Background to the study
Coat NA is a subsidiary of a multinational company based in the United Kingdom. The firm operates in the United States and primarily deals with thread. Currently, the firm is ranked as the largest manufacturer and supplier of sewing thread (Advemag Incorporation, 2010, para. 1). Its current net wroth is estimated to be US $1.6 billion of the total Coats Public Limited Company net worth.
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Most of the firm’s operations are business to business in nature. During the late 1990’s, the firm had a superior performance in its domestic market. This resulted from the fact that there was a significant manufacturing base in the United States. During its 1990s, the firm relied on a traditional supply chain. However, a significant change occurred in the United States leading into a transformation of the business environment.
Most of its customers were shifting their operational base to other countries especially those located in Asia. This posed a threat to the firm’s operation considering the fact that 70% of its assets were in the United States. After the shift, only 20% of the firm’s customers would remain in US. There was also a reduction in turnover in the American and European markets during the period ranging fro 2000 to 2008.
It was only in Asia where turnover was on an upward trend. In its US market, Coats NA was faced with a challenge due to misalignment of its asset base and customer base.
This means that the firm was faced with a dire need of making a change to both its supply chain network and supply chain process. Mason-Jones, Naylor and Towill (2000, p.4061) are of the opinion that consumers are a key determinant in the performance of a firm’s supply chain.
Considering the nature of the challenge that the firm is faced with regard to supply chain, the firms management team has to make a decision on the most appropriate initiative to improve its supply chain.
Some of the choices available to the firm entail whether to incorporate the concept of leanness or agility in its supply chain management. According to Sabri and Shaikh (2000, p.6), these two supply chain management strategies can lead to an improvement in the firm’s operation.
The aim of the report is to evaluate the most appropriate strategy with regard to lean and agile supply chain management strategies which Coat NA should adopt in an effort to improve its market performance.
The report is organized into a number of sections. The first section entails background information of Coat NA. In this section, the challenges facing the firm’s supply chain are identified. The concept of lean and agility are discussed in the literature review section.
The analysis section establishes the link between agility and lean management in Coat NA. In addition, the section also illustrates the strategies being adopted by the firm in an effort to resolve the issues faced by the firm and eliminate the tension between agile and lean. Finally, the effect of the changes to the firm and the concluding remarks are given.
Key aspects of lean and agile in the supply chain
According to Thomas, Stanley and Anthony (2006, p.1), agility and lean management concepts have been increasingly adopted by firms management teams in an effort to manage their supply chain. Some of the main factors leading to their increased adoption are their effectiveness in reducing cost, developing a firm’s competitive advantage and improving customer service.
The concept of lean mainly entails elimination of various forms of wastes which might result into the firm incurring loss. Lean thinking emphasizes that all activities which utilize a firm’s resource and does not create any value for the customer should be eliminated.
Supply Chain Digest (2010, para. 5) asserts that lean as an approach to supply chain management enables a firm’s management team to determine the intrinsic value in a particular product. In order to attain this, the concept of value stream is integrated which enables the firm’s management team to analyze the necessary flow of information and material in the production process (Tapping, Luyster, & Shuker, 2002, p.54).
The resultant effect is that a firm is able to produce goods based on market demand. According to Supply Chain Digest (2010, para/ 4), a firm’s management team is able to forecast demand for the goods based on the market feedback received from next tier distributors.
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This means that actual orders are not used in forecasting demand. As a supply chain management concept, lean management also enables a firm to eliminate waste in relation to time (Mason-Jones, Naylor &Towill, 2000, p.4061). In lean systems, the demand horizons are usually shorter. In addition, the entire supply chain is dependent on finished inventory (Basu & Wright 2007, p.65).
With regard to agile systems, the core focus entails responding to customer demand more efficiently. In their consumption process, the core objective of consumers is to maximize their utility. Consumers have got diverse product and services requirement. In supply chain management, agility enables a firm to address unique customers’ demand.
In order to achieve this, make-to-order (MTO) concept is utilized in the manufacturing process in an effort to fulfill the order. This means that a firm which has incorporated the concept of agility depends on well known demand rather than speculative notions. Therefore, the firm does not commit its resources unless it is aware of the market demand.
Carrying inventory whose worth is 70 days underscores the fact that Coat NA had adopted a lean system in its operation. The core objective of this inventory was to enable the firm meet the market demand within a short period. However, there are costs associated with holding inventory for a long duration.
According to Callioni, De-Montgros, Slagmulder, Van-Wassenhove and Wright (2005, p.135), holding a product for a long period results into reduction in its value.
In extreme situations, the product may become obsolete. Holding inventory for a considerable long duration is a disadvantage to the firm’s operation. This arises from the fact that there is a high probability of mismatches occurring between demand and supply. This may lead into the firm holding excess inventory and hence the cost involved.
Considering the fact that the firm’s operations are mostly B2B in nature, the firm may experience loss due to price protection costs. Callioni, De-Montgros, Slagmulder, Van-Wassenhove and Wright (2005, p.135) define price protection cost as the cost incurred by distributors as a result of a decline in the price of goods they are holding in their shelves.
