Journal of Economics and Behavioral Studies

Vol. 3, No. 5, pp. 287-295, Nov 2011 (ISSN: 2220-6140)

Significance of Lean, Agile and Leagile Decoupling Point in Supply Chain Management

Faiza Amir
SZABIST Islamabad Campus Pakistan
[email protected]

Abstract: A supply chain is a system, consisting of material suppliers, production facilities, distribution
services and customers. These are all linked together through the downstream feed forward flow of materials
and the upstream feedback flow of information. Several organizations have adopted the concept of “Lean” to
improve the performance and position in the market place and. The “Agile” manufacturing has been recently
emerged as a customer demand driven option. It defines as using market knowledge and virtual corporation
to exploit profitable opportunities in a volatile marketplace, leanness stands for developing a value stream to
eliminate all waste, including time and to ensure a level schedule. Leagile is one suitable way to exploit the
both approaches, lean and agile. It requires the selection and setting up of a material flow decoupling point.
The positioning of the decoupling point, therefore, depends upon the longest lead-time and at the same time
customer is prepared to tolerate this time lag and the point at which variability in product demand
dominates. Downstream from the decoupling point all products are pulled by the customer demand, that is
why that part of supply chain is market driven. Upstream from the decoupling point the supply chain is
essentially forecast driven. This review paper will explore the approaches of lean, agile and leagile decoupling
point to suggest the most suitable supply chain practices, processes and procedures. Several factors are
needed for lean and agile practices’ success; not only is it necessary to implement most of the technical tools
but an organization’s culture needs transforming too.

Keywords: Lean, Agile, Decoupling point, Upstream, Downstream, Lead time.

1. Introduction

A supply chain is a system consisting of material suppliers, production facilities, distribution services and
customers who are all linked together through the downstream feed-forward flow of materials (deliveries)
and the upstream feedback flow of information (orders). In an established supply chain, each member is
responsible for his own inventory control system and production or distribution ordering procedures.
Another basic attribute of supply chain and production/inventory control problem is that all members in a
traditional supply chain e.g. retailers, distributors, manufacturers and raw material supplier must solve, “just
how much to order, the production system to produce and the suppliers to supply, so as to facilitate a supply
chain echelon to satisfy its customer’s demands”.

The emerging trend in current business markets is that it’s supply chains that compete, not companies and
the deciding factor for the success and failure of any supply chain is determined by the customers. Providing
the right product, at the right price, at the right time to the customer is the key for the success and survival in
this era of cutthroat competition. Supply chain works for improving integration between supply and demand,
to provide satisfaction to customer. Improvement in supply chain helps reducing uncertainty in the system
and bullwhip effect. Many organizations have adopted the concept of “Lean” to improve the performance and
position in the market place and recently the agile manufacturing has been emerged as an alternative to
leanness (Womack & Jones, 1994; Richards 1996). Now what are these two concepts lean and agile, according
to the Naylor et al. (1999) agility defines as using market knowledge and virtual corporation to exploit
profitable opportunities in a volatile marketplace and leanness stands for developing a value stream to
eliminate all waste, including time, and to ensure a level schedule.

It may not be advisable to adopt a single approach to understand this dynamic business world and there is
not any “one fit for all” formula. If lean means waste reduction and agile means optimization of the processes,
sometime organization wants them to be at the same time. There has been recently some significant debate

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about the advantages and disadvantages of lean and agile approaches in supply chain management, some
suggest these are mutually exclusive, other says that these approaches can complement each other (Towill &
Christopher, 2002). The underline focus of leanness is cost minimization and value addition in specific
product, which can be achieved through the concept of TQM (total quality management), continues
improvement and quality assurance at every level and stage of supply chain. On the other hand, agility stands
for a system of doing business in which entrepreneurs introduce the new product with the objective of
sustainability in the dynamic competitive markets.

A new emerging trend is hybrid approach that leanness and agility can be combined with strategic use of
decoupling point, to optimize the benefit of both concepts by adopting leagile supply chain and getting the
best of the both worlds (Towill et al., 2000). This combined approach is known as `Leagility’ and, as a
consequence, the supply chain can thereby adopt a lean manufacturing approach upstream, enabling a level
schedule and opening up an opportunity to drive down costs upstream while simultaneously still ensuring
that downstream of the de-coupling point there is an agile response capable of delivering to an unpredictable
demand of marketplace.

