Sommer (2003) argues that the global competition has forced many organisations to search for increasingly smaller and more sophisticated sources of competitive advantage and they have redefined competitive advantage as a function of how well their organisational culture initiate and/or adapt to change, e.g. change in market conditions, competition, new product development etc. In order to realise such change, organisational processes and the technology that enables them must be continually re-evaluated and modified to reflect the needs of new integrated customer/supplier relationships. He argues that the need for flexibility has made the organisations to focus on their core competencies and use outsourcing as a mean to increase their flexibility and have implemented flexible portal/exchange solutions as well as relying on Application Server Provider (ASP) and Secure Data Centre (ADC) to host their solutions.
Vokurka et al. (2002) argue that Supply Chain Management (SCM) offers a strategic choice for achieving manufacturing capabilities without the same level of capital investment. Tully (1994) (Cited in Vokurka et al. (2002)) provides evidence to support the theory that firms are achieving needed flexibility through the use of SCM practices. They iterate the fact that certain supply chain practices directly impacts operational flexibility and supply chain management practices should be used to excel in agile manufacturing. They also argue that conventional theories of capability trade-offs espoused by Skinner (1969) (cited in Vokurka et al. (2002)) such cost , quality and customer satisfaction, have proven to have diminished due to the introduction of Total Quality Management, Just In Time management, cellular manufacturing and other strategic manufacturing strategies which sometimes makes capability trade-offs not necessary. Ferdows and De Meyers (1990) (cited in Vokurka et al. (2002)) argue that capabilities can be attained and sustained in a cumulative manner, depending on the firm’s sequence of pursued objectives related to these capabilities. Ferdows and De Meyers (1990) propose a cumulative model (sand cone model) based on Nakane(1986) (cited in Vokurka et al. (2002)) model where a definite order exists for the pursuit and sustainability of the competitive priorities of quality, dependability, speed and cost efficiency. So they argue that cost efficiency does not lead to improved quality but is rather a possible consequence of higher quality levels (see Figure 1).
Figure 1- Ferdows and De Meyer (1990) Sand Cone model
As emphasised above, companies will no longer compete against companies but rather supply chains will compete against supply chains. Therefore cost effectiveness is a goal that must be achieved not only through internal improvements but also the supply chain must improve its overall operations to achieve this strategic capability. Therefore Vokurka and Flienner (1998) extended Ferdows and De Meyer (1990) manufacturing sand cone model to broader supply chain as is seen in Figure 2. Therefore contrary to previous literature, they have differentiated between flexibility and agility. Vokurka et al. (2002) define flexibility as the ability of the firm and its management to change rapidly in responses to changes taking place in the market place. But they argue that while flexibility is the ability to switch between tasks using established procedures for changeover, agility has as its main difference the ability to respond to unanticipated market changes where there is not necessarily a predefined procedure. But in order to have agility fist one should focus on developing high levels of flexibility.
Figure 2- Vokurka and Fliendner (1998) modified sand cone model
- Application of Supply Chain Flexibility
As was mentioned before in general flexibility reflects an organisation’s ability to effectively adapt or respond to change. While there are many ways to characterise such ability (for example, manufacturing flexibility, marketing flexibility etc.) flexibility should be viewed from the perspective of the entire value-adding system i.e. total system flexibility (Vickery et al. (1999). This viewpoint suggests that supply chain flexibility should be examined from an integrative, customer-oriented perspective.
- Applying Flexibility Concept
In order to apply the concept of flexibility, one must look at the whole supply chain and such an investigation is out of the scope of this work. To help in demonstrating some aspects of supply chain, one might consider a Pizza shop franchise and apply some of the aspects of the flexibility across part of the supply chain. A Pizza franchise is part of the supply chain as it requires supplying pizza ingredients from suppliers and processing them to a condition suitable for distribution across its various shops using distribution network. In many cases, suppliers are spread across various countries to enable the franchise in reducing costs. The supply chain is not limited to food ingredients but also boxes, tools and equipment etc. The franchise then makes the product and distributes it directly to customers or alternatively uses a distribution network (drivers) to distribute them to the customers. In this section, various aspects of flexibility will be applied to this simple example and then the impact of changes to one part of supply chain to other parts will be demonstrated. Figure 3 shows a simple diagram of supply chain for this example. If only one ingredient of pizza is considered such as processed meat, the supply chain includes farmers, distributors, manufacturer of processed meat and intermediate processing such as cutting to the right size, packaging and preparation for distribution to various pizza outlets and ultimately distribution to pizza shops and then to customers directly or via designated drivers. But supply chain also includes other components such as the chain for providing floor for dough, meat, sauce, spices, soft drink boxes and etc. The initial focus of this assignment will be on the franchise itself and distribution of pizza to customers.
