The case for agility: interview with Dr. Daniel Pellathy
It’s not always easy to sell top management on the benefits of supply chain agility, says Dan Pellathy. But making the investment now will pay big dividends later.
David Maloney has been a journalist for more than 35 years and is currently the group editorial director for DC Velocity and Supply Chain Quarterly magazines. In this role, he is responsible for the editorial content of both brands of Agile Business Media. Dave joined DC Velocity in April of 2004. Prior to that, he was a senior editor for Modern Materials Handling magazine. Dave also has extensive experience as a broadcast journalist. Before writing for supply chain publications, he was a journalist, television producer and director in Pittsburgh. Dave combines a background of reporting on logistics with his video production experience to bring new opportunities to DC Velocity readers, including web videos highlighting top distribution and logistics facilities, webcasts and other cross-media projects. He continues to live and work in the Pittsburgh area.
The lean, clockwork-like supply chains of the past revealed their weaknesses during the past year. Though they had worked well for a long time, it became clear they lacked the ability to respond quickly to changes, opportunities, and the many global threats we now face, including an ongoing pandemic, war in Ukraine, China shutdowns, and overall economic uncertainty. This perfect storm of disruptors has led many to rethink lean supply chains in favor of more resilient and agile networks. But how do companies get there?
Pellathy teaches supply chain and operations management at the graduate and undergraduate level at Grand Valley State in Michigan, and actively consults with companies on supply chain agility, organizational alignment, supply chain risk, and end-to-end operational excellence. His research has been published in academic journals and The Wall Street Journal. Pellathy, who holds a Ph.D. in supply chain management from the University of Tennessee-Knoxville, recently spoke with Group Editorial Director David Maloney on an episode of DC Velocity’s“Logistics Matters” podcast. What follows are excerpts from their conversation.
Q: Could you tell us about the origins of the research?
A: The research originated out of the University of Tennessee’s Global Supply Chain Institute. It is a collaborative study with other academics as well as a number of industry sponsors. We have been working on this now for two years and have had well over 20 conversations with senior supply chain executives and other senior leaders from companies across a number of different areas, so it has been a really rich conversation.
Q: How do you define “supply chain agility”?
A: Supply chain agility reflects how quickly a company can adjust operations to avoid disruptions while at the same time capitalizing on opportunities in a changing environment.
Agility means more than just mitigating the downside effects of a problem after it has occurred. Instead, it means proactively investing in internal capabilities and external relationships so as to provide alternatives to managers who are facing a highly uncertain environment. Agility should be less about accurately predicting a particular risk event and more about building response capabilities.
Q: Every company wants a supply chain that’s agile, but what is the reality in the market? Are their supply chains as resilient as they should be?
A: That is a great question. We went into this research thinking we were going to find best practices in supply chain agility, but very quickly we realized that that was not going to be the case. Instead, we found that companies were very uneven in their thinking and their activities as it relates to agility.
Some companies were just starting their journey and facing a lot of the barriers that we identify in the research. Other companies were doing some really innovative things, but even in those more innovative companies, the thinking across functional areas and at different levels of the organization was quite mixed. I would say that supply chain agility is definitely a topic of conversation in organizations, and now is the time for supply chain managers to make the case for investing in agility.
Q: What questions should companies be asking themselves about their agility?
A: Leadership teams need to ask themselves some tough questions as they start to dig into supply chain agility. That includes questions like: Is our organization focused on incremental cost reductions but at the same time missing opportunities to engage the market? Does our organization put up barriers to investing in supply chain agility? That might include using valuation methods that are based on net-present value and other kinds of valuation techniques that are biased against agility projects.
Also, is our organization able to identify target areas for investments? I think these questions help companies expose some of the structural barriers that may be hindering improvements in agility.
Then at a more systematic level, leadership teams can use supply chain audits by external experts or self-assessment tools like the one in our white paper to judge where they are in their agility journey and think about different areas where they can start to make investments.
Q: For companies long accustomed to running lean supply chains, investments in agility can be a tough sell. How do you pitch the idea to upper management?