Leagile is one of suitable ways to exploit both the approaches, lean and agile. It requires the selection and
setting up of a material flow decoupling point. Upstream of this decoupling point, the processes are designed
to be lean (Level scheduling) and downstream, processes are designed to be agile (Responsive). This review
paper will explore the approaches of lean, agile and leagile decoupling point to suggest the most suitable
supply chain practices, processes, procedures and their practical implications in the modern, dynamic, global,
competitive business world.

Objective: The objective of this paper is to in-depth review of the concepts of lean, agile and the emerging
approach of leagile decoupling point paradigm. For the stated purpose, a detailed literature review has been
conducted in this regard and different dimensions of the lean and agile supply chain have been discussed at
length. The main purpose of the research is to investigate the application and significance of the decoupling
point which is a relatively new concept in the dynamics of supply chain management. Business wants to
achieve the best possible utilization of the resources while maintaining optimum level of operation and
providing maximum level of satisfaction to the customers for survival in this competitive market place. This
review paper will explore the approach of leagile decoupling point to suggest the most suitable supply chain
practices, processes and procedures.

2. Literature Review

Manufacturing progress in the 80s (TQM, Lean management and JIT) helped many organisations improve
their manufacturing efficiency and reduce costs. However, competition in worldwide markets, demanding
customers, the need to deliver value, revolutionary advancements in technology are some of the aspects that
have led organisations world-wide to re-evaluate their operations. The need to be flexible and efficient while
minimising costs has resulted in the focus on all operations that impact on the flow and transformation of
manufactured goods. Management understands that running of material and service inputs from the supplier
base and the distribution of finished goods offer new challenges and opportunities. The primary aim is to
efficiently deliver higher value products with lesser input, hence in cost effective manner. The magic word is
“Lean”.

Leanness: A lean supply chain process has been rationalized to reduce and eliminate waste or non-value
added activities to the total supply chain flow and to the products moving within the supply chain, it is
destined to reduce surplus inventory in the supply chain. Compressing cycle time and increasing inventory
swiftness are the preferred results for lean supply chain management. The most common sources of wastes
are; over supply, transportation, inventory, waiting, movement, defective service or product and over
processing.

The sources of lean thinking can be found on the shop floors of Japanese manufacturers and, in particular,
innovations at Toyota Motor Corporation (Shingo, 1981; Monden, 1983). These innovations, resulting from a
shortage of resources and strong domestic competition in the Japanese market for automobiles, included the

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just-in-time (JIT) production system, which is in fact the spirit of lean and agile practices. Another important
aspect of Japanese production system is the respect for their employees and high levels of employee problem
solving. According to Monden (1983) the lean operations management design approach focused on the
elimination of waste and excess from the planned product flows at Toyota (the Toyota “seven wastes”) and
represented an alternative model to that of capital intensive mass production, with its large batch sizes,
dedicated assets and the hidden wastes.

Major part of the early work process at Toyota was under taken during the leadership of Taiichi Ohno in auto
engine manufacturing in the 1950s, then to vehicle assembly during 1960s, and finally it was applied to the
wider supply chain in period of 1970s. At the latter stage of application, the supplier manuals were produced
and the secrete tips of this lean approach were shared with companies outside Toyota for the first time. These
manuals were written in Japanese, and it took almost another ten years before the first literature translated
in English language was available (e.g. Shingo, 1981; Schonberger, 1982; Hall, 1983; Sandras, 1989). Still, the
interest taken in lean by the western manufacturers was limited until the performance gaps between Toyota
and other carmakers were highlighted by the book “The Machine that Changed the World”, which also
introduced the term “lean production” or “lean manufacturing” (Womack et al., 1990).

The purpose of a lean supply chain is to meet the 8R's which are right materials, right quantity, right time,
right place, right source, right service, right price and right quality, if these are taken in consideration
appropriately then we can reap the benefits of the leanness in best possible manner. The components of the
“Lean Supply Chain” are lean suppliers, lean procurement, lean manufacturing, lean warehousing, lean
logistics and lean customers. When the requirements and constraints of the marketplace are understood, only
then an enterprise can try to develop a strategy that will meet the needs of both the supply chain and the end
customer. The supply chain performance enhancement programs strive to match supply to demand and
consequently driving down costs concurrently with improving customer satisfaction. This requires
perpetually reducing uncertainty within the supply chain, as much as practicable to facilitate a more
predictable upstream demand (Mason- Jones et al., 1999).

