The New AAA Supply Chain

Hau L. Lee
Graduate School of Business, Stanford University

Agility, adaptability, and alignment (AAA) have long been key factors in the success of world-class supply chains. In recent years, changes in environments and natural forces pose new challenges. For those who wish to remain competitive, Hau Lee suggests that it is time to revisit these AAA capabilities to understand what they mean today.

In 2004, the Harvard Business Review published my article “The Triple-A Supply Chain.” In it, I described the vital elements of first-class supply chains — agility, adaptability, and alignment, constituting the Triple A. Agility describes the responsiveness, flexibility, and efficiency of a supply chain in meeting the day-to-day uncertainties and variations in supply and demand. Adaptability describes the strategies needed to make a supply chain dynamic, able to meet changes in needs and environment over time. Alignment ensures that the many and often diverse interests and incentives of partners in the chain be integrated to insure mutual benefits and success. Leading companies have long striven for these AAA capabilities.

Today, the nature of agility, adaptability and alignment have changed. To gain a competitive advantage from the new AAA supply chain, executives need a new focus.

Fifteen years after the debut of that article, I believe the AAA concept is still applicable, and that winning supply chains should still be agile, adaptable, and aligned. In order to master AAA, companies must have organizational leadership, vision, and commitment. Today, the nature of agility, adaptability and alignment have changed. To gain a competitive advantage from the new AAA supply chain, executives need a new focus.

Super-Agility

Agile supply chains are the province of companies with the ability to sense and respond to their environment. They detect demand and supply changes quickly, interpret the signals to avoid nervous responses, and even predict future events with considerable precision. Next they respond by preparing appropriate resources and sound plans in anticipation of random events, analyzing the best course of action when they occur, and acting promptly. “Quick response” or “fast fashion” companies such as Zara and 7-Eleven Japan have used these methods to propel their huge success in their respective industry sectors.

In a world in which information can travel in nanoseconds, agility has accelerated dramatically. I label this new element “super-agility.” Today’s digital technologies, coupled with social media, allow consumers to receive information, share ideas and preferences, and make purchase decisions in seconds. And they want correspondingly fast and reliable delivery. Measuring delivery time in days used to be viewed as agile. Now we talk about hours. These surges of demand in a very short window require companies to sense and respond at similar speed, to have a “super-sensitive sense” and a “super-responsive respond.” This super-agility is not just for retailers or e-tailers facing consumers directly. Suppliers at the other end of the chain face the same pressure. Truly super-agile supply chains must be super-agile from end to end.

Digital technologies such as the Internet of Things (IoT), big data, and artificial intelligence (AI) enable fast and smart sensing of both demand and supply conditions in real time.

So how can we achieve super-agility from end to end? We have to start by placing fast and smart sensing of demand uncertainties at one end, and a quick and flexible design at the other. Digital technologies such as the Internet of Things (IoT), big data, and artificial intelligence (AI) enable fast and smart sensing of both demand and supply conditions in real time. Digital sampling, virtual reality, and 3D-printing let us generate products super-efficiently. 3D-printing also allows products to be more efficiently personalized, customized, or built to order. Li and Fung, an apparel supply chain and trading company, has used digital technologies to cut its product sampling time from the industry average of thirteen weeks down to four, a 70 percent reduction. Instead of providing customers with an iterative sequence of physical samples, the company’s 3D-sampling technologies can much more rapidly produce almost realistic digital samples, and modify them digitally as well.

But digital technologies are not the only solution. Companies must also skillfully deploy fundamental supply chain best practices. I was struck by the description of Hans van Alebeek, former SVP of supply chain at Nike, of how the company arranged to have the right jerseys on sale the day after the Super Bowl or the World Cup. They had to be the jerseys of the winning team, with some mention of their victory or, for a specific athlete, the MVP logo. Nike achieved this super-agility through careful planning. It stocked the right materials at different stages — fabrics, plain jerseys, jerseys with team logos, and even some customized prints in keeping with the predicted outcome. This kind of super-agility could also be achieved by producing championship products for both teams, but that would result in a huge inventory of the wrong products which would then have to be discarded or dumped into underdeveloped markets. Instead, Nike carefully assessed the risks of products at each stage of production, stocking each appropriately. It was a beautiful example of smart inventory stocking and postponement.

Construction industry disrupter Katerra is using supply chain innovations to drastically reduce the duration of construction projects. The company’s model is rooted in a range of practices including extensive use of standardization, modularity, and postponement in housing design, moving the push-pull boundary through off-site prefabrication, appropriate vertical integration, sound procurement strategies, and tracking in detail both the progress of projects and the use of materials through cloud-based IoT. Katerra still faces many challenges in its bold venture and it is not yet clear if it will succeed. Regardless, with veteran supply chain executive and former CEO of Flextronics Michael Marks at the helm, the ambitious startup has certainly made excellent use of innovative supply chain concepts.

Super-agility is becoming critical for many online retailers. China’s e-tailers, like Alibaba and JD.com, met dramatic surges in demand on Singles Day, a shopping holiday in China. Amazon has likewise faced unprecedented demands during the COVID-19 pandemic, with so many people homebound. These companies weathered the storm by properly positioning their inventory ahead of time, deploying digital technologies, and cultivating an agile organizational culture.

Architectural Adaptability

In my original HBR article, I emphasized that companies needed to dynamically adjust their supply chain strategies to meet changing needs and environments. These changes are often in response to the maturity of the product or the market. For example, when a product is introduced, its supply and demand characteristics can be very different from when it is mature or approaching the end of its life. Some of a product’s supply sources may be in developing economies which, as they mature, become emerging or even developed economies. China is an excellent example. It is vital that supply chain executives be aware of such evolutions and be prepared to revisit their sourcing strategies in response to changes in labor costs, worker skills and education, local environmental and social regulations, logistics infrastructure, and the availability of resources.