Figure 3- Supply Chain under study
- Dimensions of flexibility
Beamon (1999) identified the use of resources, the desired output and flexibility as vital components to supply chain success and argues that flexibility measures are distinctly different from resource and output measures and does not have to be demonstrated by the system to exists as flexibility is a measure of potential and has multiple dimensions (range and response). Beamon then provides volume flexibility, delivery flexibility, Mix flexibility (process flexibility) and new product flexibility. Scannell et al. (2000) used cost performance, quality performance, innovation performance and flexibility performance to measure the success of supply chain of car manufacturing companies in US. They used four dimensions: mix flexibility, volume flexibility, change over flexibility and modification flexibility for measuring performance of these supply chains.
Vickery et al. (1999) defines five dimensions of flexibility. The first of these are product flexibility or “the ability to handle difficult, non-standard orders, to meet special customer specifications and to produce products characterised by numerous features, options, sizes and colours. While product flexibility is a key competitive priority in the operations literature, it requires the effective collaboration of other functional players, including marketing, product design and development and engineering.
A second type of flexibility mentioned in literature is volume flexibility or the ability to effectively increase or decrease aggregate production in response to customer demand (Miller and Roth (1990), Vickery et al. (1999)). Volume flexibility directly impacts customers’ perceptions by preventing out-of-stock conditions for products that are suddenly in high demand. This dimension becomes a lot more important in a highly cyclical industry such as furniture in order to enable the manufacturer to accelerate or decelerate production very quickly and juggle orders so as to meet demands and unusually rapid delivery (Hayes and Wheelwright (1979) cited in Vickery et al. (1999)).
During the last few decades it has been proven that companies can gain a variety of competitive advantages by being first to the market. These advantages include pioneering performance, where early market entry is related to higher market share or profitability, quality image perception advantage, where early entrant has the first opportunity to build and nurture a long-term relationship with the buyer and search costs would induce the buyer to remain with the early entrant, innovation leadership advantage, which leads to consumer perception of technology superiority and scale and experience economy advantage, where early entrant can gain production efficiencies from early build-ups of experience and size advantages (Vickery et al. (1999)). The ability to rapidly introduce many new products and product varieties is a strategically important flexibility that requires integration of numerous value activities across entire supply chain.
Another critical supply chain flexibility with high customer impact is distribution or access flexibility, the ability to provide widespread or intensive distribution coverage. This flexibility captures a company’s proficiency at getting the product close to the customer (Vickery et al. (1999)). Access flexibility is facilitated by close coordination of downstream activities in the supply chain whether performed internally or externally to the firm (Stern and El-Ansary, 1996 cited in Vickery et al. (1999)).
Finally, the last dimension of flexibility is “responsiveness to target markets” ((Vickery et al. (1999)). This flexibility captures the overall ability of the firm to respond to the needs of its target markets. Responsibility for this flexibility is spread throughout the supply chain; effective performance on this dimension hinges on a firm’s ability to leverage the capabilities of its supply chain to meet or exceed customer requirements (Vickery et al. (1999)).
To apply these dimensions on the case study, one needs to consider the following facts:
- Pizza outlets have a menu set that customer can choose from and is able to ask for extra ingredients by paying extra and remove some ingredients. Obviously this can be categorised as limited product flexibility.
- Pizza outlet provides pizza to the customer at the shop or delivers pizza to their desired location with a variable lead time and with an extra charge. The dual delivery method can not cope with variable demand in home delivery in peak times or split between in shop sales and delivery. Therefore during busy period, either the customers in the shop will need to wait a long time or the delivery has go long lead time due to unavailability of driver which will lead to drop in the quality of the pizza delivered.
