Financial Supply Chain

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How Agile is Your Supply Chain? We report the latest research from McKinsey, which explores ten operating practices are tied to higher service levels and lower inventory costs.

How Agile is Your Supply Chain?

Our research shows that ten operating practices are tied to higher service levels and lower inventory costs.

by Raoul Dubeauclard, Kerstin Kubik, and Venu Nagali, McKinsey

What would it take for manufacturing businesses to operate like the best online retailers? How can such companies turn orders around in a day, deliver them with greater customization, and replenish stocks seamlessly? These aren’t idle questions for the top teams of manufacturers, because customers, across both B2C and B2B markets, are more fickle now; service demands are steadily notching upward; and economic volatility shows no sign of abating. Supply operations often struggle to keep pace, as many aren’t sufficiently agile to capture fleeting upside opportunities or to mitigate fast-moving risks.

To shed light on the enablers and enemies of agility, we examined the supply-chain performance of companies in five industries, as well as a range of practices that influence it. We analyzed proprietary data from interviews with operations executives at more than 250 global companies. The interviews assessed ten supply-chain capabilities, including portfolio and complexity, order and demand, forecasting, and risk.[1] Responses were plotted on a scale of one to five and the overall agility scores organized into quartiles. We then compared those scores with two widely employed measures of supply-chain performance: service levels, as measured by the proportion of orders delivered on time and as promised,[2] and days of inventory held.[3] Companies with more agile supply-chain practices (as described by executive-survey respondents) had service levels that were seven percentage points higher and inventory levels that were 23 days lower than their less agile peers did (Figure 1).[4]

Figure 1

 

Figure 2

We also looked at specific agile practices and how consistently top-quartile companies adopted them (Exhibit 2). Most, we found, do well in areas such as demand forecasting, labor flexibility, and the optimal placement of inventory across distribution networks. Fewer had mastered capabilities such as modularization and postponement, which require standardized manufacturing and process inputs so that companies can respond more fluidly to fluctuations in demand and to lower stock levels. Most struggled to shape demand, a practice that relies on variable pricing—increasingly grounded in advanced analytics—to regulate the flow of products through supply networks and to optimize margins. One example of a company that uses these techniques is Amazon, which adjusts prices and inventory levels in real time in response to competitors’ moves, among other things.

Notes
[1] The survey solicited self-reported answers to more than 60 questions on the following topics: forecasting, the ability to shape demand, risk management, modularization and postponement, integrated planning, labor and asset flexibility, network agility, lean fulfillment, inventory placement, and disruption-response planning.
[2] Operations executives use the term “on time and in full,” or OTIF.
[3] Inventory days average raw materials, work in progress, and finished goods across the supply chain. For this analysis, we examined more than 70 companies distributed across five industry groups. Industries such as chemicals and pharmaceuticals had higher average inventory levels than consumer products and automotive did.
[4] We found statistically significant correlations between reported OTIF service levels and agility scores across quartiles. Regression analysis also revealed a statistically significant relationship between reported inventory days and agility quartiles.

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