Other costs which the firm may incur include obsolescence cost which represents loss incurred on unsold products due to introduction of new models. Despite the Coat NA’s capacity to reduce demand horizon via holding inventory, the decision is not appropriate considering the high inventory carrying cost involved.
In its operation, Coats NA is faced with a challenge due to change in customer base. This limits the firm’s profitability potential within its American market. According to Bruce, Daly and Towers (2004, p.151-170), the textile industry is very dynamic.
In addition, the industry is also very volatile and has a short product lifecycle. In order to succeed, it is vital for firms in the industry to have a quick response. Lack of agility is one factor which has contributed into the recent poor performance of Coat NA.
In an effort to improve its performance via reduction of the amount of inventory held, the firm’s management team adopted the i2’s inventory optimization. Incorporation of such a model would play a significant role in reducing inventory carrying cost. This arises from the fact that the core objective of this model is to ensure that a firm only holds the appropriate level of inventory.
This enables a firm to minimize the holding cost via elimination of excess inventory. Despite the firm conducting a series of improvement in its supply chain, the firm retained the Make-To-Stock strategy. This limits the firm’s operation efficiency via an increment in the cost of operation.
Lack of agility in its supply chain management also means that the firm’s capacity to satisfy customer requirements via provision of products which are in line with the market demand is limited. This is one of the reasons explaining the shift in customer base.
Adoption of decision support systems
In order to resolve the conflict between lean and agile, the firm’s management team has adopted new technology in its supply chain management. One of the most notable changes is implementation of Advanced Planning and Scheduling/Optimization (APS) which is a component of Decision Support System (DSS). Through this system, the firm has been able to forecast market demand effectively.
The resultant effect is that Coat NA manufacturing processes have become aligned with the market demand. This has played a significant role in the firm’s effort to reduce the amount of inventory. For example, due to effective forecasting of demand, the firm’s management team has been able to cut down finished goods inventories with a margin of 48%. In addition obsolete inventories have been reduced by 63%.
Adaption of the APO software has also enabled the firm to attain agility in its operation. This is evident in that the firm has adopted make-to-order strategy in its manufacturing process which has been necessitated by its ability to forecast demand (Gregory, 1998, p.6). As a result of increased efficiency in its optimization process, the firm has been able to reduce its average lead-time from 20 to 7 days.
Misalignment of the firm’s asset and customer base is one of the challenges that the firm is facing. This explains the significant reduction in the firm’s turnover in its American market. Through introduction of the APO software, the firm has been able to solve this problem to a given level. The firm’s management team has been able to align its assets with the existing customer base.
By attaining effectiveness in forecasting, the firm assigns production depending on the manufacturing site. In an effort to improve its supply chain strategy, the firm’s management team has retained its lean management strategy.
This is evident in the fact that the firm manufactures its products from a single point depending on the market forecast and distributes them to other markets. Most of the predictable product lines are produced in Romania while those which are not are locally manufactured. As a result, the firm has been able to attain low cost in its manufacturing process.
Integration of agile supply chain management strategy
In order to determine the quantity of product to produce, Coat NA uses sales information generated by the APO software. The information adopted is usually real time in nature which has made the firm to attain flexibility. Real time information has also enabled the firm to be able to manufacture specific customer orders.
Consequence of the changes
Incorporation of the above strategies will result into an improvement in the firm’s competitive advantage in a number of ways. For example, ability to forecast demand via optimization will enable the firm to attain cost minimization objective via a number of ways such as reduction in the quantity of finished goods inventories held and elimination of obsolescence cost.
Through attainment of agility, the firm will be able to improve its profitability potential via delivering products which are in line with market demand. This means that the firm will be able to minimize uncertainty with a certain degree. According to Mason-Jones, Naylor and Towill (2000, p.4063), the fashion and textile products are characterized by a high degree of demand uncertainty.
This will culminate into minimization of obsolescence and stock-out risk. Forecasting using the APO software will ensure that the firm’s management team emphasizes on the concept of value stream. This will result into alignment of supply and demand thus increasing the firm’s capacity to respond to market changes.
From the case, it is evident that the Coat NA is faced with numerous challenges with regard to its asset and customer base. This threats the firm’s survival as a going concern entity. In order to deal with this situation, the firm’s management team is charged with a responsibility of making changes to its supply chain management.
One of the main challenges relates to the decision on the supply chain management strategy to adopt. Over the years, the firm has been operating on a traditional supply chain. However, changes in the market have stimulated the need for change in its operation. To deal with the two challenges, the firm’s management team should conduct an improvement in its supply chain management.
The improvement should be conducted in such a way that the concepts of agile and leanness are put into consideration. In order to improve its supply chain management, the firm incorporated decision support systems. Integration of Information Technology (IT) in the firm’s operation will improve the firm’s capacity to deal with market changes considering the dynamic nature of the industry.
In addition, lean and agility in its production process will enable the firm the firm to deliver value to its customers. In its implementation process, the firm’s management team should consider the nature of demand for the product. Lean strategy should be applied to products with relatively stable demand while agile strategy should be applied to those with unstable demand.
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