Supply Chain Optimization: Targeting Capacity or Capability?

Companies strive to leverage their supply chain to stay ahead of the competition and gain additional market share. Today, more and more companies demonstrate that supply chain excellence represents an element of their overall business strategy. Within this context, increasing value to customers becomes everyone’s business, not just the management’s.

 Supply chain potential is not being fully exploited for a variety of reasons, including a weak supply chain strategy formulation, inefficiencies in daily operations and processes, inappropriate balance or use of supply chain tactics, and gaps in people skills or change management capabilities. Despite their desire for supply chain optimization, companies don’t always know what they should be targeting: capacity or capability?

 In order to understand why you should optimize your supply chain capacity or your supply chain capability, it’s important to understand the difference. Supply chain capacity is more of a volume measure referring to how much throughput an organization can achieve across its supply chain. On the other hand, the capability of a supply chain is concerned with how solid and agile the supply chain is when it comes to disruptions. Here are two important issues related to supply chain capacity and capability:

    • While the measure of supply chain capacity is generally a fixed figure, it really depends on the moment in time the capacity is measured. You may add new suppliers which can increase overall capacity. The point is that the goal of supply chain capacity is to achieve as close to 100% as possible.
  • Supply chain capability on the other hand is measured in a slightly different way. What level of redundancy do you have? What would happen if your single supplier’s output declined considerably? Will the supplier become a bottleneck for your production process? In such a case, you stand a higher disruption risk, which depends directly on the number of redundant suppliers you have.

Supply chain optimization can be achieved in both of these metrics. Technology allows you to model and simulate with software and predict actual results:

    • You can improve supply chain capacity if you optimize the processes employed by supply chain partners, which will ultimately improve your throughput capacity. Getting things right the first time and reducing areas of waste in both processes and materials can help increase throughput capacity as well.
  • Modeling and simulation can help you in understanding how delayed or disrupted order or material shortfalls can impact your production output. This can help you opt for modifying redundancy or capability across supply chain partners.

When you are committed to supply chain optimization, you should analyze both metrics: capacity and capability. Sometimes, you may be forced to choose one over another and in that case it all depends on you. Usually, it is best to focus on capability as the risk of failure from a capability gap comes with more devastating effects than a decline in achieving full throughput of your supply chain. From a purely risk management perspective, it is obvious that the potential for the greatest failure is more likely to occur when supply chain capability is inadequate. You can easily and safely commit to optimizing your supply chain capacity once you have managed the capability risk to an acceptable level.

Mike Earle