Pearson on Excellence: Adaptable Structure—The essence of supply chain flexibility

In this column—the third in a series of five articles focused on dynamic operations—we look at the role and importance of adaptable structure.

Think about how rapidly mergers, acquisitions, market shifts, economic upheavals, and other events can knock a company’s supply chain off balance. Almost overnight, arteries, people, and facilities may no longer be positioned to buy, make, move, or sell the right items in the right quantities in the right places. Change happens. But rigid supply chain structures don’t like change. An adaptable structure, on the other hand, embraces change.

Companies often respond to the above-mentioned shifts by adjusting their product designs. However, it can be far more difficult to achieve the process and system flexibility needed to also adjust your supply chain operations. This is the focus of adaptable structures. The most obvious example is flexible manufacturing: responding quickly to currency fluctuations, supply disruptions, or sudden demand shifts by altering manufacturing volumes, venues, and mixes.

In addition to flexible manufacturing, companies with adaptable structures may excel at hedging. These organizations are often able to rapidly assess the level of redundancy needed to mitigate supply chain risks. If risk is deemed too high, they can raise their investment in the flexibility of a particular node—procurement, manufacturing, distribution, etc.

Companies with adaptable structures also tend to leverage outsourcing as a cost-management mechanism and even a competitive weapon. The ability to turn fixed costs into variable costs is, in a very real sense, the epitome of flexibility.

Nissan is a good example of how adaptable structures can play a big role in today’s volatile business environment. As it was covered in great detail, 2011 was a tough year for Japanese automakers. Two natural disasters—the Japan earthquake and the Thailand floods—crippled production, while a strong Yen and increasing competition put extreme pressure on markets.

However, Nissan fared quite well. Following the earthquake, Nissan was the first Japanese car company to get back to business. And in the wake of the Thailand floods, Nissan was able to contain the issues locally, with global parts-supply operations hindered far less than those of many competitors.

Several innovations explain Nissan’s adaptability. One is that the company had carefully implemented a long-term strategy focused on rapid recovery during times of volatility. Cross-functional teams—led by the CEO and a chief recovery officer—were already in place to ensure continuity and manage adverse situations. Within days of the earthquake, the CEO and a risk management team visited the plant, surveyed the damage, and determined what should be done to regain normal operations.

Another innovation was Nissan’s global, low-cost “V” platform for vehicles in emerging markets. The V has allowed Nissan to extend its production base across the world—using standardized parts in different production facilities. When the Thailand floods hit, Nissan was able to swiftly re-source parts from China, thereby limiting production constraints to Thailand. Global operations were largely unaffected.

In the wake of Asia’s weather calamities, Nissan’s adaptable structure innovations helped the company sell more cars in the U.S., while its competitors dealt less effectively with production issues. Nissan’s Altima model did particularly well, outselling competitors and capturing the top position for several months. Nissan also posted strong sales in other regions such as China and Europe. And in Japan, Nissan suffered 2011 sales drops that were far less severe than those of most competitors.

Making it happen
Adaptable structure has a handful of cornerstones. But companies can often benefit by taking a far-reaching, multi-pronged approach:

• Infuse a risk-management mindset throughout the company, instead of a risk-avoidance mindset.
• Develop a variable, rather than fixed, cost structure on a node-by-node basis. At one company, it may be feasible to contract out some manufacturing operations, thus making it easier to scale or move production. At another organization, outsourcing might make more sense for post-sale service management than for manufacturing.
• Launch flexible-capacity initiatives to ensure the ability to handle demand peaks and reduce costs during slow times.
• Establish hedging strategies for critical components and supplies, and put appropriate backup plans in place.
• Consider actual insurance policies for specific high-risk events.
• Explore the use of shared services models.
• Implement flexible pricing structures to rapidly align demand and supply.

Perhaps the easiest way to understand adaptable structure is to envision a supply chain environment in which products, processes, and systems are easily modified in response to changing conditions. This, in turn, could be one of the clearest paths to high performance.