Managing supply-demand risk in global production: Creating cost-effective flexible networks

Globalization has led to the creation of hyper-efficient supply chains that work well in a predictable world. However, with globalization comes a world full of uncertainties, and these efficient supply chains often cannot cope with unpredictable fluctuations in demand and supply. These supply-demand imbalances are a major business risk in a vast array of industries—including aerospace and defense, automobiles, chemicals, engineered products, pharmaceuticals, and semiconductors—because capacity is very expensive. Mix flexibility—whereby a plant can produce more than one kind of product—is an attractive antidote to this risk. In this article, we discuss better and worse ways to embrace mix flexibility. To begin, senior executives need to answer two key questions: How do we create flexible plants? And how do we go from flexible plants to a cost-effective flexible network? Successful companies will not blindly apply the same flexibility tactic throughout their business: they will tailor the Four Ps—product design, process design, production technology, and people—to fit the different characteristics of different tiers in their production chains. Successful companies will not sacrifice cost at the altar of flexibility: they will create cost-effective flexible networks by strategically configuring partially flexible networks in a way that delivers almost all the benefits of totally flexible networks.