"Supply chains compete, not companies"

"Supply chains compete, not companies"

Keeping a Lid on Supply Chain Complexity

One of the biggest challenges facing business today is the growing complexity of their supply chains.

In its strictest sense, complexity does not mean complicated, but rather it describes a condition of inter-connectedness and inter-dependencies across a network where a change in one element can have an effect on other elements – often in unforeseen ways.

The problem with complexity is not only that it is a significant driver of cost within a supply chain but that it also contributes to variability and uncertainty.  Because so many of the interactions between agents and entities within a network can have a cumulative and combinatorial effect, it is not always possible to predict the impact of these interactions.

Complexity in a supply chain can arise from a number of sources and some of the most common causes are detailed below:

i. Network Complexity
The more nodes and links that exist in a network then clearly the more complex it becomes.  As a result of out-sourcing non-core activities many companies are today much more reliant on external suppliers of goods and services.  Those external suppliers also are dependent upon a web of second tier suppliers and so on.  There is a strong likelihood that the focal firm at the centre of the network will not even be aware of many of the second or third tier suppliers that feed their upstream supply chain.  The potential for unexpected disruptions to the supply chain is clearly heightened by these extended networks.

ii. Process Complexity
Underpinning every supply chain are innumerable processes – processes internal to the firm as well as those processes managed by upstream and downstream partners.  Often these processes have been developed in a haphazard way and have been added to and modified to reflect current requirements and as a result have become more complex.  This complexity is manifested in processes with multiple steps, often performed in series rather than in parallel.

iii. Range Complexity
Most business organisations find that the range of products and/or services that they offer to the market has a tendency to grow rather than reduce.  The rate of introduction of new products or services; new pack sizes or variants and brand extensions seems to outpace the rate at which existing products or services are eliminated.  The general effect of this mushrooming of the product/service portfolio is to extend the ‘long tail’ of the Pareto distribution.
Typically as more variants are added to a range the demand per variant will reduce with a subsequent impact on forecast accuracy.

iv. Product Complexity
The design of products can have a significant impact on supply chain complexity.  It can be argued that the supply chain begins on the drawing board in that decisions on the choice of materials and components can directly or indirectly impact total life cycle costs as well as agility and responsiveness.
Product complexity can arise because the number of components or sub-assemblies is high, or because there is little commonality across the Bills of Material for different products.  The less the commonality at the Bill of Material level the less is the flexibility to vary product mix or volume.

v. Customer Complexity
Customer complexity arises as a result of too many non-standard service options or customised solutions.  The costs of serving different customers can vary significantly.   Each customer will exhibit different characteristics in terms of their ordering patterns, e.g. frequency of orders, size of orders, delivery requirements and so on.  These differences will be increased further as a result of the availability of different service options or packages and/or customisation possibilities.
Even though from a sales and marketing perspective there may be advantages to be gained from offering a range of options to customers, these decisions must be tempered by a detailed knowledge of their cost and agility implications.  Ultimately the only complexity that can be justified is that complexity which delivers real value for which customers are prepared to pay.

vi. Supplier Complexity
The size of the supplier base can add to supply chain complexity by increasing the number of relationships that must be managed as well as increasing total transaction costs.  Because one of the pre-requisites for agility is a high level of collaborative working with key suppliers, this implies a high level of active supplier management and supplier involvement in process integration.  It is unlikely that this degree of closeness can be achieved across a diverse supplier base and hence the need for rationalisation

vii. Organisational complexity
Most businesses have traditionally organised around functions and departments and their organisation charts have many levels and tend to be hierarchical in their structure.  Such ‘vertical’ organisational arrangements are no doubt administratively convenient in that there can be a ‘division of labour’ between functions as well as effective budgetary control.  However, they tend to inhibit agility because they are, of necessity, inwardly looking with a focus on efficiency rather than customer facing with a focus on effectiveness.  A further problem is that over time the functions have a tendency to become ‘silos’ with their own agendas and they can lose sight of the fundamental purpose of the business, i.e. to win and keep profitable customers.

viii. Information Complexity
Today’s supply chains are underpinned by the exchange of information between all the entities and levels that comprise the complete end-to-end network.  The volume of data that flows in all directions is immense and not always accurate and can be prone to misinterpretation.  Visibility of actual demand and supply conditions can be obscured through the way that information is filtered and modified as it passes from one entity or level to another.  The so-called ‘Bullwhip’ effect is a manifestation of the way that demand signals can be considerably distorted as a result of multiple steps in the chain.  As a result of this distortion, the data that is used as input to planning and forecasting activities is flawed and hence forecast accuracy is reduced and more costs are incurred.

Coping with Complexity
It will be apparent that one of the most effective ways to improve agility and reduce cost in the supply chain is through complexity reduction.  However, it also needs to be recognised that it is possible to go too far in seeking to rationalise and simplify supply chain strategies.  It can be argued that it is through complexity that a firm differentiates itself from its competitors i.e. if everything we did was straightforward and simple then it would be easy for others to replicate.  The challenge is therefore to understand what is the requisite level of complexity that enables our supply chain to be distinctive and also to understand what is the role of complexity in value creation and delivery?  Ideally we should seek to offer only that level of complexity that customers value – and hence for which they would be prepared to pay.

Because complexity implies uncertainty, one powerful way to handle it is through creating a higher level of adaptability in the supply chain.  An adaptable supply chain is one that can change its structure in response to fundamental shifts in the business environment.  The emphasis in an adaptable supply chain is very much on flexibility and re-configuration.  In other words to cope with the volatility and turbulence that go hand-in-hand with complexity we need a much more fluid approach to supply chain design.