How agile is your supply chain?

What would it take for manufacturing businesses to operate like the best online sellers? How can such companies turn orders around in a day, provide them with higher personalization, and renew stocks perfectly? These aren’t idle concerns for the top groups of manufacturers, due to the fact that customers, across both B2C and B2B markets, are more unpredictable now; service needs are gradually notching upward; and financial volatility reveals no indication of easing off. Supply operations commonly struggle to keep up, as lots of aren’t sufficiently agile to record fleeting upside chances or to alleviate fast-moving dangers.

To shed light on the enablers and opponents of agility, McKinsey & Company examined the supply-chain performance of companies in five industries, in addition to a range of practices that affect it. McKinsey & Company examined proprietary data from interviews with operations executives at more than 250 global companies. The interviews examined 10 supply-chain capabilities, consisting of portfolio and complexity, order and need, forecasting, and risk.1 Responses were outlined on a scale of one to 5 and the total agility ratings organized into quartiles. McKinsey & Company then compared those ratings with two extensively employed steps of supply-chain performance: service levels, as determined by the proportion of orders provided on time and as guaranteed,2 and days of inventory held.3 Companies with more agile supply-chain practices (as explained by executive-survey respondents) had service levels that were 7 percentage points higher and inventory levels that were 23 days lower than their less agile peers did.


McKinsey & Company also looked at specific agile practices and how regularly top-quartile companies embraced them (Exhibit 2). The majority of, they found, succeed in locations such as need forecasting, labor versatility, and the ideal positioning of inventory across distribution networks. Less had actually mastered capabilities such as modularization and postponement, which require standardized manufacturing and process inputs so that companies can respond more fluidly to changes in demand and to lower stock levels. The majority of had a hard time to form demand, a practice that relies on variable prices– progressively grounded in advanced analytics– to regulate the flow of items through supply networks and to optimize margins. One example of a company that makes use of these techniques is Amazon, which changes prices and inventory levels in real time in response to rivals’ steps, to name a few things.


Experience in 2 markets demonstrates how supply-chain agility make up divergent levels of performance amongst companies.

Chemicals: One top-quartile company is an industry leader producing a full range of chemicals utilized in agriculture and food processing. After routinely missing deliveries as a result of raw-material shortages, executives shook up their operations and now snugly integrate planning efforts with those of providers: the company shares data on forward orders with them and gets their insights into the availability of materials and capability constraints.

The company has also purchased redesigning processes (the modularization and postponement mentioned above) so that end products can be made more efficiently and rapidly from basic inputs that are always in the production stream. Thus, when demand enhances for an individual product, a plant manager can access the modular base and rapidly produce the final solution with just a couple of more steps than would be necessary with nonstandard inputs. That capability has not just sharply reduced the variety of final product the company has to stock however simplified SKU management as well. This company has also negotiated higher labor flexibility across its plant network, relieving contractual constraints on hours worked. In addition, it has trained staff members in numerous areas of process knowledge, so teams can quickly shift from one site to another to fulfill demand peaks. Factories now go for almost complete capacity, with lower logistics expenses and far less costly express shipments.

An industrial-chemical company with a broad product portfolio ranks two quartiles lower. Its service levels have actually slipped, since chronic scarcities of materials, arising from inconsistent coordination with suppliers, commonly delay deliveries. At the same time, the company carries high levels of inventory because of its difficulties changing work schedules when need boosts.

Consumer products: A huge consumer-goods company had difficulty meeting demand for its fast-moving food and beverage classifications. On closer evaluation, it discovered that an absence of openness throughout its supply chain was the culprit. To fix the problem, the company charged a senior supply-chain executive with handling sales and operations planning end to end– something consumer-products companies often aim to do but rarely solve. After a successful pilot, the company extended the program to the majority of its providers, retailers, and representatives. Inventory data ended up being more trusted, collaboration enhanced, and on-time order fulfillment rose significantly.

Operations executives also sought ways to lower the dangers when gyrating geographic and seasonal need patterns put pressure on the supply chain. After a review of the company’s distribution network, these executives discovered they might alleviate customer stockouts by outsourcing a considerable part of their warehouse operations. When local demand for a line of new items surged, the business could easily add low-cost warehouse capability.

By contrast, service and inventory performance were less strong at one home-products manufacturer, which like the consumer-products company above boasted a varied line of product however had lower agility scores for operations planning and run the risk of management. Its logistics expenses are 25 percent higher than those of the customer company, and it has actually been struck by persistent transportation issues that need it to carry two times as much inventory.

Agile practices can assist companies navigate an increasingly volatile and unforgiving international financial environment. Only a few companies, nevertheless, are adopting these methods extensively enough to enhance their supply-chain performance substantially.


Source: McKinsey & Company

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