In the wake of ever bubbling geo-political risks, legislation & regulation ambiguity, cyberattacks, natural disasters, climate and global health events, supply chain resilience is perhaps one of the top-of-the-mind concerns faced by senior leaders of every organization, country, or an institution. Internet is abuzz with a whole lot of articles, frameworks, survey results and the like – enough to make a hapless supply chain manager’s mind spin. A supply chain manager is today faced with a blizzard of terminologies, viz., disruption, uncertainty, fragility, risk, resilience, and many more. Amidst the pressure of real changes, and a surfeit of here-is-one-more frameworks, the environment is ripe for the supply chain manager to get back to first principles. To build resilience from groundup, it is important to clarify terms relating to supply chain uncertainties. With this as the backdrop, Prof (Dr) Kalyana C Chejarla and Ganesh Mahadevan trace a few relevant resilience strategies, using the basic lean management principles.
Uncertainty is when reality differs from what we expect. Strategies to address uncertainty therefore belong to both sides of the coin viz., shape reality (demand management, redundant capacities, multiple suppliers etc,) and update expectations (change model parameters, (re)negotiate service levels, invest in training, etc.). Supply chain uncertainties can be grouped into following four categories. This grouping is loosely in the order of: (a) decreasing order of ability to know or quantify, (b) increasing order of magnitude of impact and (c) increasing spatial and temporal system boundaries.
Randomness refers to the unpredictable component of variation in behaviour of every process, equipment, or system from mean/expected behaviour. Randomness (also called white noise) is when the deviation does not exhibit specific patterns. Control limits are defined based on the extent of randomness, that prescribe the buffer needed to run the adjoining processes smoothly. Technically this is called Aleatory uncertainty. When the system under study is zoomed into a unitary process level, randomness is observed. Good techniques to address randomness are statistical process controls, six sigma approaches, robust designs, etc. To an extent, these techniques help bring the process performance within control limits.
If the deviation is beyond control limits or if there is a pattern in the deviation of a process parameter, it implies that there are causes affecting the system, which we are not fully aware of. Such a variability is called Epistemic Uncertainty and could addressed by undertaking focused study of the system and learning about all the affecting causes. Incomplete knowledge, understanding, and articulation are information induced sources of variability. Additionally, few action induced uncertainties are triggered on account of feedback effects and decision making by various supply chain entities.
By design, supply chains are wider in scope in comparison to individual processes, and so are subject to epistemic uncertainty. Naturally, as the system boundary increases, complexity and therefore variability increases. We are not recommending unending study or development of models that are the exact replica of real world. The skill and art lie in the ability of supply chain manager to draw and redraw boundaries of system knowledge (s)he should strive for with changing circumstances. A good way to do that would be to link the supply chain risk management to the investments in enhancing supply chain visibility. The cost and effort involved in learning a system must be commensurate with the benefit of resultant uncertainty reduction.
Much less talked about, but very much the cause of a numerous supply chain mishaps, is the presence of inappropriate mental models / belief systems in the minds of supply chain managers. This phenomenon is called Ontological uncertainty. Closely related to these mental models are behavioural factors such as cognitive limitations, bounded rationality, and availability of information and time, etc., that affect supply chain decision making.
Typical biases are:
- Confirmation Bias is a short term bias in which a supply chain manager accepts only the information that confirms her view, disregards contradicting evidence e.g., failure to adjust forecast against one’s optimistic/pessimistic view,
- Endowment Effect is a medium term bias, in which a supply chain manager overvalues the decision in which (s)he has invested time and effort e.g., not changing a supplier (that (s)he selected) even when better alternatives become available.
- Sunk cost fallacy is a longer term bias, in which the supply chain manager throws good money after the bad money, eg., he/she continues to invest in a capital project in increments despite the new adverse information. The longer it takes one to realize, recognize and make corrections to one’s mental models, the bigger the risk one faces. Peter Senge’s ‘The Fifth Discipline: The Art & Practice of The Learning Organization’ does an excellent job of sensitizing and equipping managers to overcome this bias induced uncertainty.
Black swan events such as a pandemic breakout, Suez Canal blockade, natural calamities, or accidents etc., are termed as disruptions. In highly globalized supply chains, a disruptive event occurring at one corner of the world can swifty transmit to another corner causing plants to shut down. Unlike the previous three uncertainties, which can occur on both supply and demand side of supply chains, disruptions are more common on the supply side.
LEAN MANAGEMENT IS MORE THAN JUST ‘LEAN’
The term Lean was popularized by John Krafcik, in his article, ‘Triumph of the Lean Production System’ in 1988. Then an MIT researcher referred it to as Toyota Production System (TPS). This choice of terminology was perhaps motivated by the central principle of elimination of different kinds of wastes in supply chains in TPS. Unfortunately, such a nomenclature resulted in a somewhat second hand treatment of couple of other fundamental principles of TPS namely Gemba (to observe the problem at site and learn) and Kaizen (continuously strive for improved state). As noted in the vast lean management literature and examples, mere elimination of even a single waste, results in a marked performance improvement of supply chains. Lost in the temporary success, kaizen-led Gemba was inadvertently pushed under the carpet, or forgotten by many leaders.
This article is meant to remind the supply chain managers of these two principles of learning. The main outcome of waste removal in the initial stages of lean implementation is to provide visibility to supply chain unknowns. Achieving financial performance improvement is just a happenstance. Recall the popular example of a smooth sailing of the ship on highwaters of a sea with a rocky bed. As soon as the water level falls, the problems (read – Opportunities to Improve) surface.
