Chapter 2 Literature Review
2.1 Flexibility
H3 H2
H1
2.1 Flexibility
Flexibility becomes a critical order-winning criterion since a firm with flexibility gains competitive advantage by rapid response to customer’s volatile demand. Gupta and Goyal (1989, p.120) defined flexibility as “the ability of a manufacturing system to cope with changing circumstances or instability caused by the environment”. Zhang et al. (2003, p.
178) regarded manufacturing flexibility as “the ability of the organization to manage Flexibility:
Volume Mix
New Product Delivery Shared
Vision
Trust
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production resource and uncertainty to meet various customer requests”. In addition, Upton (1994) described internal flexibility as what the firm can do and external flexibility as what the customer sees. Examples of internal flexibility include machine, material handling, and routing flexibility. External flexibility directly affects a firm’s competitiveness; by contrast, internal flexibility relates to a firm’s operational efficiency (Chang et al., 2003). Examples of external flexibility are volume, mix, new product, and delivery flexibility (Chang et al., 2003). In contrast, internal flexibility relates to operational efficiency instead of market demand (Chang et al., 2003). To achieve customer value (i.e. delivery on time, high quality, and low-cost), firms must look beyond their internal flexibility (Lummus et al. 2003;
Zhang et al. 2002). From the perspective of buyers, the following external flexibilities significantly relate to supplier response to environmental turbulence.
1. Volume flexibility: the ability to change the level of aggregated output.
2. Mix flexibility: the ability to change the range of products made within a given time period.
3. Product flexibility: the ability to introduce novel products, or to modify existing ones.
4. Delivery flexibility: the ability to change planned or assumed delivery dates.
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2.1.1 Volume flexibility
Volume flexibility is the ability to effectively adjust aggregate production in response to customer demand (Hayes and Wheelwright 1984). Volume flexibility permits the firm to adjust production upwards and downwards within wide limits (Khouja, 1998). Vickery et
al. (1999) related volume flexibility to high market share and financial performance,
especially in highly cyclical markets. Firms rely on their external supplies as long-term sources of volume flexibility (Jack and Raturi, 2002). With changing customer demand, the buyer not only adjusts its own capacity, but also needs its suppliers to meet customer demand quantities. With regard to supplier volume flexibility, the buyer is concerned with quantity, cost, time, and quality (Beamon, 1999; D’Souza and Williams, 2000; Suarez et
al., 1996) associated with volume change. The strategies for increasing volume flexibility
include building slack resources, building inventory buffers, and training cross-functional workers. Research suggested that suppliers reach the volume flexibility requirement through production efficiency (e.g. just-in-time delivery) and resource utilization (e.g.
overtime). In addition, reserve capacity and changeover time affect volume flexibility (Yang et al., 2007). In other words, suppliers with the ability to alter equipment operating rate and the speed and knowledge of base workers have an internal capacity focus. Tan et
al. (2002) also suggested that quality, quick response, and volume flexibility are critical criteria in evaluating supplier performance. Buyers will regard suppliers that cannot
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respond to demand fluctuations and manage effectively to achieve buyer’s requirements, as unqualified. Volume flexibility is an important primary flexibility of the manufacturing system. The buyer is concerned with the supplier’s capacity for volume requirement.
2.1.2 Mix Flexibility
Mix flexibility refers to the ability to change various products produced within a given period of time economically and effectively without incurring major set-up costs (Das, 2001; Slack, 2005). Mix flexibility implies the capability of a firm to respond quickly and economically to different product mix changes in the market (Karuppan and Ganster, 2004) to enhance customer satisfaction (Gerwin, 2005). A firm with mix flexibility efficiently uses resources and responds to market change (Gerwin, 1993). From a buyer’s perspective, a buyer will require its suppliers to produce differentiated products in a certain capacity and change over quickly from one product to another to respond to a variety of customer preferences without incurring a major cost penalty (e.g. changeover cost). Hutchison and Das (2007) listed capabilities to achieve mix flexibility: manufacturing processes that produce a wide range of products, workforce flexibility, and quick changeover times.
Gerwin (2005) also indicated that flexible manufacturing competencies include machines, labor, material handling, and routing flexibilities.
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2.1.3 New Product Flexibility
Koste and Malhotra (1999) proposed addressing product flexibility by two different dimensions: modification flexibility and new product flexibility. Modification flexibility refers to the ability to make minor design changes into a specific product (D’Souza and Williams, 2000; Gerwin, 1993). As products have a short life cycle, a buyer needs to shorten the lead-time of new product development. Sethi and Sethi (1990) discussed product flexibility measurements as either the time or cost required for introducing new products to existing operations. Studies have shown that the early stage of product development involving determining the specifications and designs of a product to be critical to new product success (Cooper, 1990; Bacon et al. 1994). Chang et al. (2005) presented that manufacturing involvement, multi-skilled workforce developments, and manufacturing/design integration have significant positive effects on new product flexibility. Kara and Kaysi (2004, p.471) described, “Multi-skilled workers and continuous learning are some of the factors enhancing product/new product/modification flexibility”.
The new product pre-launch stage includes concept generation, preliminary technical assessment, testing and marketing plan. All supply chain partners jointly share the responsibility for achieving new product flexibility (Kumar et al., 2006). Suppliers that work closely with the buyer to provide technical or design support during the new product pre-launch stage and the engineering change on existing products, could save the buyer
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time or cost during product development.
2.1.4 Delivery Flexibility
With regard to supplier’s delivery performance, on-time delivery, lead-time, and reliability are primary metrics (Shin et al., 2000). Delivery reliability refers to the ability to deliver on or before the promised scheduled due date (Handfield et al., 1992) and delivery dependability refers to the ability to deliver on time with accurate quantities and kinds of products needed (White, 1996). Delivery flexibility is “the ability to accommodate last-minute changes to order quantities, small-batch deliveries, fast deliveries, and higher on-time delivery rates” Ketokivi (2006, p. 220). Sa´nchez and Pe´rez (2005) argued that delivery flexibility is the firm’s capability to adapt lead-time to meet changing customer requirements. Gupta and Goyal (1989, p.120) define flexibility as “the ability of a manufacturing system to cope with changing circumstances or instability caused by the environment”. From the literature, delivery flexibility not only encompasses delivery reliability and delivery dependability, but the ability to cater to changing orders in a very short time (Sawhney, 2006). Market demand has previously been more stable and product life cycle longer. Now, customer preferences and demand are difficult to forecast. A firm should be able to change planned delivery dates in meeting customers’ requirements. A buyer’s collaboration practices with suppliers enable it and its partners to act together to improve delivery performance. The supplier that lacks the ability to accommodate rush
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orders and deliver on promised due dates (Chan, 2003), will result in additional cost to the buyer (e.g. line down cost) and negative customer value. Suppliers’ delivery flexibility is the ability to change the product mix and reallocate capacity to accommodate buyers’ rush or special orders. In other words, suppliers that operate at different output levels and quickly and easily change production quantities, and quickly change to a different product mix or to producing various products without a major changeover, are more responsive to buyers’ demands and deliver on the promised due date. In summary, suppliers with mix and volume flexibilities achieve delivery reliability and dependability and accommodate buyer’s rush orders.