A: I think you have hit on the biggest challenge managers face when talking about agility. Too often, companies view investments in supply chain agility simply as expenses, and managers are penalized for increasing costs if those investments don’t yield an immediate return. But what that approach doesn’t capture is that there are losses that companies face from disruptions, which are significant.
More importantly, traditional methods of valuation don’t capture missed opportunities that come about with market changes that the companies are not prepared to capitalize on because they haven’t made the agility investments in advance.
The key problem here is that supply chain leaders have been approaching agility with the wrong set of tools. Traditional budgeting techniques—like payback period, the internal rate of return, or net-present value—typically translate uncertainty in the environment into more aggressive discount rates while ignoring managers’ ability to positively influence outcomes after investment. So that results in viable projects getting shelved due to overly pessimistic valuations.
We talk a lot in our research about how managers need to expand the toolkit they use to value agility investments.
Q: Since we are talking about return on investment, what do companies typically consider an acceptable ROI for their agility investments?
A: That is a great question, but there, too, there is a lot of diversity across companies that we’ve talked to in terms of what their target ROI is. We would even suggest that ROI may not be the appropriate investment metric for agility projects. I would say more broadly that companies need to flip the script on how they think about investing in agility.
The central questions need to be how much agility is appropriate given the dynamics of our market, and then what investments do we need to make in order to create that level of agility. These are really strategic questions related to the overarching goals of the company. To answer them, companies need to continuously work at scanning their environment, making seed investments, and building flexibility.
However, in most companies, supply chain managers are under intense pressure to justify any agility investment with an immediate return. That really puts pressure on managers. As I mentioned, these pressures are often driven by an internal rate of return or traditional budget techniques that simply assume an average expected cash flow over the life of a project.
But in a dynamic environment, that assumption doesn’t make sense. It also doesn’t take into account managers’ abilities to make follow-on decisions that could improve the return outlook for the investment after an initial investment has been made. It is a complex problem—one that takes a lot of work and a lot of collaboration across functional areas.
Q: What are some of the common barriers to agility?
A: After two years of talking with executives, we’ve concluded that there really are three main areas where companies struggle when it comes to supply chain agility. The first is how to think about supply chain agility. That really means basically defining “agility” for your company and establishing what we call an “agility mindset” in your team.
The second is how to make the business case for internal stakeholders, and that includes some of the challenges I mentioned earlier with conducting the valuation.
The third is how to develop agile relationships with external stakeholders. Companies really need to be thinking about their end-to-end supply chain as they invest in agility. Focusing exclusively on what’s going on within your four walls is not going to be enough.
Q: Your research identifies three categories of agility investments: digital, physical, and process agility. Could you briefly describe what each means?
A: Absolutely. For any particular company, supply chain agility is going to require some combination of investments across those areas, with the right mix depending on the company strategy and how the operating environment looks.
Under digital agility, the real opportunity areas for investment include data integrity, visibility tools, cognitive analytics, human resource skills, and fast information flows that are going to facilitate quick decision cycles.
With physical agility, we are talking more about flexible physical capacity, automation, strategic working capital, inventory investments, product simplification, and SKU rationalization.
Finally, process agility covers cross-functional alignment and really focusing on cycle-time compression and then supplier and leadtime compression. Overarching all that is the imperative of building an agility mindset, a culture of agility, a culture of risk-taking, and understanding these investments in agility in terms of a risk/reward framework.
Q: How should companies start their journey?
A: I am a big believer in getting straight on what a company is trying to achieve before going out and starting new projects. Investments, again, need to be seen as true investments, not just expenses. Those investments have payoff probabilities. They impose opportunity costs. They can fluctuate in value relative to environmental conditions, which means those are the kinds of things that need to drive the conversation.
The investments in supply chain agility should focus on holistic solutions for matching supply and demand, and should therefore be evaluated against company performance. When you have that understanding as a foundation for discussions about agility, then companies can really move forward on deciding which of the investment areas to target for maximum gain.
Editor’s note: The white paper mentioned in this article, Understanding and Valuing the Impact of Agility in Your Supply Chain, is available on the Global Supply Chain Institute’s website. You can download a free copy here.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.