The automotive industry is often seen as the pinnacle of lean supply chain environments. Lean supply chains emerged from the lean manufacturing principles of the Toyota Production System (TPS), where just-in-time (JIT) inventory is used to eliminate waste, lower inventory counts, and reduce costs. Lean supply chains aim to adopt continuous improvement methodologies to improve supply chain performance.
On the other end of the spectrum is an agile supply chain that must be flexible and adaptable enough to adjust to changing customer preferences or seasonal and cyclical customer demand. These supply chains are ideally suited to industries or markets with high unpredictability. An agile supply chain must be capable of adjusting to the unforeseen.
So, when it comes to a lean vs. agile supply chain, what are some of the criteria that make either work? More importantly, where is the competitive advantage between the two?
Lean Supply Chains
The goal with lean supply chains is to match current inventory counts to current customer demand. Carrying just the right amount of inventory to meet customer demand ensures that companies don’t carry excess inventory or have to deal with the high costs of retaining inventory for longer than necessary. For these companies, lean supply chains are the ultimate purchasing tool that reduces costs.
Companies running lean supply chains often have linear or consistent customer demand where low-variability ordering is the norm. In many instances, the companies that run JIT or lean supply chains are significant market players with the economies of scale to dictate terms within the supply chain. Some suppliers may even be positioned near the company to minimize transit and turn-around-times (TAT) on incoming orders.
- Large Market Player: Companies must have sufficient economies of scale to dictate delivery terms within the supply chain. A lean supply chain often equates to lower inventory counts and lower costs for the company or companies closer to the top of the lean supply chain as opposed to those lower in the supply chain.
- Low-Variability Ordering: Lean supply chains are often associated with companies with high manufacturing volumes with minimal changes to ordering patterns. Companies that manufacture a high volume of customized products often have difficulty running JIT because of the variability in the volume and type of orders.
In lean supply chains, all suppliers must be willing and able to provide the company inventory as needed. When that inventory perfectly matches customer demand or production throughput, the company benefits from improved cash flow by ensuring its accounts receivables are closely aligned with its accounts payables.
- Low Cost of Financing: Fewer inventory counts, and lower inventory levels, mean that companies have a lower cost of inventory financing.
- Low Inventory Obsolescence: The benefit of not carrying more inventory than needed is that the incidence of inventory obsolescence is minimal at best.
- Less Incidence of Inventory Damage: Fewer inventory counts mean fewer incidences of inventory damage due to poor handling and storage.
- Minimal Dead Stock: Since inventory is ordered as needed, there is little chance of encountering high costs due to dead stock.
- Smaller Inventory Footprint: Running a lean supply chain allows companies to maximize their inventory and warehousing costs per square foot.
Agile Supply Chains
Agile supply chain strategies differ from lean strategies in that their entire supply chain is built around handling unpredictability in the market and customer demand. These supply chains are ideal for companies with short product life cycles where rapidly evolving customer trends and preferences often force the supply chain to react accordingly.
Amazon and eBay are the most recognized agile adopters. These companies have supply chain agility because they can read and react in real-time and adjust their inventory counts, volumes, sourcing, logistics, and prices based on current customer demand, changing customer preferences, and emerging market trends. This ability to react instantaneously to the market is a shared responsibility across the supply chain.
- Customer-Centric Focus: A successful agile supply chain is one where the entire supply chain has well-established goals, objectives, metrics, and key performance indicators (KPIs) that analyze, track, and interpret customer needs, demands, and requirements.
- Quick Decision Making: Your team must be empowered to make immediate decisions by sharing and interpreting information. Focusing on real-time data helps shorten the time it takes to analyze that data and react accordingly. Always focus on improving the accuracy and quality of the information within the supply chain.
- Process Alignment: The entire supply chain must be aligned with common goals, objectives, and processes to improve how the supply chain reacts to sudden changes. Improving access to supply chain data and ensuring that data is immediately shared helps to improve how the supply chain reacts to sudden disruptions.
- Virtual Integration: The ideal solution is for the entire supply chain to share real-time data and analytics on inventory counts, volumes, customer demand, and preferences. Improved analytics helps the supply chain react to external threats or changing market conditions.
- Eliminate Redundancy: Redundant and time-consuming approval processes have no place in agile supply chains. Eliminate any top-down decision-making process steps that do nothing more than waste valuable time. Focus on improving the speed with which decisions are made by giving employees access to data-driven tools to remove obstacles and roadblocks.
The Best of Both Worlds
Don’t make the all-too-common mistake of assuming these are mutually exclusive strategies. They aren’t. Several organizations may use a lean and agile supply chain simultaneously. It ultimately depends upon the industry, markets, and customers the company services and its product portfolio.
Companies with established product lines with linear and constant demand can use lean supply chains. These product lines have fixed bills of materials where the only variable is the volume required to meet current demand.
These same companies may have other product lines catered to the everyday consumer. These product lines have shorter life cycles and therefore require a more agile response to changing customer dynamics. Even companies whose main product line requires lean methodologies may have consumables, spare parts, and ancillary support items that require an agile supply chain.
Companies that provide critical after-market products typically require an agile supply chain, even if their core supply chain adopts lean principles.
Eliminating Supply Chain Risk with Sensible Micro
Sensible Micro is a forward-thinking enterprise that sources, stocks, and distributes electronic components, consumables, and hardware to multiple industries and markets. The company combines this sourcing excellence with an in-house testing laboratory capable of testing, validating, and certifying multiple electronics to their original specifications.
If you would like to work with a partner that can help reduce your supply chain risk, contact us now.