Should You Use a Lean or Agile Supply Chain?

Supply and demand are no longer the only driving factor of the market. Consumer behaviors and economic movements are changing daily, so manufacturers and shippers alike are forced to find ways to keep up. 

Supply chains need to look at both fluctuating market dynamics. Today’s customers are both digital and global. This means they have access to just about every product and company right at their fingertips. This boosts competition in a way that was never possible in the past. This competition creates a need for companies to innovate with regards to their products as well as how they deliver those products to their consumers quickly and efficiently.

Additionally, the worldwide web has enabled trends to quickly pop up and then dissipate just as fast; consumer preferences are changing at a higher velocity than ever before, and companies need to maintain flexibility and adaptability in response.

To cater to the changes in the supply chain landscape, companies have two primary models that cater to these market fluctuations, in different ways. These 2 supply chain models are known as the lean supply chain or the agile supply chain.

But what is the difference between a lean and agile supply chain? Furthermore, which strategy is better for your business?  

What is a Lean Supply Chain?

The lean supply chain is the traditional “factory” chain, which focuses on producing high volume at low cost. The goal is to add value for customers by reducing the cost of goods and lowering waste (waste is whatever isn’t valuable to the customer). This sort of supply chain focuses on reliability and predictability rather than on flexibility and adaptability. Production is planned months or even years in advance rather than adapting to a changing market.

This pre-planning helps to find the lowest possible cost for large volumes of goods. Generally, the lean supply chain is best for products with low market variability.

Demand for these products stays even keel despite the economic situation or changing supply chain trends. These tend to be necessary, functional products like food and toiletries. The lean supply chain has traditionally been the most popular form of production because it focuses on reducing costs—and all consumers like to pay less.

However, more and more companies are moving away from a strictly lean model since today’s markets can change overnight. Adaptability and agility become crucial factors in responding to these fluctuations.  

What is an Agile Supply Chain?

The agile supply chain focuses on flexibility and receptiveness. It responds quickly to changes in demand, customer preference, and industry. It’s made to handle unpredictability in the market through “postponement”— waiting to see what the market will dictate before finishing production. An agile supply chain waits to see how much demand there is before creating the final product, thus responding directly to demand rather than forecasting. Some predicting of the market is still necessary, though, since parts of a product are created ahead of time to make the finalization process fast and efficient.

Agility focuses on balancing up-to-date data with short-term forecasted projections. Agile supply chains are generally used for products with short life cycles or customizable elements. Take fast fashion as an example. Fashion changes rapidly in today’s Instagram and blogger culture, so production needs to be prepared to keep up with the emerging and shifting trends. There needs to be both flexibility and efficiency to get the product on the shelves and into the hands of consumers before the next big craze hits.  

Strong partnerships and interactions between vendors are crucial to making an agile supply chain work. If there isn’t a collaboration of suppliers with one another and with the market, goods will not be created as quickly and efficiently as an agile chain calls for. An agile supply chain also tends to have less warehousing costs. You aren’t holding significant inventory on hand to meet demand. Rather, demand comes and supply is then created to meet the demand. A lean chain, on the other hand, focuses on overstocking inventory in order to keep up with potential demand.  

Should You Use a Lean or an Agile Supply Chain?

In today’s fast-paced and global market, most businesses are opting for the flexibility of an agile supply chain. However, agile chains can create high levels of waste and drive up prices for certain types of goods.

In 2015, McKinsey & Co reported that an agile supply chain was overall more effective for a majority of top companies. It found that agile supply chains generally perform in the highest quartile for labor and asset flexibility, risk management, inventory placement, and integrated planning. It also found that on time and in full deliveries (OTIF) were 94% for agile and 87% for others (including lean), with 85 days spent in agile chain inventory as opposed to the average 108 days.

And that research holds just as true today as agile supply chains navigate uncertain landscapes as we have seen during the COVID-19 pandemic.

However, this doesn’t mean that agile supply chains are the answer for all companies...

In fact, many companies are finding that they need a lean-agile hybrid in order to achieve the smoothest level of operation. This “hybrid supply chain strategy” is able to create small quantities customized to customer’s needs by building certain parts ahead of time. In this way, forecasting and real-time data are equally balanced, which in turn balances the overall level of risk. Consider the following questions to help determine what supply chain strategy is right for you:

• What goods are you producing? How consistent are these products’ sales throughout the industry?
• Who is your target audience? What is their consumer behavior?
• What is the demand for your product today? Will this demand change and fluctuate rapidly?
• How quickly does your target market change?
• How will fluctuations in the economy influence your product, your consumers, and the spending habits of your industry?
• What does your supply chain look like?
• How do your supply chain partners operate?

The Bottom Line

The difference between lean and agile is the fluidity with the response to the market. A lean supply chain focuses on cutting costs by producing high volumes of products with low variability. An agile supply chain focuses on responding to the market demand with smaller, customizable batches of items. Often a lean supply chain is more cost-effective and predictable, while an agile supply chain is more flexible and adaptable.

The bottom line is this...

There is no cookie-cutter answer for all businesses. You need to look at your product, your consumer, your market, and your partners to come up with the right type of supply chain strategy for your business.