At times, it is difficult to remove uncertainty from the supply chain because of the nature of the products
involved. For instance, if a commodity is highly fashionable and its innate nature of high value, its demand
will be unpredictable. Explicit supply chains are usually deal with the circumstances where they have to
tolerate uncertainty. They need to develop an effective strategy that facilitates them to match supply and
demand. Due to these reasons significant interest has been shown in recent years in the idea of lean
manufacturing (Womack, Jones & Roos, 1990), and the wider concepts of the ‘lean enterprise’ (Womack, &
Jones, 1996). In essence, the lean approach emphasize on the elimination of waste. The increased focus and
interest in lean manufacturing can be traced to the Toyota Production Systems (TPS) with it’s emphasize on
the reduction and elimination of waste (Ohno, 1988).

Agility: One of the biggest challenges to organizations today, is the need to respond to ever-increasing levels
of volatility in demand. When the demand is unstable and the customer requirement for variety is high, a
much higher level of agility is required. The concept of agility is defined as a business wide capability that
integrates organizational structures, information systems, logistics processes and specially, mindsets. An
important characteristic of an agile organization is flexibility and adaptability. The origins of agility as a
business concept relates to flexible manufacturing systems (FMS).To meet this challenge of volatility of
demand; the organization needs to focus its efforts upon achieving greater agility such that it can respond in
shorter periods both in terms of volume change and in terms of variety change. The concept of agility should
not be considered same as leanness.

In the beginning it was a popular belief that the way to manufacturing flexibility and adaptability was through
mechanization to smooth the progress of swift changeovers (i.e. reduced set-up times) and that is why enable
a greater responsiveness to changes in product mix production quantity. Later this idea of manufacturing
flexibility was extended into the wider business context (Nagel & Dove, 1991), and the concept of agility as an
organizational orientation was born. It is becoming increasingly evident that competitive advantage derives
from the combined capabilities of the network of linked organizations, are called ‘the supply chain’ in the
present business world. This concept of the business model is a fundamental shift from the traditionally held

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view of a business model based upon a single company. With the technological advancements and market
competition, it is becoming obvious that markets are increasingly volatile and that is why less predictable.
Therefore, the requirement for an extra agile response has grown. Integrating these two approaches directs
us to the conclusion that an agile supply chain is a pre requisite for success in present volatile markets.

Agile supply chains are, that utilize strategies aimed at being responsive and flexible to customer needs, while
the risks of supply shortages or disruptions are hedged by pooling inventory or other capacity resources.
These supply chains essentially have strategies in place that combine the strengths of “hedged” and
“responsive” supply chains. They are agile because they have the capability to be responsive to the shifting
diverse and unpredictable demands of customers on the front end, while minimizing the back-end risks of
supply disruptions.

Leagile: Leagile is the combination of the lean and agile paradigms within a complete supply chain strategy
by positioning the decoupling point at a particular desired point, so that it will best suit the need for
responding to an unpredictable demand of the markets downstream and at the same time making possible to
facilitate, level scheduling upstream from the marketplace (Naylor et al., 1997). The innovative use of
information technology in the field of supply chain, to share information data between buyers and suppliers
is, in fact creating a virtual supply chain. Virtual supply chains are information centered rather than inventory
focused. The creative approach of electronic data interchange (EDI) and the Internet have enabled partners in
the supply chain to act upon jointly on the same information data. In traditional supply chain inventory
management, orders are the only information firms’ exchange. But information technology now allows firms
to share demand and inventory data quickly and inexpensively. Using the internet to develop agile supply
chains with information sharing, coordination and postponement has enabled companies such as Xilinx and
Adaptec to compete successfully in their market places. The Challenges are great, but so are the
opportunities. The internet has enabled companies to tap into bigger supply base to ensure reliable supply of
the products so as to be responsive.

