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Supply Chain Complexity – Dealing with a Dynamic System

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Supply Chain Complexity – Dealing with a Dynamic System MANAGEMENT Supply Chain Complexity – Dealing with a Dynamic System By Zohar Yami, Golan Meltser and Rotem Greener Examining how to prevent, reduce and manage the increasing degree of complexity in supply chain What is our first reaction when we hear about An intricately structured and variable supply chain complexity? If we are honest, the system term often conjures up negative connotations Highly sensitive in its adjustment to and our gut feeling is that this is something to the initial conditions or to even minor be avoided or neutralized where possible. But changes, creating a vast number of what is really behind the mask? development possibilities A large collection of interacting In order to understand what supply chain components complexity means, let us first examine the Difficult to understand or examine due to word “complexity”. its design and/or operations A system in process, changing and Complexity describes a system of multiple developing over time parts, interconnected in a non-linear style. In non-formal terms, complexity is: 18 Tefen Tribune | Spring Issue, 2010 MANAGEMENT Supply chain complexity is therefore a system with a broad range of variations. A typical example would be a globally operating corpo- ration with multiple production sites, all of which are in contact with numerous distribution centers worldwide, supplying thousands of end points. In an attempt to further examine this dynamic form of business, PRTM launched the 2006 Supply Chain Complexity Study in conjunction with the Supply Chain Council and the MIT Supply Chain Strategy newsletter. The objective of this study was to help companies understand the impact that supply chain complexity has across their supply chains, and to illustrate the measures taken by leading firms to gain an enhanced operational edge in their industries. The study revealed that roughly 80 percent of the participating companies believed their supply chains to be highly complex. In addition, almost 60 percent of the participants also thought that their supply chains had a high infrastructure cost basis. Product/Service Proliferation as Top Complexity Driver However, there is a significant gap between The study highlights the impact of product and the complexity management practices that service proliferation across the supply chain companies perceive to be important and their as perceived by the participants, regardless ability to identify and track effective metrics for of industry or size. Almost 40 percent of all those practices. Less than 60 percent of the participants identified the number of products participants currently track the performance and services provided as either their top or of those complexity management practices second most significant complexity driver. which they consider to be important. Participants confirmed that the ability to To help us understand the subject and the understand, measure and manage supply options for handling it, we can differentiate chain complexity drivers is important as it between three main aspects of complexity: helps them achieve: Operational complexity Cost savings Logical complexity Improved on-time delivery Administrative complexity Reduced inventory and work in process Quality This article will focus on the first two aspects. Tefen Tribune | Spring Issue, 2010 19 MANAGEMENT Operational Complexity One way of dealing with unpredictability is to Over the last decade, corporate procurement increase direct control of the value chain. Over has changed significantly. In the past, companies the past decade, corporate mergers and commonly used decentralized procurement, with acquisitions have become a popular choice for each division/factory handling the matter on an this reason. However, the drawback is that this independent and local basis. only serves to increase supply chain complexity still further, as we see the local character of The next and more advanced step was to create business giving way to a global identity. a specialized procurement department for the entire organization. Although this increased As a result of this globalization trend, single- complexity, there is no doubt that this generated factory manufacturers have suddenly been faced significant added value and countless benefits, with the management of several production sites including specialization at an organizational/ simultaneously, some of which are overseas. The group level; a broad system-wide view, with specialization of production centers; a need for enhanced transparency and control; quantity customer/supplier proximity in order to minimize discounts; process standardization and a transport and distribution costs; risk manage- reduction of internal costs. ment and disaster recovery plans are only some of the issues presented by this new level of Another factor which has contributed to pro- complexity. Supply chains are flooded with a curement complexity is the borderless global host of new challenges and a multitude of economy, expressed in a multitude of factors: opportunities, including the logistic complexity of inter-site transport; reduced flexibility in the Diverse logistics with numerous trans- event of production line failures; planning process portation options (sea, land and air), complexities and capacity balancing headaches, requiring that organizations make daily in order to increase Overall Equipment Effective- decisions to remain competitive. ness on the one hand while still minimizing Unpredictable influences on supply logistics costs on the other; making decisions times, such as port strikes, natural on what to manufacture, where to manufacture disasters, etc., forcing businesses to it, and where to source raw materials; not to increase their level of safety stock to mention overall management and control of maintain the level of service. inventories and processes. Although opening up Navigation of foreign regulations and the global market creates a welcome increase legal restrictions in opportunities, corporations are also now The need for professional cultural and suffering from the decision-making battle, which linguistic specialization in order to benefit goes along with the benefits. from the opportunities offered by the global economy. Another reason for operational complexity is the way in which we manufacture our products. There are four main stages in the product life cycle that increase the number of product Over the last decade, corporate procurement has changed significantly. In the past, companies commonly used decentralized procurement, with each division/factory handling the matter on an independent and local basis. 20 Tefen Tribune | Spring Issue, 2010 MANAGEMENT components, thereby directly affecting supply Today, the mobile phone market is one of the chain complexity: functions, features and most active and fast growing sectors in the attributes, size, and packaging. At each stage world. Producers need to keep pace with the of the process, the number of components speed of technology – leading to more fea- increases in line with the order of magnitude. tures and attributes – while still fulfilling the demand for visual aspects (design, size, color), In recent years, customers have become more new trends and differentiation to boost social sophisticated and focused in their demands. status. As the number of devices booms, in an Companies are now under pressure to satisfy attempt to appeal to different markets with their this changing trend through differentiated individual cultures and tastes, the complexity products, designed for narrower segments. of the supply chain has also risen. As if opera- One example of this has been the mobile phone tional complexity was not enough, increased industry. In the early nineties, when these regulatory requirements have also created new devices were used as a primary means of constraints. The effects of these on the supply communication, the number of these products chain can be seen in higher inventory levels (raw on the market and the diversity of functions materials and finished product), which directly were relatively low. influences chain costs (financing, handling, Tefen Tribune | Spring Issue, 2010 21 MANAGEMENT management, storage), planning process com- chains. There is an ongoing need to filter and plexities (build to stock vs. build to order, loss of process data into information in order to satisfy efficiency due to switching between products), as the demand for quick decisions and fast re- well as location and display costs in stores. sponse times and to feed the appetite for multi- disciplinary knowledge. The unceasing search Information Complexity for more information forces companies to protect As technology advances (internet, social net- their knowledge databases, leading once again works), we are exposed to a greater volume of to even greater complexity. data, which needs to be constantly filtered and processed in order to derive useful information Incorrect or incomplete information can also lead to amplification in demand, more commonly However, in our rapidly changing world, this known as the Bullwhip Effect, a phenomenon information is sometimes only valid for a limited in which we see the demand grow as we move time, as in the case of prices, currency exchange up the supply chain, due to changes in rates, weather conditions, etc. The reliability of end-customer consumption. data may also suffer due to disinformation or manipulation by the information/data provider. This phenomenon has many implications for When our information is obtained
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