Supply Chain Agility: Benefits and Strategies

Structural Agility Versus Operational Agility

There are two broad categories of supply chain agility: structural and operational.

Structural agility refers to the ability to quickly realign procurement, inventory flows, and capacity usage across the supply chain. This requires oversight of raw materials and finished products as they move from suppliers to manufacturers to customers, as well as anticipating demand trends and supply disruptions at a granular level. Automation and seamless data flows facilitate this kind of agility. With structural supply chain agility, organizations can scale production up or down by adjusting assets across their supply chain network. A large retailer, for example, might create structural agility by integrating their inventory management software with demand forecasting to create automated stock replenishment plans. That way, the company can quickly respond to potential product shortages and prevent stockouts.

Operational agility is the ability to optimize processes throughout the supply chain for a swift response to short-term, unexpected demand and supply shifts. This type of agility comes from real-time supply chain planning, vertically integrated manufacturing, and close relationships with suppliers. For example, Tesla has a more vertically integrated supply chain than most other automakers, designing many parts and components in-house—making it less reliant on original equipment manufacturers for parts. Leveraging this vertical integration—as well as in-house software engineers, advanced automation, and direct ties with chip suppliers—Tesla redesigned their vehicles to circumvent the 2020 computer chip shortage. This operational agility helped Tesla increase production by more than 80% in 2021 while many other carmakers waited on their suppliers, which were waiting on chip manufacturers.

1. Increased responsiveness to customer demands

Supply chain agility requires keeping a constant pulse on consumer demand, both current and forecasted: Do sales show that customers demand more of product X this month? Do broad consumer behavior trends imply that they’ll want more of product Y next year? Agile supply chains have this kind of detailed, real-time insight into demand, usually via software that collects data from every party in the supply chain and uses advanced analytics to create forecasts. Agile supply chains can also quickly ramp up or slow down production in response to demand changes, thanks to simplified production processes, partnerships with multiple suppliers or manufacturers, and relatively low amounts of stock on hand.

2. Improved customer satisfaction

Agile supply chains scale production based on demand shifts. As a result, they improve customer satisfaction with their ability to meet demand. Technology is especially important here. Solutions that leverage machine learning and other advanced technologies in demand planning allow companies to sense demand shifts before competitors do, then adjust production and stock levels to prepare for demand surges. Combined with the ability to fulfill orders quickly—via multiple shipping partners or strategically placed warehouses, for example—this drives customer satisfaction.

3. Reduced inventory costs

Agile supply chains often make use of just-in-time inventory management, which involves ordering only the amount of stock needed to meet current demand. That can reduce the costs of holding inventory in a warehouse, transporting more goods than needed, or discarding unsold or obsolete inventory.

4. Improved supply chain visibility and collaboration

The technology that creates supply chain agility also creates transparency. A manufacturer might use a supplier portal, for example, to manage its multiple suppliers on a single platform so that everyone at the organization can track purchase requisitions, quotes, and goods receipts. The capacity for speedy, efficient data exchange fuels collaboration between departments and with suppliers. For example, if a distributor detects that demand for a product has dropped, it can contact suppliers immediately and halt incoming orders.

5. Increased flexibility in production and distribution processes

Companies with agile supply chains can shift production based on demand changes. A fashion retailer with the ability to predict consumer trends, source new fabrics, and quickly reconfigure production lines can develop and produce a collection with a few months’ notice to capitalize on a predicted trend and unseat competitors. Supply chain agility also means more distribution options—via partnerships with third-party logistics (3PL) providers or setting up new warehouses, for example—that allow companies to quickly change the way they transport products to customers if needed.

6. Enhanced ability to manage risk and uncertainty

Leaders of agile supply chains communicate with suppliers regularly and closely monitor their performance, so they’re alerted to any issues—such as an impending supply shortage—sooner than others and they can more readily determine whether a supplier poses compliance risks. Working with multiple suppliers reduces the risk that an issue with any one of them—for example, a power outage at a supplier’s warehouse—will render the company unable to keep production flowing or deliver to consumers.

7. Improved efficiency of operations

Optimizing processes across the supply chain, a core tenant of supply chain agility, creates efficiency. For many organizations, automation is the key to more efficient supply chain operations, from the back office to the warehouse and beyond. For example, a distributor might use software to automate order processing and warehouse robots to automate order picking so that it can quickly fill orders in case of an unexpected demand surge. Meanwhile, a supplier portal automatically delivers real-time order forecasts to suppliers so they can anticipate and prepare for purchase orders. Robust supply chain software can also help organizations make better use of multiple supplier relationships for maximum efficiency. For example, sporting equipment brand Cleveland Golf increased on-time shipments by nearly 82% using order management software from Oracle, which makes it easy to choose between fulfillment sources for time- and cost-effectiveness.

