Achieving Agility Through Postponement

Achieving Agility Through Postponement:

An Application

By

Bernardo Villarreal*, Guadalupe Elizondo*, Alejandra Villarreal* & Adalia Rocha*

Universidad de Monterrey

Ave. I. Morones Prieto 4500 Pte., San Pedro Garza Garcia, N.L., Mexico

Abstract No. 002-0005

Agility is a business-wide capability that is actually required to compete successfully in a dynamic and volatile market. Two fundamental elements for achieving higher levels of agility is the minimization of both; total lead time and inventory levels. The aim of an agile company or supply chain should be to carry inventory in as generic a form as possible. This is the concept of postponement, a vital element in any agile strategy. This paper is concerned with the implementation of strategies for improving service levels for a Mexican company that manufactures fibreglass reinforced polyester panels for industrial applications. The main strategy is concerned with applying the concept of postponement to improve service levels through reducing lead times with lower inventory levels.

*Correspondence: Bernardo Villarreal. E-mail:

Guadalupe Elizondo. E-mail:

Alejandra Villarreal. E-mail:

Adalia Rocha. E-mail:

1.Introduction

An important feature of current business competition is that success or failure is determined by both; the efforts carried out at the supply chain level, and in the marketplace by the end customer. Additionally, increasingly demanding customers have created a dynamic and volatile environment for many companies. Agility is a business-wide capability that is actually required to compete successfully under such conditions. This environment characterized by change and uncertainty for manufacturing organizations and their respective supply chains is also faced by the supply chain of a Mexican manufacturer of fibreglass reinforced polyester panels for industrial applications with headquarters located in Monterrey, Mexico, named Itsa-bilit hereafter.

Flexibility is the key characteristic of an agile supply chain. In fact, the concept of agility emerges from the development of flexible manufacturing systems (FMS). The idea of a manufacturing system being highly responsive to changes in product mix or volume was extended to a wider context at the supply chain level, Nagel, et al., 1991.

This paper describes the process of defining a strategy to improve the agility of Itsa-bilit through the implementation of the concept of postponement. The following section provides a review of the literature that deals with concepts and models related with agile supply chains and postponement. The third section offers a brief review of the process undertaken by Itsa-bilit to treat the problem. Section 4 provides the description and results of the ongoing application. Finally, several conclusions about the project are given in the last section.

2.Previous Research

Actual industry dynamics have influenced the design of supply chain systems by increasing emphasis on achieving improved levels of customer service, cycle time, quality of products and services, costs and flexibility of product offering to meet customer needs. Getting the right product/service, at the right price, at the right time to the customer is vital to competitive success and survival. Hence, customer satisfaction and marketplace understanding are crucial in the definition of a supply chain strategy.

The concepts of agility and leanness have been related and confused. The concept of lean supply chain has its origins in the idea of lean manufacturing, Jones, et al., 1997 and Womack, et al., 1999. Lean manufacturing can be traced to the Toyota Production System and its focus on waste reduction and elimination. Naylor, et al., 1999 provide clear definitions of these two concepts. Agility concerns the use of market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace. Leanness means developing a value stream to eliminate all waste including time, and to enable a level schedule. Lean is about doing more with less, which is acceptable as long as customer satisfaction is met.

The design of a supply chain strategy requires the knowledge of the baseline to enter the competitive arena and the capabilities necessary to win an order in the market. Hill, 1993 developed the concepts of order qualifiers and order winners to link the definition of manufacturing strategy to the marketing strategy. This idea is extended by Masson-Jones, et al., 2000 to the delineation of the supply chain strategy. They also suggest that the lean based strategy is the best option when the order winner is cost, and that an agile based strategy should be preferred if the order winner is customer service. This is clearly shown in Figure No. 1.

Figure No. 1. Market qualifiers and winners for agile and lean strategies.

Observing the matrix, it seems that the available choices are to have the leanest agile supply chain or the most responsive lean supply chain. Christopher, et al., 2001 and Masson-Jones, et al., 2000 recommend approaches for the development of strategies for leagile supply chains, that is a chain in which both, leanness and agility, are sought and achieved. In fact, Christopher, et al., 2001 contend that lean methodologies are important contributors to the creation of agile systems. The idea that lean precedes agile is established. Figure No. 2 shows the scheme provided by Christopher, et al., 2001.

The model states three levels associated with the principles of agility (level 1), the programs that could be part of the strategy to achieve agility (level 2), and level 3 consist of the specific actions or projects that support these programs. According to this model, agility could be achieved through strategies based upon waste reduction and flexibility along the chain and/or strategies defined to improve integration and synchronization of the chain.