When new trade restrictions go into effect, companies that can quickly adapt to new sources will come out ahead.

Adaptation of this kind must respond to many more dimensions in today’s business climate. Sourcing decisions have recently been complicated by the shifting trade and tariff policies of various regimes. Trade has retreated from multilateral agreements, becoming more and more bilateral. Regional trade agreements have proliferated while the rules for what constitutes country of origin have become more complex. Meanwhile, the rise of protectionism and national security concerns has contributed both to an increase in trade barriers and to the complication of customs calculations. At the same time, tariffs and trade agreements are dynamic, and may change erratically over time. The result is that supply chains must be adapted to frequent change. When new trade restrictions go into effect, companies that can quickly adapt to new sources will come out ahead.

Another critical dimension of adaptation is the integration of supply, innovation, and demand. While their sourcing strategies must reflect the changing landscape of supply, supply chain executives also need to design strategies that cover the entire supply chain. As emerging economies which once were simply sources mature and become capable of product and process innovations, they also produce a rising middle class, and with it important markets. Supply chain strategies should therefore reflect the changing characteristics of new economies not just as supply sources, but as innovation centers and demand points. Leading supply chain companies should be thinking about concepts such as “frugal innovation,” which devises products and processes to serve developing economies, crowdsourcing, as a means of generating innovative ideas for different markets, and “last mile” logistics, to serve customers in challenging locations.

The advance of technology also drives adaptation. Supply chain strategies should be poised to adapt as technologies become available, or as they are widely adopted by suppliers or customers.

The expanding needs and multiple dimensions of adaptation have led to a new role: supply chain architect. I learned the term from Dr. Victor Fung, chairman emeritus of Li and Fung. Dr. Fung’s view is that we should not adapt just to the differences of the time, but also to the many products, markets, or customer segments a given company may have. We need to design the right supply chain strategies, building an architecture that takes into account where production is sourced and supplied, whether to outsource, what technologies to use, and how to configure products to accommodate these differences. Of course, with the rapid advances of online business, even the strategic architects at Li and Fung have had to hurry to create the right adaptations.

This year we saw adaptation make a big contribution to the battle against the coronavirus pandemic. Many companies were able to turn on a dime, retooling their production process, leveraging their technical know-how, retraining their workers, and, in some cases, using extra capacity to produce medical supplies like masks, protective gear, and ventilators. This rapid adaptation required the companies to be decisive, to have the right degree of flexibility, to use what they know and have, and to make the necessary investment. It is a very admirable adaptation.

Ecosystem Alignment

Alignment has traditionally focused on how to strengthen the partnership between buyer and seller. We align the interests and incentives of a buyer and a seller, so that each will act in such a way that both win. Buyer and seller must thus exchange appropriate information, define responsibilities and accountability clearly, and share the costs, risks, rewards, and consequences of their collaboration.

Now, various forces in our modern economies call for us to expand our view of what alignment entails. First, the supply chains of different industries have become more interdependent. Cosmetic companies such as L’Oreal have begun making electronic wearables, such that the cosmetics and electronic supply chains intersect. Entertainment supply chains have become more and more digital. Apparel manufacturer Esquel has teamed up with the New Zealand Merino Company to create Comerino, blending the cotton and wool supply chains to create a new cotton-wool product. So the consequences of an action in one sector can now affect not only immediate trading partners, but also other sectors.

Even nonprofit and for-profit supply chains can now intersect. COMACO, based in Zambia, was founded as an NGO to monitor and police activities that cause environmental degradation, such as animal poaching and deforestation. Discovering that the low incomes of farmers were the root cause of these activities, the organization expanded to offer training in sustainable farming, provide equipment and other resources for farmers, and help them to reach premium markets. The agricultural business is for profit, but it contributes to nonprofit environmental improvement.

The stakeholders of a given alignment are no longer just the buyer and seller. They may include local governments, NGOs, or communities, all with a stake in environmental and social issues.

The increasing concern and interest in environmental and social responsibility has two immediate implications for alignment. First, alignment is now concerned with more than just cost and revenue. Second, the stakeholders of a given alignment are no longer just the buyer and seller. They may include local governments, NGOs, or communities, all with a stake in environmental and social issues.

The importance of these concerns is also heightened by increased consumer awareness, and by the aforementioned adaptations in supply chains. As trade frictions increase and traditional supply sources mature, driving up costs, sourcing managers have expanded their range to include even frontier economies like Bangladesh and Ethiopia. Ensuring environmental and social responsibility is as critical to these expansions as aligning the interests of new stakeholders.

This expanded understanding of the value chain, to include multiple supply chains and a broader stakeholder base, has led supply chain companies to take an ecosystem view of supply chain alignment. Nestle’s Shared Value Vision and Nike’s Equitable Manufacturing Initiative are both about ensuring that each of a much bigger set of players in the supply chain wins. The welfare and livelihood of all of these stakeholders are now an integral part of alignment.

As the scope of supply chains expands in multiple dimensions, the use of digital platforms will become more and more important. Platforms bring together more constituents in the ecosystem to share information, coordinate, and exchange ideas, playing an ever-greater role in alignment.

Hau Lee is the Thoma Professor of Operations, Information, and Technology at the Graduate School of Business at Stanford University. His research into global supply chain management has appeared in major publications and won awards. He has also consulted extensively for industry. He is a member of the US National Academy of Engineering as well as a Fellow of INFORMS, POMS and MSOM.