- Pizza will be baked based on order received from customers (pull system) but the shop will require keeping an inventory of ingredients, therefore the shop has limited volume flexibility
- There is no obvious flexibility in responsiveness to target market or new product introduction. Probably this dimension of the flexibility has been detrimental to reputation of other fast food outlets such as McDonald. McDonald failed to recognise the trend in the market for less fatty foods and healthier diet on time and therefore was forced to spend a lot of money in advertisement and introduction of new menu items to repair the tarnished image of the franchise.
In order to increase the flexibility in the operation of the imaginary pizza franchise under study with hundreds of outlets, one might look at means of introducing flexibility in baking various types of Pizza (analogous to increasing manufacturing flexibility as discussed in previous sections) by suggesting the following:
In addition to menu set that is currently provided to the customers, customers can make their own pizza by choosing the ingredients rather than a pizza from menu set. To increase this flexibility, customers can choose the makeup of the cheese that is used on the pizza as well (Product flexibility).
Adding this flexibility, will require adapting the standard means of baking pizza to a more flexible process to accommodate the customer requirements. The introduction of this flexibility will make quality control more difficult and in order to maintain the same quality of the product, employees will also require to be extensively trained.
The introduction of this flexibility in the product will not only affect the pizza shop and their staff, but also will have impact on the suppliers as well. While previously a forecast of the sale of various types of pizza would have given suppliers an indication of ingredients needs of pizza shops, now the forecast will need to be based on the ingredients rather than pizza units themselves. Therefore while previously SKUs were pizza items, now SKUs are the ingredients used in the pizza.
Masket (2001) argues that the swift trend towards a multiplicity of finished products with short development and production lead times has lead many companies into problems with inventories, overheads and efficiencies. He argues that they are trying to apply the traditional mass-production approach without realising that the whole environment has changed. Mass production does not apply to products where the customers require small quantities of highly customised, design-to-order products, and where additional services and value-added benefits like product upgrades and future reconfigurations are as important as the product itself. He also argues that even world class manufacturing and best practice approaches are based upon the time-honoured concepts of mass production of standard products. The famed Toyota Production System has two kinds of products; type A and type B. Type A is a standard product and type B is custom product. Practitioners of TPS strive hard to eliminate type B parts and products because they do not fit the concepts of one piece part flow and rate-based schedules (heijunka) (Masket (2001)). An agile approach to manufacturing faces the reality that we must serve customers with small quantities of custom designed parts with perfect quality, 100 percent on-time delivery and at very low cost (best pizza, to be ready on time and without any extra cost).
A perfect example of a flexible product is Honda motor cycle in Japan. Honda has developed a range of machines that have credit-card sized electronic key. This key does not serve as a security devise to unlock the steering mechanism, the electronic fuel pump and other major components, it also contains information that changes the performance of the machine by changing the fuel injection, the timing, the ignition settings and other parameters. The rider can choose between fast, high performance, economy, town or mountainous driving and so forth. The addition of electronic configurability allows the rider to easily reconfigure the machine to meet his or her needs. This flexibility and customer responsiveness was created because Honda has an understanding of the customers’ varying needs and saw an information-based method of providing a wide-ranging solution. Increasingly it becomes the company’s information and the skill of the people that becomes premium. The company ceases to sell products but is selling the ability to fulfil the customer’s need (Masket (2001)).
Back to the example with pizza franchise, the next level of flexibility can be introduced as follows:
To improve distribution and volume flexibility, the franchise can introduce mobile baking facility mini-trucks. This will mean that making pizza and delivery is combined in one mini-truck. Therefore as orders arrive, it is relayed to mini-trucks and while the mini-truck is on its way to customers, the pizza is baked based on customers order. The mini-truck will require to be occasionally loaded with basic pizza components (pizza base and source) but customisation and baking will be done in the truck. Therefore in this way customisation will be performed at the last minute, the delivery lead time as well as product quality to the customers is also reduced.
This approach will also increase service to all other customers as well. During high demand or busy period, the mini-trucks can be used to either perform routine delivery or to be located near the main outlet to help direct customers.
Prater et al. (2001) argues that supply chain agility is a crucial factor at the strategic level and complexity is a major factor influencing supply chain exposure and agility. Increasingly, large multinational firms, in an effort to simultaneously provide local responsiveness and global integration are developing complex, differentiated network structures (Nohrai and Ghohal, 1997, cited in Prater et al.(2001)). Large manufacturing firms have even argued that they are “hostage to complexity” with regard to their supply chain structure. These statements support the model that a firm’s structure and management processes must grow increasingly complex to respond to a complex environment.
