Hybrid supply chain strategy

This section will discuss the hybrid SC strategy with its applicability and impacts on the LF and the suppliers.

Applicability

The LF can use the hybrid SC strategy, proposed by Christopher (2016) and Naylor et al.

(1999), by postponing the assembly of the FP with an ATO production method as illustrated in figure 8. This strategy is also suggested in Pagh and Cooper (1998) as a ’manufacturing postponement strategy’. The hybrid SC strategy is used to cope with the large inventories of an MTS or STS production method and the long delivery lead times of an MTO pro-duction method, by using an ATO propro-duction method (Feitzinger & Lee, 1997). As the LF has a production lead time of 10-16 hours for the FPs, a one-piece flow production, and steady demand from end-customers, the LF is highly capable of manufacturing with an ATO production method. This production method will give the LF the ability to postpone the customization of the FP.

Figure 8. The supply chain of the finished product with a hybrid supply chain strategy

Figure 8 shows the proposed hybrid SC strategy in which has no DCs, an ATO production method by the LF, the decoupling point located before the LF’s production, and the suppliers with an STS production method. How this change impacts the lead firm and the suppliers will further be examined, respectively.

Impacts on the lead firm

To achieve the hybrid SC strategy, the decoupling point must be moved upstream from the lead firm’s DCs to their manufacturing site in Scandinavia, as is shown in figure 8. This is aligned with van Donk’s (2001) possible decoupling point of the stock of semi-finished products.

Thus, the LF will not produce (assemble) any FPs without receiving an actual order from customers. According to Harris et al. (2011) and Nicholas (2011), moving the decoupling point upstream should increase the LF’s flexibility, and eliminate the inventory of FPs. The reason for this is that the LF will produce the FPs with high effectiveness by assembling to order. However, to produce the FPs with high effectiveness, the LF needs to increase its inventory of the components before its production. The reason for this is to have all components available to produce and customize the FP according to customers’ orders. Fur-thermore, the only risk for obsolete products is the components that are kept before the LF’s production, as the LF will still have to forecast the number of components they will need from upstream suppliers.

By doing this, the customers would no longer be constrained to ordering the 18 versions that the LF offers, as the LF can now offer customers the opportunity to customize the exact functionalities and looks they want of the FP. The director of digitalization stated that he strongly believes that such customization is something that the LF would have to offer in the future to stay competitive. Hence, changing the SC strategy to a hybrid SC strategy with an ATO production method may give the LF a major competitive advantage, as it is capable

of offering the customers the opportunity to customize. Furthermore, it would be easy for the LF to keep adding new looks and functionalities, as their only risk is increased inventory levels of the new components in which may be of minor value. With this SC strategy, it will also be easier to remove functionalities and looks in which there is no or low demand for, to reduce the waste of inventory.

As the FP already will have a customer ready when the product is produced, the need for the DCs as the location of inventory will be eliminated. This is illustrated in figure 8. As a result of this, there will be no tied-up capital in these locations, and transportation can optimize its effectiveness by transporting directly to end-customers. High effectiveness in transportation will greatly reduce the LF’s tied-up capital through transit inventory, as emphasized by Baumol and Vinod (1970) and Seth and Gupta (2005). On the other hand, shipping directly to end-customers may reduce transportation efficiency as it may be more difficult to have as high utilization as before. However, it is still possible to achieve high efficiency by using some DCs as hubs.

Nevertheless, the LF does promise their customers a short delivery lead time. This can be solved by more expensive air shipments. However, as the customers mainly are large institutions, they may accept longer delivery lead times. If not, the LF could shift the decision to the customer by making them choose an expensive, quick delivery, or an inexpensive, much slower delivery.

Moreover, another alternative with the hybrid SC strategy is to postpone the differentiation of the FPs to the DC(s). As mentioned, the LF offers the opportunity to differentiate the FPs into three different colors. Thus, by postponing this differentiation, the number of versions that the LF has to forecast for can be reduced from 18 to 6. This strategy can then be used with the same amount of decentralized DCs as they have now, or with less DCs to lower the need for forecasting even further. However, we have no information about how difficult and expensive this will be to implement in terms of production. Thus, this alternative will not be further assessed.

Impacts on Supplier A and Supplier B

The impact on Supplier A and Supplier B, if the LF changes to a hybrid SC strategy with an ATO production method, will be quite similar to the impacts from the lean SC strategy. In the hybrid SC strategy, the decoupling point is located at the factory in Scandinavia. Thus, the LF must be more agile to meet demand as they cannot rely on the safety stock levels of the FP in the DCs (Yang & Burns, 2003). Moreover, a prerequisite for the LF to use an

ATO production method is that the LF has a high availability of the components. For this to work, without keeping unnecessary high inventory levels, the supply lead times should be short, where currently the long transport distance from China to the LF in Scandinavia creates long supply lead times. This impacts the suppliers, as high efficiency is required in their operations and the location of inventory must be at the LF’s factory to always ensure that the LF has the necessary cables and transport protectors available for the production.

This could increase the waste of inventory. However, as for the lean SC strategy, the waste of overproduction should decrease.

To achieve this, as with the lean SC strategy, Supplier A and Supplier B should produce with an STS production method. This production method will enable the suppliers to provide high availability of components with low inventory waste as their operations’ will have high efficiency. This combined with the location of inventory being located in Scandinavia leads to very short supply lead times, as the suppliers will keep the inventory of the components close to the LF. Thus, the suppliers will be responsible for that the components are available for the LF. Furthermore, due to the low price of the components, and that they can be used in all versions, the risk for obsolescence is low and the inventory at the factory will tie-up little capital for the suppliers. Thus, applying an STS production method for Supplier A and Supplier B should enhance their efficiency without major consequences on their effectiveness, and strengthen their relationship with the LF as they can deliver with short supply lead time.

Furthermore, as with the lean SC strategy, the hybrid SC strategy enhances even more to implement information sharing through visibility of actual demand and real-time production schedules. Thus, the demand for the FPs could be visible for Supplier A and Supplier B, enabling them to avoid the waste of inventory and overproduction. The reason for this is that the suppliers can produce and store components based on the demand for the FPs.

The risk for a bullwhip effect through the SC will be low in the hybrid SC strategy, as the LF assembles the FPs towards actual demand. Thus, as the components can be used for all of the versions, the risk for overproduction and obsolete components will be low. Further, if the LF shares the information about actual demand with the suppliers, they can replenish their inventory at the factory with the amount that the LF needs to produce the orders of the FPs.

This would further decrease the risk of the bullwhip effect. However, if the market demand changes very unexpectedly, the information about the change could become delayed to the suppliers leading them to overproduce components. Still, if the LF implement information sharing to give the suppliers visibility of actual demand, this risk for delayed information

would reduce. Thus, this would further decrease the risk of a bullwhip effect.