. For investments in flexible operations, there is now considerable evidence that these also help companies become more agile. More specifically, an agile supply chain builds on operational flexibilities. Unfortunately the opposite is not always true: the fact that company has flexible operations does not necessarily mean that they will automatically respond quicker to the market because this tends to require additional competencies such as effective forecasting or market intelligence.

In our work, we found that there were three types of operational flexibilities that showed a particularly strong relationship with strategic sourcing and supply chain agility: namely, supply, product-design related and process-related flexibilities. Supply flexibility suggests that a company has access to suppliers that can comply with their changing needs. Companies that have design-related flexibility can develop new products, make minor design changes, and adjust the product mix in response to changes in customer demand in a timely and cost-effective manner. Finally, companies that enjoy process-related flexibility use multi-purpose technology, cross-trained workforce and can adjust output volumes in line with changes in demand without a loss.

Let's consider the mechanisms by which strategic sourcing improves these three different types of flexibilities. With respect to supply flexibility, all activities under strategic sourcing have substantial impact. Strategic sourcing entails a clear understanding of strategic goals and thus helps a company to optimize its supply base according to its priorities. Understanding the foreseeable needs of other departments via coordination and sharing this information with suppliers allow suppliers to prepare for them. The company can have more direct influence over supplier responsiveness through supplier development activities.

Design-related flexibility improves when both procurement and suppliers share information with the design team about the risks and opportunities in the supply market. This can be particularly important for companies where significant parts of the operations have been outsourced to suppliers.

As for process-related flexibility, suppliers' responsiveness to volume changes improves considerably with information sharing and supplier development activities. A company's involvement in supplier development also tends to facilitate suppliers building process flexibility themselves, allowing them to be more aligned with the buyer's needs.

Interestingly, these mechanisms tend to be quite robust across companies with different product characteristics and process types (i.e. companies that made to stock vs. offered customized products to orders specified by the customers).

This series was originally produced for the Procurement Leaders Network. Visit their website at www.procurementleaders.com

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