Figure No. 2. Integrated model for enabling the agile enterprise.

A fundamental component of the previous approaches is the concept of decoupling point (DP) introduced by Hoekstra, et al., 1992. This represents the point at which inventory is held to satisfy customer demand. It is the farthest position upstream the supply chain that customer orders penetrate and separates the part of the supply chain geared to directly satisfy customer orders from the part based on planning. The approaches suggest to identify the decoupling point of the supply chain, and then, develop a lean strategy for the part of the chain located upstream the DP, and an agile strategy for the operations downstream the DP.

The position of the DP associated with the concept of postponement, that is a key principle for obtaining agility, enables the supply chain to reduce the risk of both stock-outs and holding excess inventories. Thus, product differentiation is postponed until the DP. This way, it becomes feasible to apply a lean approach to the part of the chain (upstream the DP) that processes and operates a smoother demand of products with a low degree of variety. Similarly, the application of an agile approach would be appropriate for the operations (downstream the DP) exposed to the variability of demand and a high degree of variety of products.

The concept of postponement lies in organizing the production and distribution of products in such a way that the customization is made as close to the point when demand is known as possible. It is regarded as an effective strategy for managing product variety, Garg, et al., 2000. Under this strategy, products within a family share common parts and processes until their point of differentiation. There, a fan-out occurs because end products require some special components and/or processes. This allows for the achievement of economies of scale and lower safety stocks for common parts or materials due to the risk pooling effect from the demands of different end products. Lee, et al., 1993 and Feitzinger, et al., 1997 have exploited this concept considering it as part of the product design and development process.

3.Description of Process to Achieve Agility

The structure of the process defined for achieving agility in a supply chain includes several concepts from the approaches described in the previous section. The model considers four phases and was developed by the team UDEM-Itsa-bilit. This is illustrated in Figure No. 3.

Figure No. 3 Process for strategy development.

The initial phase has the purpose of alienating the strategic direction of the enterprise with the project. It is recommended to understand the complete strategic context derived for the enterprise. Though, the basic and necessary information required for further consideration is that of the critical competitive factors. How the enterprise competes in terms of quality, price, response time and the like is of fundamental. It is also relevant to determine the gaps in these factors required to compete successfully in the market.

The second phase corresponds to the assessment of the current situation. The purpose at this step is to obtain and structure the basis for the development of the strategy. In this phase, the structure and characteristics of the market and the supply chain are described. It is important to determine the market requirements in terms of desired response times for each market segment, the variety of end products offered, and its mix represented by an ABC analysis.The physical structure of the supply chain consisting of suppliers, manufacturing plants, and distribution facilities should be described in terms of quantity, capacity, location and function or role.In particular, the inventory levels and the degree of variety along the flow of products or services throughout the chain must be mapped.To obtain this information, it is suggested to elaborate the variety funnel and pipeline maps in detail, Hines, et al., 1997. Finally, current performance of the supply chain in terms of the order qualifiers and winners should be gathered and analyzed.

The third phase has the objective of developing and evaluating the strategy to improve the levels of agility and leanness required to meet the goals for the order qualifiers and winners of the company. A fundamental analysis that corresponds to this stage is that of positioning the decoupling point of the chain. The specific projects or programs that should be implemented depend upon the particular gap and decoupling point analysis of the chain. Christopher, et al., 2001 describe a roadmap (see Figure No. 2) that could be followed as a framework to define the contents of the strategy.

The final phase is that of implementation and control. In this phase, the projects selected from the previous stage are implemented. It is important that the required organizational and information system infrastructure be in operation to enable a close monitoring of the results.

4. Implementation and Results

The implementation of the process model suggested previously is summarized in the following section.

4.1 Strategy alienation phase.

The company where the model is implemented is part of a larger conglomerate with headquarters located in Monterrey, Mexico. This firm manufactures and distributes fibreglass reinforced polyester panels for industrial applications to the Mexican and the international market, with several manufacturing plants and distribution centers located in Mexico, USA and Spain.

There are two plants in Mexico located in Garcia, N.L. and Tlalnepantla, Mexico. The rest of the supply chain located in Mexico consist of five distribution centers. Their locations are: Guadalajara, Tultitlan, Villahermosa, Oaxaca and Mexicali. Figure No. 4 illustrates the locations of the facilities in Mexico. The company sells four families of products; Liner panels, polyester goods, E-87 and Truck and trailer. Total annual production capacity is estimated at 20 million square meters.

