Supply chain agility: What it is and why you need it

Any retail or e-commerce brand should assume that its supply chain will be disrupted—one way or another—soon. 

According to the McKinsey Global Institute, companies typically experienced a supply chain disruption of 1 to 2 months every 3.7 years before the pandemic. Now, disruptive market conditions are happening even more regularly, costing businesses.

Businesses of all sizes need to revamp their supply chains to become more agile. But what does that mean, and how can it be done realistically and in a scalable manner? 

Supply chain agility definition

Supply chain agility refers to the organization’s ability to respond to shifts in consumer demand or other market changes, such as material shortages, geopolitical crises, rising shipping costs or natural disasters. The more agile a supply chain is, the better prepared it will be to weather these disruptions, which may be an advantage over unprepared competitors.

Structural agility vs. operational agility

Supply chain agility can be divided into two broad categories: structural agility and operational agility.

Structural agility is the ability to adjust inventory flows, capacity usage and procurement across the supply chain. This involves scaling production up or down by adjusting assets across the supply network. To do this effectively, businesses need supply chain management to have close oversight and control of raw materials and finished goods as they move from stage to stage.

Operational agility is the ability to optimize processes across the supply chain to respond to rapid changes in supply or demand. Businesses can use this to shorten the manufacturing cycle and reduce lead times by simplifying operations.

The importance of agile supply chains

Agile supply chains can help meet customer preferences, future-proof operations, secure a position in the market and much more. Here’s a look at some of the benefits associated with agile supply chains. 

Better response to consumer demand

Trying to forecast customer demand can get expensive, and while efforts mostly succeed, customers can still do the unexpected. A previously niche product can suddenly become the new “in” thing overnight—or vice versa. 

Brands have become better at detecting these trends thanks to monitoring tools and more comprehensive sales data. But it’s not enough to see it coming. Supply chain management needs to be able to shift gears rapidly, or the brand will have to watch as the trend passes. 

Businesses with agile supply chains can leverage real-time data to respond quickly. They can ramp production up or down as needed, confirm inventory levels and work with partnering fulfillment centers to process orders promptly.

Reduced inventory costs

A truly agile supply chain management process won’t keep a lot of excess inventory on hand. Instead, relying on historical data and consumer planning will help to meet the current production quotas. Just-in-time (JIT) production reduces costs associated with storing and shipping surplus products and eliminating waste.

More flexible production and distribution

Agile supply chain operations can also help companies capitalize on opportunities by giving them more production and distribution options. 

For instance, an agile supply chain management team could more easily reconfigure production lines and tap different sources of raw materials to build a completely new product ahead of the competition. Then, a flexible distribution network composed of multiple distribution centers and third-party logistics (3PL) partners could help a brand improve delivery times in existing regions—or enter entirely new ones. 

Better supply chain resilience

An agile supply chain is a resilient supply chain. When the supply chain has multiple levers to pull and alternate resources to call up, it becomes more resistant to external forces. The business will be able to continue to keep products flowing to the customer—even at a reduced rate. 

Operational efficiency

Building resilience and optimizing supply chain processes automatically creates efficiencies. This includes investing in cutting-edge technology, like warehouse automation, training supply chain staff on the latest procedures and best practices and streamlining processes across the logistics chain.

What does an agile supply chain look like?

An agile supply chain operates with high efficiency during normal times, can detect or forecast significant shifts in the market, and then act on this information effectively. It does so by altering the supply chain to minimize any negative impact on the company’s market position. 

One oft-cited example is Tesla. A chip shortage in 2020 caused global vehicle shortages. The suppliers that provided car electronics could not get the chips they needed, causing cascading failures in the parts supply chain. Tesla circumvented this problem by increasing vertical integration, where parts and components are designed and manufactured in-house. Tesla also employed a high number of in-house software engineers and built relationships with supply chain partners and chip manufacturers. 

All of this investment paid off when, the following year, Tesla increased production by 80%.

How to increase supply chain agility

Although the best way to ensure supply chain agility is to build the entire thing from the ground up with a plan, there are three things to do to start improving existing supply chain performance now.

Implement demand forecasting

Investing in demand forecasting tools that use predictive analytics can help estimate a customer’s future demand for products or services and increase supply chain visibility. Then, use customer behavior to coordinate stock replenishments more accurately and maintain the correct amount of inventory at all times.

Define SKU reorder points

Don’t wait until inventory is at a critical point before replenishing stock. Instead, use historical sales data to calculate the optimal reorder quantity for a given SKU. Just remember to factor production lead time into any calculations to minimize the chances of an accidental stockout if there are delays.

Streamline warehouse operations

There are a couple of ways to make day-to-day operations more efficient, and they’re not mutually exclusive.

Automate order processing using cloud-based warehouse management or inventory management systems. These can help track inventory levels more accurately and provide real-time data on what’s in stock in which warehouse. 

Upskilling the supply chain workforce can also provide short and long-term benefits to the business, as it has been shown to increase productivity, foster company loyalty and raise employee morale.

The modern supply chain is agile

To be considered truly agile, businesses need to move beyond stagnant and obsolete supply chain infrastructures and proactively invest in new and more flexible solutions. Supply chain leaders will need to review their existing setup, identify potential weak points and either eliminate or build redundancies around them to minimize the impact of the next big market shift and future growth needs.