At the fundamental level, it is the information and trust that binds supply chains. As explained earlier, poor quality of either of these two binding elements results in a blindness, which we call as Uncertainty. A well-documented phenomenon called the bull-whip effect ensues with the most upstream players facing the maximum brunt of wild swings of demand propagation. A conventional supply chain response to this blindness was to create buffers in terms of inventory, capacity, and customer lead time. While this might be ok as a short-term measure, our advice to supply chain managers would be to to go beyond the short term measure, and focus on improving the quality of information and trust among supply chain partners.
In doing so, supply chain managers should leverage digital technologies intelligently to reduce lead time by improving the quality and timeliness of information collection, processing, and propagation within and through the departments as well as the entities outside the organization. Then, through process improvement, developing better understanding of immediate environment, leveraging technology and practices, organizations can continue to keep reducing their uncertainty.
Following are some of the strategies that can be pursued in response to different degrees of uncertainties. The strategies make sense when implemented in the order (except the last) mentioned below, as the capability acquired in one stage serves as the ground to implement the next stage:
Reliability: Improve the reliability of the process through statistical process control techniques such that it operates well within the customer specification limits.
Robust: Robust engineering goes a step beyond reliability by taking control of process design such that the output stays within desirable levels, regardless of changes in environmental conditions, up to an extent beyond which the benefits don’t justify the redundancy costs.
Responsive: Responsiveness as an effective supply chain strategy to counter uncertainty, if the products are innovative, have high margins, and short life cycles or fixed selling seasons. A firm is responsive, when it can meet the alternative delivery requests such as changes in product features, quantity, delivery lead-time, location, or lot size, etc. Ways to achieve responsiveness requires deliberate cushion building in the supply chain by signing up with more responsive suppliers, logistics service providers, keeping inventories at various echelons, having quick access to spare capacity, etc.
Flexible / Agile: Supply chains can be made flexible by making them meet the changing environment or more proactively agile by making supply chains able to rapidly capture the opportunity presented by an uncertain event. Organizations can build flexibility into their plans by undertaking a segmentation analysis of their products, component parts and creating operations plans to consist of a mix of standard, optional, and rare products right from design to delivery. Flexibility and agility are structural capabilities, whereas responsiveness refers to information and process capabilities.
Resilient / Anti Fragile: Resilience is a measure of the organizations’ ability to quickly restore its normal functioning post disruption. Several frameworks have emerged both from academic institutions and consulting firms to measure and implement resilience. The frameworks range from improving visibility through digital aids on one hand to big data driven analytical understanding the supply chain data on the other. Further, supply chain managers can improve the knowledge and limitations of their existing supply chains by undertaking supply chain vulnerability assessment, mapped to current and potential geopolitical risks and the likes mentioned at the beginning of this article. Armed with such deeper understanding, the managers can know the critical spots of in their supply chains, invest on appropriate reinforcements.
Purpose-driven: While the previously mentioned strategies largely focus on the information exchange and structural issues of supply chains, building trust is quite different. Responsible supply chains have always held higher value system than being just profitable. Supply chains touch lives of a huge number of people both within and outside the organization. Purpose-driven supply chains understand that organizations are nothing but people, and people are motivated much more by values such as dignity of work, respect for individual, security, etc., than just money. Such trust can only be built over time by repeated actions that reinforce the belief system of the purpose-driven supply chains, especially in the face of adversity. Motivated stakeholders provide the most resilience cushion that supply chains can ever have in comparison to any other strategies.
Linkwell, an energy meter manufacturer, grew fivefold within a couple of years due to a surge in demand in the overall economy. This growth was managed through lateral expansion of both in-house facilities and multiplying subcontract vendors for upstream processes. By early 2019, fluctuating order characteristics such as product type, order quantity, lead time, etc., and the resultant pressure on profit margins made the management look for ways to implement a flexible operating model that can synchronize output with orders.
The answer was implementing Lean to improve flow both within the plant and two levels of subcontractors, followed by implementing pull throughout its entire value stream, and finally by stabilizing the processes at a higher level of performance. The built-in flexibility throughout Linkwell supply chain during 2019 and early 2020, helped it bounce back on to its feet soon after lockdowns were lifted post Covid-19, resulting in a highly resilient organization. The lean way of thinking is so much imbibed into everyone at the company that it was able to take in its stride numerous challenges imposed on account of Covid-19 such as social distancing, reduced manpower, disturbances in supplies, and occasional order cancellations, which is a mark of ahighly resilient organization.
As we can see, a short-sighted view of Toyota Production System, misunderstood as ‘only’ Lean Management is the source of woes of several supply chains during recent supply chain disruptions over the past few years. The core principle of lean is about bringing supplier and customer closer in all possible ways - physically, capacity wise and information exchange. Any efforts in this direction contribute to better sync between the supplier and the customer, which makes the relationship strong and resilient to the uncertainties. Leaner the supply chain, less is the inventory and the lead time. Flexibility is the natural benefit of Lean and is the basic requirement of a resilient supply chain.
What we are suggesting to the supply chain managers in this article is that blaming Lean Management as the cause of all troubles, and hence dropping all lean initiatives is akin to throwing the baby with the bath water. Rather this is the time to take Lean to next stage. Don’t let Lean be yet another fad that had passed its time and miss all the gains achieved. Instead, develop a comprehensive understanding of TPS to create learning supply chains that can quickly respond to the dynamics of internal and external shocks. Lastly, it’s worth remembering that only change is permanent, and so no supply chain design is ever eternally optimal. A higher purpose provides supply chains with true north and support at times of turbulence.