8. Reduced lead times

Supply chain agility tactics, such as pursuing vertical integration, maintaining a diverse supplier base, and sourcing materials locally, all serve to reduce lead time, the time from receiving orders to shipping products. With vertical integration, for example, manufacturers process their own raw materials or produce their own component parts to reduce lead times for sourcing and procurement. Technology can create supply chain agility and reduce lead times, too. For example, Juniper Networks used supply chain planning software from Oracle—notably the system’s backlog order management feature—to automatically prioritize open orders for fulfillment, model potential transit changes, and more, improving lead time by 20%.

9. Increased cost savings

Supply chain agility boosts cost savings in inventory management, logistics, and other areas. A few examples: An agile supply chain involves more frequent and clearer communication with suppliers, creating the opportunity to negotiate contracts with more favorable pricing. Optimized inventory levels reduce the cost of storing excess stock in warehouses. And working with multiple suppliers, fulfillment partners, and shipping carriers can reduce shipping costs.

10. Improved sustainability

Companies with agile supply chains have optimized inventory production and storage, so they expend only the natural resources—in production lines, warehouses, and other venues—necessary to manufacture and store products, improving environmental sustainability. The logistical efficiency of an agile supply chain also cuts down on unnecessary truck, plane, and boat shipments and the greenhouse gases they usually emit. Sustainability also involves social and economic factors. An agile supply chain improves social sustainability, for example, by providing manufacturers the ability to switch suppliers if one proves to use unethical labor practices. An agile supply chain’s prioritization of efficiency means that economic sustainability, or the ability to drive growth while minimizing environmental and social impact, also improves.

1. Demand forecasting

Companies can create agile supply chains by investing in demand forecasting software that involves predictive analytics, the application of AI, statistics, and modeling techniques to analyze vast data sets. Inventory management and demand planning software with predictive analytics produce more accurate forecasts for consumer demand as well as more general consumer behaviors and stock replenishment needs. With these forecasts, businesses can fine-tune manufacturing resources and inventory levels to meet demand, avoiding both stockouts and excess stock.

2. Synchronized production and scheduling

Production scheduling involves maximizing efficiency in the manufacturing process by synchronizing a company’s stock needs with its capacity in terms of machinery, labor, raw material lead times, and more. It involves carefully planning which orders to fulfill, in which sequence, to minimize machine downtime, waste, and delay in delivering finished goods. Companies that have tightly synchronized their production and scheduling can adjust production schedules for quick responses to demand changes. For example, when hit with an unexpected shortage of a particular widget, a manufacturer can swiftly reallocate its machinery and labor resources to work on products that don’t require those widgets.

3. SKU reorder points

The SKU reorder point is the point at which a business must reorder inventory of a particular item to avoid stockouts. Calculating SKU reorder points makes the supply chain more agile by ensuring companies order only the stock they need, and only when they need it, so they aren’t caught with too little or too much stock amid demand shifts. The formula to calculate the SKU reorder point is the following:

SKU reorder point = (average daily sales x lead time in days) + safety stock

Automating this calculation with software that incorporates past and real-time sales and supplier data allows for even faster, more effective reactions to changes, such as holiday demand spikes for a specific product.

4. Real-time data

Companies with an agile supply chain communicate with their suppliers and partners in manufacturing, logistics, and distribution easily and often—ideally through a cloud-based supply chain management platform—and share real-time data throughout the network. This quality of data and type of connectivity allow all parties in the supply chain to proactively make decisions that affect them collectively. For example, imagine a manufacturing facility’s production and packaging of a commodity will be completed in three days versus the forecasted two days. Its software system automatically triggers an alert as soon as the deviation is detected, and logistics providers are notified to pick up commodities for shipment at a specific date and time.

5. Warehouse automation

Automating warehouse processes helps the supply chain react faster to changes in supply and demand. A cloud-based warehouse management system can automate order processing—which includes picking, packing, and shipping—while Internet of Things (IoT) technologies such as smart shelves and sensors automatically track inventory levels and movements. Meanwhile, autonomous mobile robots automate tasks such as order picking and unloading shipments. Automating these types of warehouse processes might, for example, help a distributor ship its average order 24 hours faster. That way, if demand suddenly spikes, the distributor can meet it while a competitor with slower, manual warehouse processes misses out on the revenue opportunity.

6. Geographic warehousing

By analyzing revenue, customer, and SKU data, companies can configure their supply network and warehouse facilities to best serve the most profitable customers and products, a strategy known as geographic warehousing. For example, if 500 SKUs in a product set of 1,000 SKUs tend to sell to 10 of a distributor’s largest customers in a specific state, then it might expand warehouses in that region. It can then deliver to those valuable customers even when bad weather shuts down air freight because the warehouse is close enough to deliver by truck.

7. Third-party logistics

Companies can build supply chain agility by tapping into the resources of third-party logistics (3PL) providers, which offer outsourced warehousing, fulfillment, and transportation services. For example, a retailer with four warehouses might partner with a 3PL that operates 15 warehouses across the United States. The retailer gains the ability to ship from alternate locations in the event of demand surge in the Southwest or inclement weather in the Northeast.