SCDigest editorial staff
The News: A research article in the most recent issue of The Journal of Business Logistics compares the strategies of lean, agile and hybrid or so-called “Leagile” supply chain strategies, and finds important differences in cost and service results for one component manufacturer.
The Impact: The research presents a valuable framework for analyzing which model is best for a given company, and demonstrates that the specifics of a company’s supply chain (demand variation, inventory holding costs, etc.) determine which strategy will produce the optimal results.
The Story: In the most recent issue of the Council of Supply Chain Management Professionals’ Journal of Business Logistics, Thomas J. Goldsby of the University of Kentucky, Stanley Griffis of the Air Force Institute of Technology, and Anthony Roath of the University of Oklahoma, shed considerable light on the inter-related supply chain strategies of Lean, Agile, and a hybrid model sometimes referred to as “Leagile.” (Modeling Lean, Agile, And Leagile Supply Chain Strategies, available to CSCMP members through the web site)
They first provide the helpful service of clearly defining each concept:
Lean: Developed in large part in the Toyota production system, Lean focuses on the elimination of waste with a bias towards “pulling” goods through the system based on demand. Lean is an approach that “identifies the value inherent in specific products, identifies the value stream for each product, supports the flow of value, lets the customer pull value from the producer, and pursues perfection. It is through this holistic, enterprise-wide approach to lean implementation that the theory extends beyond functional strategy to a broader supply chain strategy employed by the company.”
Despite the focus on pull, however, the authors note lean is really a make-to-stock system, reacting to “demand signals” that typically come from forecasts or next tier distributors, rather than actual orders (e.g. Toyota). The demand horizons are typically shorter than non-Lean systems, but the overall supply chain still relies on finished goods inventory.
Agile: The agile systems focus is on flexible, efficient response to unique customer demand. It uses a make-to-order (MTO) process for manufacturing and order fulfillment. Instead of relying on speculative notions of what might be demanded, the quantity of demand, and the location of that demand, agility employs a “wait-and-see” approach to demand, not committing to products until demand becomes known.
Agile systems are built around flexibility, emphasizing flexible lot sizes, quick changeovers, and/or manufacturing products to specific customer orders. Agile systems are often deployed in companies where there are very short product life cycles (such as electronics) or very erratic demand. While Dell’s make-to-order model is the most prominent, companies such as Taylor Made golf clubs have also adopted the strategy.
Hybrid: “Leagile” is a hybrid of lean and agile systems. However, this can take one of several approaches:
- Using make-to-stock/lean strategies for high volume, stable demand products, and make-to-order/agile for everything else
- Have flexible production capacity to meet surges in demand or unexpected requirements
- Use of postponement strategies, where “platform” products are made to forecast, and then final assembly and configuration done upon final customer order
The researchers note that Toyota itself uses a hybrid strategy for its Scion line of cars, in which a base model is produced in Japan, but with the addition of many customer options either at an operation near the port of Long Beach or at the dealer based on a customer’s specific preferences.
Which System is Best?
The answer to that question, of course, is that “it depends.” To demonstrate the truth of that statement, the researchers worked with a manufacturer of components for the HVAC industry. The company currently employs a lean strategy, manufacturing in Mexico and distributing from two U.S. distribution centers.
Based on actual operating data, the researchers then model what supply chain performance would look like if either an agile or hybrid (postponement) strategy was embraced. As always in this type of work, a number of assumptions were necessary to create the model, but in this case they do not seem to make the analysis too far removed from the real world, as is often the case.
The table below shows the projected costs for the company based on a simulation run. As shown, it turns out the lean strategy the company was currently employing did in fact result in the lowest total supply chain costs. In addition, as shown in a separate chart in the article, the Lean/make-to-stock model also had the minimum customer lead times by far.
Importantly though, the results can changed based on differences in key variables. For example, as the value of finished goods and/or the carrying cost of inventory rise, agile strategies become more attractive, and in this example become the lowest total cost option in some cases. In no combination of finished goods cost or carrying cost option, however, did a hybrid strategy become the optimal choice.
The authors note: “The reason for this appears to be the manufacturing cost premium associated with producing semi-finished assemblies and then reintroducing them to the manufacturing process closer to the customer. In the leagile model, a 25% manufacturing cost premium was charged for this two-stage production.”
Of course, this analysis was based on the specifics of one company’s supply chain, and cannot be generalized to the broader universe. Still, it does well highlight the trade-offs involved, and provides a solid analytic framework. The researchers comment, for example, that “leagility might prove advantageous with products and manufacturing scenarios where the manufacturing premium associated with disjointed operations is minimal.”
What are your thoughts on the researchers’ work here? Do you have a perspective on when which of these strategies makes the most sense? What else needs to be added to the analysis? Let us know your thoughts.