Forecasts are rarely perfect. If you believe Fed Chairman Ben Bernanke and business leaders like Cisco’s John Chambers, we are in a period of “unusual uncertainty” , which means that your forecasts will probably be even less accurate and that you will face surprises no matter how robust your planning processes are. In order to protect your business, you should focus more on how well you can respond to demand changes and less on how to forecast them perfectly.
This uncertainty has brought the concept of achieving “flexibility” front and center again. But while there is a consensus on the importance of flexibility, there is not consensus on what it actually means and how to achieve it. In the next few paragraphs, we will give your our perspective on the three biggest mistakes we see companies make when it comes to planning and executing on flexibility.
Holes in coverage. It seems obvious that the reason that you implement a flexibility plan is to allow your company to respond to changes in demand. It also seems obvious that you need all of the pieces of a product in order to ship it. The simplest device (e.g. a resistor or a capacitor) can derail any upside plans as much as a customized IC. With that as a foundation, it is surprising how often companies create a patchwork of buffers but do not create a plan that will cover a whole product. The parts that are not covered will be the weakest link and will limit any upsides. It is important for you to make sure that you understand the minimum increase to which you want to respond. This creates a baseline level of flexibility and all components, subassemblies, etc. should be set-up so they can meet this baseline level with a high degree of confidence. Other factors may provide justification for adding additional buffers (e.g. risk due to a sole sourced part), but all parts should be able to meet the minimum threshold. The other area that causes holes in coverage is the varying lead-time of parts. Parts that have a long lead-time will need more coverage than parts that have a short lead-time. You must make sure that you have coverage throughout lead-time just like you must make sure that you cover all parts to a minimum level.
All products treated the same. In the previous paragraph, we mentioned buffers as part of a flexibility plan. Although that is an element to consider, true flexibility comes when you are able to reduce the inefficiencies (e.g. the seven wastes as described in Lean) from your supply chain. “Purchased” flexibility (e.g. buffers) will mostly help you when demand increases. Flexibility that is designed into the supply chain will help you when demand is increasing and decreasing. Getting to this type of flexibility can be a significant effort and not all products deserve the same attention. In each company there are products that are more important than others for a variety of reasons. These products deserve the most attention when it comes to creating true flexibility. The strategy for these products should be differentiated from those products that are less important or may be in a less hostile competitive environment. Many companies dilute their efforts on flexibility by trying to tackle all of their products with the same broad-brushed approach. This creates two problems. First, the overall effort is slowed because the resources are tackling a larger scope. Second, each product has a unique supply chain and a unique set of customer needs. This uniqueness is lost in a generic approach to the problem.
Nothing behind the numbers. Flexibility in your supply chain requires more than just contract terms. We often see how OEMs put language in a contract that requires a certain percentage of flexibility within one month, two months, or an entire quarter. But what happens in the background to actually meet those numbers is often a mystery. If you do not know what is behind the numbers, you cannot have any confidence that you will have any protection when you need it. In addition, market conditions change for both products and the components that go into them. So not only do you need to understand the infrastructure behind the numbers that will deliver the flexibility but you also need to have a mechanism to update the approach based on what is happening in the products and the components. Without this discipline, you are likely to have trouble on both the upside and downside.
Flexibility in the supply chain has always been a valuable attribute. In these economic times, flexibility becomes even more important. Building robust flexibility plans tailored to a product’s needs is one of our focus areas. If you would like help or more information please contact us at info@symphonyconsult.com.