Discussion & Analysis: According to Lee (2002) demand and supply uncertainties can be used as a
framework to devise the right supply chain strategy. Innovative products with unpredictable demand and an
evolving supply process face major challenges. When product demand is unpredictable, pursuing a
responsive supply chain strategy is more appropriate than a cost effective strategy. While agility can make
the supply chain very responsive at the same time leagile is the most suitable strategy for the purpose.

Because of shorter and shorter product life cycles, the pressure for dynamically adjusting and adapting a
company’s supply chain strategy is increasing. In early 1995, A Compaq manager lamented in the trade press
that HP was light years ahead of competition, in its ability to deliver products quickly and at a low cost
(Cochaon & Fisher, 2000). Many success stories have resulted from collaborative efforts of manufacturing,
engineering, distribution and marketing organizations. In the following diagram, Hines et al. (2004) have very
appropriately elaborated the concept of leagile, as showing the importance of waste elimination and
customer satisfaction at the equilibrium for supply chain players. It is becoming more and more desired for
upstream and downstream supply chain members as vital for sustainability in the dynamic and competition
driven business world.

Figure 1

Source: Peter Hines et al. (2004), learning to evolve: A review of contemporary lean thinking.

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Leanness and agility are the two approaches, which must be integrated at all levels in the organizations. The
conceptual framework in this regard developed by Hines et al. (2004) exhibits that there are five principles
involved in lean thinking, which are lean procurement, lean production, lean operation, quality control and
lean distribution. These elements are essential for total quality management (TQM) approach and directly
related to continues improvement philosophy. The application of TQM at all echelon is the requirement of
continues improvement for leanness. For better inventory management practices, new emerging concept is
JIT (Just in time) inventory system, which can only work with zero fat (waste). It is only possible through the
lean practices of waste minimization and ultimately application of TQM practices.

Figure 2

Source: Peter Hines et al. (2004), learning to evolve A review of contemporary lean thinking.

According to Hines et al. (2004) at strategic level at one side five principles of lean thinking are important for
success, then on other side at operational level at action stage along with leanness, TQM, 6σ, ERP, the
responsiveness and agility is the key for success. As for agility, a precise, conscious and consistent effort is
required at the level of downstream supply chain players to be able to meet the volatile demand of the
customer and provide optimum service level. It is only possible through well-organized and integrated effort
from the whole supply chain players at different echelons. All these can be possible through leagile
philosophy by achieving and sustaining the most appropriate decoupling point in the supply chain
management.

Figure 3

Source: Towill et al. (2000) Lean, agile or leagile? Matching your supply chain to the marketplace

The decoupling point is the point in the material flow streams to which the customer’s order penetrates. At
this specific point, the order driven and the forecast driven actions and strategies connect. As a rule, the
decoupling point coincides with an important stock point subject to some addition or deletion, in control

291
terms a main stock point ± from which the customer has to be supplied (Hoekstra & Romme, 1992). The
decoupling point positioning is greatly relied upon the longest lead-time and customer is prepared to endure
it at the same time the variability in product demand dominates. Downstream from the decoupling point all
products are pulled and influenced by the customer, that’s why we called this feature as market driven trait of
decoupling point in supply chain. Upstream from the decoupling point the supply chain is primarily forecast
driven, which depends greatly upon the forecasting techniques used by the respective players in the supply
chain. In nutshell, it all greatly relies upon the close and efficient integration and the coordination of the
upstream and downstream activities of all stakeholders and the supply chain players.

Figure 4

In this contest, the concept is to hold inventory in some basic or prepackage form and only complete the final
packing or completion when the specific customer requirement is known, e.g. the customized PC (Christopher
and Towill, 2000). The concept of “postponement” is now increasingly widely employed by organizations in
different industries (Van Hoek, 1998). As shown in Figure by utilizing the idea of postponement, companies
may utilize lean methods up to the de-coupling point and agile methods beyond it. As we moves on the supply
chain the decoupling point is pushing towards come end customer and it all becomes demand driven activity.
Companies such as Hewlett-Packard have successfully employed such strategies to enable products to be
localized much closer in time to actual demand (Feitzinger & Lee, 1997). However, as Pagh and Cooper
(1998) have pointed out, satisfying customer demand may require particular combinations of postponed
manufacture and postponed logistics.

