According to GT Nexus, a lot of companies are rather too heavy on supply chain planning, leaving themselves with too little flexibility. The California-based provider of cloud-based supply chain platform services has released a white paper which argues that supply chain management is moving away from its traditional emphasis on planning to more reactive models. It argues that companies can do better through improved data exchange with business partners and through building more flexibility to respond to changes into their supply chains.

To date, the focus of inventory optimization has been chiefly on planning, with the objective of designing optimized, lean supply chains, the paper’s authors argue. Enterprise software systems use a set of inventory-related parameters and run them through computing algorithms to determine what the firm’s inventory levels should be. This forms the basis for determining all elements of the supply chain, a matrix of an optimized supply chain setting the framework for all decisions and their execution.

Lately, however, companies have begun to move away from this model in an effort to deal with greater volatility, GT Nexus finds.

Industry leaders are beginning to shift focus from planning to execution, the authors write. “Instead of trying to devise the perfect plan, it makes more sense to become responsive in execution. That way, when disruptions do occur, a company can adjust instantly with corrective action, minimizing the damage,” they explain.

The lean supply chain is being replaced by the ‘agile’ supply chain, they claim.

Lean supply chains focus on minimizing waste at each step in a process, aiming to use the minimum level of inventory. “Agile supply chains, on the other hand, recognize that true costs come in when things go wrong, and are spry enough to react quickly to changes so they can mitigate damaging losses,” they write.

Agile supply chains give companies the chance to respond to problems like missed sailings and other supply chain disruptions as well as to shifts in demand. They can “dynamically reallocate inventory where and when it’s needed, in order to both prevent financial loss (as in the case of a disruption) and capitalize on fluctuating real-time demand.”

To make this work, employees must be empowered, GT Nexus advises, not just at top management level but also “at the edge of the network, as close to the source of supply or demand changes, instead of waiting for a centralized planning process to dictate new goals, a week later.”

The other core element that has to be in place is real-time visibility. To draw in necessary data from all relevant sources, this should be a cloud-based supply chain platform, argues GT Nexus (not surprisingly, given its own role in this space). There has to be an automatic information flow between all parties involved, it stresses.

“By using a cloud supply chain platform as the infrastructure for shared visibility and operational execution, inventory management becomes radically more effective,” the white paper declares.

This set-up can identify possible mismatches between inventory and demand and suggest shifts in inventory allocations and flows. Moreover, the system should provide a snapshot of future scenarios resulting from possible corrections.

“Inventory management that’s truly revolutionary uses real-time supply chain data to translate current order status into future inventory consequences,” the paper states. “By knowing what inventory levels exist in what places, network inventory management can forecast and dynamically predict what inventory levels will be based on real-time events.”

A study published in April 2015 by McKinsey indicates that companies with agile supply chains perform better and save money. “Companies with more agile supply chain practices had service levels that were seven percentage points higher and inventory levels that were 23 days lower than their less-agile peers did,” it concluded.

According to the GT Nexus white paper, the average inventory value for companies with a market valuation of US$5 billion or greater in the manufacturing, retail, pharmaceutical, distribution and other industries, is a staggering US$1.33 billion.

The authors of McKinsey’s study see continuing pressure to become more agile, as customer demands keep rising and economic volatility appears set to continue.

This does not mean that lean supply chains are headed for the dustbin of history. Paul Myerson, a professor of practice in supply chain management at Lehigh University, argues that it is not a case of either-or when it comes to supply chain configuration.

“Many organizations can find some form of hybrid supply chain that works well for them. In today’s ever-changing, volatile, and competitive global economy, it may often be in a company’s best interest to operate a supply chain that is both lean and agile,” he finds.

By Ian Putzger

Air Freight Correspondent | Toronto