It is worth noticing that the plants are managed as independent firms with their own organizational structures. Thus, all the operational decisions are made with a high degree of independence and a lack of synergy and economies of scale.

Competitive factors and goals of the company.

The main competitive factors of the company are price, product variety and response time. However, it was recognized that due to intense pressure from the market, response time reductions were necessary. This situation derived the development of several lead time reduction

Figure No. 4. Mexican supply chain facility location.

programs in all the operations of the company. A team formed with personnel from the logistics functions of the company, along with four more members of the Universidad de Monterrey, were appointed with the task of identifying potential areas for response time reduction and suggesting measures to accomplish it. Reviewing the company’s 2002 performance in terms of complete orders delivered on time, important areas for improvement were found. The only facility that had a satisfactory service level was the distribution center located in Mexicali with 97.5% (see Table No. 1). The plants at Garcia and Tlalnepantla delivered only 45.9% and 58.2% respectively of the orders on time. The rest of the distribution centers had service levels in the range of 21.9% and 63.9%. Service level for export sales during year 2002 was 38.5%.

Tlalnepantla

Tultitlan

Oaxaca

Table No.1 Summary of service level for year 2002.

Description of the market.

The structure of the market in terms of size and location is very important in the definition of the response time.Total sales were about 13 million meters of product in year 2002. Export sales are realized by the plant at Garcia and account for 38% of total sales. Sales in the Mexican market are distributed as follows. The plants at Garcia and Tlalnepantla contribute with 11.7% and 63% of total sales respectively.

Distribution of the products in the Mexican market is illustrated in Figure No. 5. Current distribution strategy establishes that the plant at Mexico satisfies the Mexican market directly and through stocks at the five distribution centers. The plant at Garcia produces mainly for export, and the remainder is sent directly to the Mexican market. Considering that the facilities of the supply chain are administered by different and independent organizational units, it would be expected that product distribution exhibit abundant opportunities for improvement, as shown in the Figure. This pattern of distribution could be improved under the criterion of least cost, distance or transportation time.

Analysis of cycle time and product variety.

The deficient response time provided by the plants led the team to a detailed study of their cycle time and product variety.

Figure No. 5. Distribution of products during year 2002.

Figure No. 6 shows that average cycle time is about 15 days without considering transportation time, with a range of 10.8 to 24.8 days. Production time contributes with only 2% to 5% of total time. Order waiting time to be programmed is significant accounting for 39% to 46.6%. Similarly, the order waiting time to be processed is estimated in about 16% to 30%. The rest is due to the time required to complete the order, pack it and ship it. This analysis yields the existence of a high proportion of time waste.

The analysis of product variety indicates that it explodes in the cutting operation of the line. The number of end products could be in the thousands since many products sold directly by the plants in the Mexican market are to order. The principal parameter that determines product variety is the length of the panels, which is defined in the cutting operation.

Figure No. 6. Cycle time analysis.

4.6 Generating options for reducing response time.

The achievement of the purpose of this phase is facilitated by carrying out an ABC analysis and determining the position of the decoupling point.

The ABC final product analysis indicates that 31 products account for almost 76% of total 2002 sales. Table No. 2 presents a sample of them that represent 49% of total sales. From

this, a potential hybrid strategy that could be developed would be to have a lean approach for the “A” products and an agile focus to the rest of the products.

%

Table No. 2 Sample of “A” products.

The current information decoupling point for both manufacturing plants is located in the raw materials warehouse (see Figure No. 7 ). The production program is defined with demand information obtained from the orders accumulated the previous week. Thus, the orders penetrate until the raw materials warehouse.

Figure No. 7 Current position of information decoupling point.

At this point, it is important to notice that the capacity of the production system to respond satisfactorily to the required market lead time is not adequate. This conclusion is based on the cycle time results in Figure No. 6 and observing the service level results illustrated in Table No. 1. From this, it would be desirable to re-position the information decoupling point downstream the chain. Two possibilities emerge, one is to consider de strategy described previously, and derived from the ABC analysis, in which the “A” products are produced to stock and the rest to order. Here, there would be an information decoupling point located at the end product warehouse in the plant, and another at the raw materials warehouse for the “B” and “C” products.

The other alternative would be to re-locate the point at a stage in which generic products are stored, and from there satisfy customer orders. This option is possible at the cutting operation, where products of standard lengths could be produced and stored until an order from the customer defines the specific products desired. This alternative is illustrated in Figure No. 8.

Figure No. 8 Cut to order strategy.