Virtual Enterprise Networks and Supply Chain Agility

In the US there has been a movement particularly within the defense and advanced engineering sectors to try to develop more agility in supply chains by working differently with suppliers.

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One of the leading proponents of this approach is Ted Goransen (and author of the book “The Agile Virtual Enterprise”)


But why is agility so important?

First what do we mean by the term agility?

Agility is defined as “the ability to respond to unexpected change”

So agility is important when you don't know what's coming next!


The first agility driver is cost

In the automotive sector amazingly only 30% of the cost of a car is to do with “value activities".

The other 70% are the costs and overheads of running a major automobile manufacturer in its current form.

The scope for cost savings through agility in supply chains is therefore huge.


The second agility driver is technology

A huge problem in major development programmes, often running for 5-15 years, is that the underlying technology gets locked in very early.

In many cases this technology becomes obsolete even before it is ever delivered.


How does an agile virtual approach work?

Let's say you are a major defence manufacturer of missiles.

You have two design options on the table for a particular contract.

Option 1 is a low-risk option using existing technology which can be manufactured on time at a particular cost/ feature set.

Option 2 is a higher-risk option using emerging/experimental technology.

You won't know for two years if option 2 will work – it’s got a 50% chance of being successful.

However if it does work the cost/feature set of the option 2 product is very significantly better than option 1.

Over a twenty-year product lifetime the financial benefits to the contractor and customer of an option 2 solution are be enormous.

However using the traditional approach to supply chains no one will take the risk!


Enter the agile virtual supply chain

With an Agile Virtual Enterprise approach you effectively manage two parallel supply chains with evaluation and decision point every 6 months for the first 3 years.

The suppliers in both chains know the score.

More importantly the financials are designed so that if the conservative supply chain gets canned (because the higher risk one delivers) then the canned suppliers will be still be adequately compensated.

This is made possible due to the bigger profits ahead from option 2.

This type of transparency and partnership is very different from the tradtional supply chain management styles with information controlled and manipulated by the major player at the head of the chain.


Agile or Lean?

The key question if you are a major supply chain OEM or one of their tier 1 suppliers is this:

“Am I in an agile market or a lean one?”

Lean markets (e.g. steel-making) are stable and cost is the primary driver.

Agile markets are unstable with technology changing rapidly.

Aerospace, Automobiles and Software are markets which require agility not lean.

For more on this important area see The Agile Virtual Enterprise (Ted Goranson, 1999)


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