VAI which is a large international producer of steel products recently expanded its production capabilities by setting up a joint venture with steel mills in the Ural Mountains of Russia (Prater et al. (2001)).This operation is coordinated from VAI’s offices in Austria. The joint venture allows VAI to deal with increased demand in steel while keeping costs fairly low. The supply chain agility is low, however, because of the uncertainty of transportation delivery times. VAI must organise transportation from the steel mills to the port of destination in Southeast Asia. The steel is first transported by rail from the Ural in Russia to Odessa on the Black Sea then by ship to Southeast Asia. VAI works with both Russian and Ukrainian freight forwarders. The main problem is the flow of information and reliability of transportation times. A three week lead-time is required for the first sequence of the main transport plan. The first sequence includes, the mills order railway wagons through the Moscow Railway Mission, Odessa is informed that VAI wants rail capacity for 10,000 tons of pallets, Odessa informs Ukrainian Railway ministry of rail needs, Ukrainian Railway tells Russian Railway of its needs. The next step is to get railway confirmation from freight forwarders and set up the sea transportation. All this must be done using telegrams since email is non-existent and phone service is unreliable. To track the progress of shipments, VAI hires people to observe point of the rail line. As each train passes by, the observer notes the apparent loads of rail cars (in order to check for theft) and sends a telegram to VAI giving train’s location. Once the steel is at the sea, the shipment is subject to the vagaries of the weather in the Indian and Pacific Oceans. Sea transport is outsourced. In order to have bargaining power, VAI has bought shares in each of the shipping companies it uses. Given all the attempts and costs, VAI still cannot guarantee quick response or implement an agile supply chain (Prater et al. (2001)).
To expand on the flexibility of the Pizza franchise, the franchise might decide to increase new product introduction flexibility and responsiveness to target market. This can be achieved through further customisation of the pizza delivered to the customers. For each pizza the customer will not only determine the type of toppings but also the amount of each one. Obviously this will increase uncertainty in demand and to prevent this uncertainty and the impact of bullwhip effect, the franchise might require changing its pizza baking method (manufacturing). The shop will require postponing customisation to the last minute or leaving it to the customer (see Honda example above). As an example, Pizza shop might decide to bake the base pizza (base, sauce and cheese with spices) and then bake specific toppings as chosen by customer separately and deliver to the customer in separate packages and allow them to decide on pizza topping mixture and amount.
This increased flexibility will have a further impact on the supply chain. For achieving this flexibility, the packaging of the final will need to be completely changed to accommodate the base pizza and separate toppings, the supply of toppings will require to be in smaller packages to improve storage capability (less amount is require to defreeze and therefore reduce the wastage of perishable toppings) and reduce wastage. All these will have potential impact on cost and quality.
De Meyer et al.(1989) discusses the trade-off between flexibility and cost efficiency. The survey performed by them has indicated that most of the European and North American companies have concerns about overhead costs as well as quality when dealing with flexibility.
- Conclusion
Flexibility and agility has been a major topic of research for academics and practitioners. Although flexibility and agility has been used interchangeably in literature but they establish two different concepts as was discussed in this work.
The flexibility concept was illustrated through an example and it was indicated that increasing flexibility has normally some cost impacts (De Meyer et al.(1989)). Increased flexibility not only increases costs but also increases external vulnerability (Prater et al. (2001)). Therefore as flexibility and agility of supply chain increases uncertainty and complexity increases the probability of exposure of the supply chain. To provide flexibility also the design, manufacture and deliver of a product requires ever-higher levels of knowledge and expertise within supply chain – above and beyond the exchange of information and data as agile and flexible supply chain is built on rich relationships among all parties (Bal et al. 1999).
Regardless of all the complexity, it is becoming increasingly apparent that competitive advantage derives from the combined capabilities of the network of linked organisations that today is called “the supply chain”. This is a fundamental shift in the traditionally held the view of a business model based upon a single firm. It has also become apparent that markets today are increasingly volatile and hence less predictable and so need for a more agile and flexible response has grown. Putting these two ideas leads to the conclusion that a prerequisite for success is these markets will be an agile supply chain (Christopher and Towill 2001).
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