By Leonardo Gomes and Dr. Rafael Diaz
An ambidextrous supply chain is one that is designed to reconcile conflicting goals such as exploration – related to creativity, innovation, disruption, and variation increase– and exploitation –related to efficiency, productivity, and variation decrease. How can companies be, at the same time, innovative and efficient? That is the object of this research, on which we studied the impact of this dichotomy in a consumer goods manufacturing operation, and how such conflicts might be managed better.
Companies have to innovate to survive, but it isn’t hard to see how conflicts can arise from a new product introduction (NPI) at every level, from physical incompatibilities on production lines to the distraction of management attention and quite simply increased complexity. Impacts of greater or lesser importance might be expected across many operational functions: for example, demand management, procurement, production, logistics and inventory, infrastructure and maintenance, and quality control.
Ambidextrous organizations have been a research topic off and on for over thirty years, although not often from a supply chain & operations perspective. Early researchers saw a need to remove conflicts as far as possible, in one of three general ways. Structural ambidexterity physically
separates new product activities from existing production: separate facilities, management teams, even a separate business unit. However, that is generally only viable for fairly large organizations. Vacillation separates the activities temporally: the organization would switch from exploration mode to exploitation mode, and back again, which sounds good in theory but may be difficult to envisage in practice. Contextual ambidexterity sees individuals or operations moving between the two modes as required, hopefully supported by some sort of structure (or meta-routine) to determine priorities, and this of course is how most small and medium enterprises (SME) operate.
We looked at ambidexterity in MeatCo (not its real name), a mid-size (500 employees) manufacturer of processed meat products. A competitive strategy of continuous NPI, usually in response to client demands, has raised MeatCo to a market-leading position, yet at the cost of diminishing profitability. In 2016 and 2017, the firm introduced more than 300 new SKUs and, even allowing for product retirement, that raised the product assortment from 223 to 302 SKUs. It is a reasonable hypothesis therefore to suppose that ambidexterity, or the lack of it, is at least part of the explanation for declining profits.
A survey of the company’s personnel identiﬁed clear differences between departments on the way innovations are perceived, which could undermine efforts to develop a coherent NPI strategy. For example, the marketing department might support more product variants and hence SKUs to meet the demand from ever-smaller customer segments. The supply chain function, on the other hand, prefers to keep the number of SKUs – and hence the level of complexity – to a minimum.
Evidence shows that MeatCo’s operational strategy is mostly related to providing high service levels, producing superior quality goods, and delivering fresh products: achievement of these goals can be assessed through the measurables of service level (fill rate), product quality conformance (rate of returns), and inventory freshness (turnover).
Our analysis showed that NPI has both direct and indirect impacts. By testing a series of hypotheses, we were able to examine not only the instance of these impacts on service, quality, and freshness, but also the extent to which these impacts are moderated by product-level degree of innovativeness. Direct impacts mostly showed in terms of attention shifts, learning curves, process changes, and the resulting increased likelihood of mistakes. Indirect impacts were associated largely with the complexities arising from a larger assortment: for example, increased demand uncertainties, more frequent production changeovers, and an increased risk of food cross-contamination (more and more varied allergens present in the assortment). The idea that innovativeness exacerbates the impact of NPI is mostly related to the degree of process change required by the new product.
We observed that the impact of NPI is more pronounced in the long-term time frame. Sustaining frequent new product introductions in the long run may jeopardize performance proportionally more than individual NPI events. Also, NPI can cause uncontrolled assortment growth if not coupled with clear assortment strategy, which can lead to operational disruptions due to increased complexity.
In what may be a first use in this sort of research, we also applied Conceptual System Assessment and Reformulation (CSAR) techniques to map, evaluate and reformulate MeatCo’s supply chain strategy. (CSAR is a methodology developed at MIT Supply Chain Strategy Lab, under the leadership of Dr. Perez-Franco and Prof. Sheffi.) We employed CSAR as an enabler to identify and suggest potential solutions to the exploration & exploitation trade-offs faced by MeatCo. At the highest level we found a three-way conflict between the supply chain strategy principles of “frequently launching new products”, “providing high service levels to major clients”, and “reducing the cost of goods sold”. We also unveiled direct conflict between frequent product launches and mitigating their operational impact and, less evidently, potential conflicts related to flexibility, quality, freshness, and exploration of new markets.
What to do? The analysis suggested a framework for dealing with this dilemma at the supply chain strategy level. Companies in similar situations should establish structured, systematic innovation plans, avoiding random new product introductions and setting an innovation pace that its operations can cope with. Companies must have the time to adapt to innovations – and the faster they can do it, the more innovative it is allowed
be without disrupting operations. On the other hand, by establishing clear category plans, companies can avoid unnecessary assortment expansion caused by NPI, which could also hurt operational performance if not well managed. Moreover, these actions should be enabled by improving the reliability, availability, and flow of information across the entire organization – which should also be encouraged for client-supplier relationships.
Nonetheless, it is natural that some degree of internal consistency conflicts will remain –indeed, we believe that for an ambidextrous supply chain strategy in an SME that cannot afford the structural separation of exploration and exploitation activities, some degree of conflict is inevitable. SMEs are better served by building leadership-based contextual ambiguity where individuals make (reasoned and guided) choices between exploration and exploitation activities on a daily basis.
While the analysis was conducted in the specific context of MeatCo, its findings should be applicable to any small-to-medium manufacturer of perishable consumer goods with regular new product introduction. Moreover, being a discipline that deals with “getting things done”, supply chain & operations management may be the next frontier of ambidexterity research and we hope that this research will also elicit more studies at this front.
Note: Leo Laranjeira Gomes is a fifth-year Ph.D. Candidate and Rafael Díaz, Ph.D. is Professor of Supply Chain Management, both in the MIT-Zaragoza International Logistics Program at ZLC.