A parallel concept to the material de-coupling point described above is that of the information de-coupling
point (Jones & Towill, 1999). This represents the furthest point upstream to which information on actual
demand flows, i.e. this information is first hand and accurate at the same time it has not been distorted by
inventory policies such as re-order points and re-order quantities. The ability to base replenishment
decisions on real demand clearly contributes to supply chain agility (Christopher & Towill, 2001). According
to Benjaffar et al (2005), a production and inventory system can be treated as independent units when they
are decoupled through large stock holding at the manufacturing facility or at subsequent stages of the supply
chain. It may also be justified to do this when the inventory and production system belongs to different
entities or when transportation lead-time is much bigger than the manufacturing lead-time.

Recommendation: The dramatic performance improvements available by following lean, low waste
principles are well established in high volume, relatively low variety situations. Many companies desire to
achieve identical, or better, levels of performance and that is why companies are eager to adopt lean practices
in their supply chain. However, the formula of lean practices is applicable openly only to a small section of
producers. It is very much important that most organizations must carefully identify and evaluate that which

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lean practices they can implement and use on immediate basis, and which need to be adapted to meet their
special circumstances.

It is becoming increasingly apparent that competitive advantage derives from the combined capabilities of
the network of linked organizations that today we call “the supply chain”. It is a basic modification in the
traditional concept of a business framework based upon a single organization. It has also become evident that
markets today are increasingly unstable and less predictable. Therefore, the need for a more agile response
has grown during the supply chain management practices among businesses. According to Hallgren and
Olhager (2009) the result indicates that the lean and agile manufacturing differs in terms of drivers and
outcomes. The choice of a waste elimination and cost leadership strategy fully reconciles the impact of the
aggressive strength of industry as a driver of lean manufacturing, whereas, agile manufacturing is directly
affected by both internal and external drivers i.e. a differentiation strategy, as well as the competitive
intensity of industry.

Agile manufacturing is mostly negatively connected with a cost-leadership strategy, stressing the difference
between lean and agile manufacturing. The major differences in performance outcomes are related to cost
reduction, flexibility and adaptability to customer demand. The lean manufacturing has a significant impact
on cost performance, whereas agile manufacturing has not the same impact, and that agile manufacturing has
a stronger relationship with volume as well as product mix flexibility than does lean manufacturing. Finally as
an integral part, organizations should incorporate the technological advancements in communication
channels and flow of supply chain for cost reduction. In addition, through information technology now firms
can share demand and inventory data quickly and inexpensively. Using the internet to develop agile supply
chains with information sharing and coordination, efficiency can be enhanced and profitability increased.

3. Conclusion

Summing up the discussion, many diverse factors are needed for lean and agile practices success; not only is
it necessary to implement most of the technical tools but an organization’s culture needs transforming too.
Moreover, the modifications need to be implemented throughout an organization’s value chain. Leagile has
major strategic significance importance and edge, though its implementation procedure, HRM implications,
general approach to the supplier base coupled with the overall universal conviction of viewing leagile as a set
of approaches rather than embracing it as a philosophy.

The decoupling point is the point in the material flow streams to which the customer’s order penetrates. It is
here where order driven and the forecast driven activities meet. As a rule, the decoupling point coincides with
an important stock point ± in control terms a main stock point ± from which the customer has to be supplied
(Hoekstra & Romme, 1992). The positioning of the decoupling point therefore depends upon the longest lead-
time and making customer ready to endure the waiting period, at the same time at this point variability in
product demand dominates in the market place. Downstream from the decoupling point all produced
commodities are pulled by the customer, that is why, they are market driven. Upstream from the decoupling
point the supply chain is usually forecast driven.

Future Research: As the applicability and the effectiveness of the concept got established given the examples
of the first world industries, a future research can be done on the same level for the second and third world’s
economies by comparing with the results and implications of the concept for the first world through an
empirical study and conceptual model.

Acknowledgment: All praises for Allah (SWT) who is the most beneficent and most merciful, has granted
courage and ability to creatures for undertaking the tasks. “Believers! If you fear, Allah He will grant you a
criterion and will cleanse you of your sins and forgive you. Allah is Lord of abounding bounty” (Surat Al-Anfal
08 Al-Quran). Special thanks to Dr Taraq Waheed for carrying out professional editing of the research paper
for the author.

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