Supply chain futures: the mastery of complexity

An academic perspective on the evolving supply chain models best suited to compete in an unpredictable world. By Philip Greening

The tremendous turbulence experienced in financial and commercial markets over the last year has rocked the businesses world. Recessionary conditions have greatly increased the risks of financial failure amongst trading partners and introduced significant levels of vulnerability into finely tuned supply chains. Once seemingly stable supply chain structures are no longer sufficiently robust to provide continuity and surety of supply.

Under these strained circumstances the interdependency of supply chains has been thrown into stark relief. Disruptions in supply are amplified across entire business communities, greatly increasing both supply chain and corporate vulnerability. It will be businesses ability to interpret this changing landscape and to move with speed across it that will ensure their survival.

Such dramatic changes to the global business environment have highlighted the inadequacies of current supply chain practices and thinking. The academic world has applied itself to questioning the traditional, linear approach taken by most businesses towards supply chains and is actively looking for alternative approaches. A number of institutions, including the UKs Cranfield University School of Management, are already postulating theories that embrace uncertainty and complexity, viewing the supply chain as a more unpredictable, emergent and self-organising complex adaptive system.

At Cranfield we have been paying close attention to the way businesses interact with each other - with suppliers, customers and competitors - and the influences that adjacent supply chains have on one another, exemplified last year by the collapse of Woolworths and its impact not only on trading partners such as music retailer Zavvi but also on the wider community. Competing companies frequently share suppliers and customers, so changes in the business landscape can have a profound effect on the commercial performance and ultimate success of an enterprise.

Theoretical research work is underway, exploring these complex systems. The influences and parameters that apply to a supply chain are in a constant state of flux as players learn, change their behaviour and make autonomous decisions according to the way in which situations develop and businesses evolve in relation to one another. Advanced computer modelling techniques are being used to simulate these worlds in an attempt to re-create and predict the complex interactions between these autonomous entities. The results of this research are starting to change the way academics view the supply chain and the way in which it should be structured and managed.

One vital element is the way in which managers make decisions across a community of supply chains. Results indicate that managers who make faster decisions are able to work on lower inventory levels. The challenge is how to make fast decisions across a complex, perhaps multi-channel, supply chain. Strategic choices may arise: should consumer distribution be merged with store fulfilment? What does that mean from an operational perspective? How do I trade off efficiency versus inventory?

Traditionally, technology has focused on forecast accuracy and sophisticated planning applications. It appears, however, that such rigid tools may serve only to confound management, constrain flexibility and restrict the potential for growth. As most forecasts are based on past patterns of demand, what purpose do they serve in a highly volatile and unpredictable future? These tools may well be of use in relatively stable and calm market conditions, but the current business environment is neither of these things. In this new turbulent commercial climate companies are liable to be ensnared by the competency trap, in which they are tempted to focus down on traditional processes, procedures and models in an attempt to improve efficiency without seeing the bigger picture or the competitive advantages that come from speed and agility.

Current thinking is starting to shift to strategies built around adaptability, agility and reacting swiftly to unpredictable events. Under these circumstances strategy becomes highly dependent on sensing and reporting throughout the enterprise, making event management, i.e. the process of reacting to unexpected changes, a core competitive capability. This change in mind-set does not necessarily mean that there is no value to forecasts and planning, but in uncertain times agility and mobility are at the top of the list for retaining a competitive edge.

To achieve this, systems and structures are required that are attuned to sensing and reporting in near-real-time throughout the supply chain, including at least the top two levels of suppliers. Metrics about manufacturing capacity, inventory holdings and transport availability on a global basis are prerequisites. Success will be defined by a companys ability to process such information fast, which will in turn be highly dependent upon the information systems deployed to the task. The problem for many companies is that their existing IT infrastructure is more aligned to old linear, deterministic and rigid processes rather than the requirements of a complex and fast changing world.

Agile businesses will be seeking collaborative trading technologies that foster an environment of supply chain information sharing between trading partners. Such technologies include:

• supply chain event management tools that enable decision-makers to identify potential failures before they happen;
• supply chain intelligence solutions that enable companies to track supply chain performance in real-time so they can act on new information quickly to maximise efficiency or to exploit an emerging opportunity;
• distributed order management technologies that allow companies to monitor and manage products as they move along the various stages of the chain - in inventory, as it is ordered, in production or while it is being shipped - so that companies can aggregate and prioritise orders to meet the needs of important customers or re-route in-transit inventory based on where it is needed most.

Academic attention is also turning to the brittleness inherent in so many supply chains, the result of a widely held quest for simplification of the chain and where an overemphasis has been placed on efficiency, thereby sacrificing flexibility, mobility and resilience. Unfortunately, as supply chains have stretched across the globe and the number of suppliers has been reduced to simplify the process, inventory has been concentrated into fewer nodes with fewer connections. But with this slimming of the supply base, dependency on just a few key suppliers has increased the risks dramatically, a situation that has become all too apparent over recent months as suppliers succumb to financial pressure and poor credit availability. An ossification of the supply chain has occurred which has left it brittle and susceptible to failure.

Another side to the theory of agility and adaptability is that of diversity. A diverse business structure can mitigate risk and allow for the exploitation of successful lines of business activity and the scaling back of less successful ones in accordance with the ebbs and flows of market demand. UK based global retailer Tesco is an example of a business that has embedded diversity into its business model, a key strategy in a complex world and one completely at odds with the traditional focused approach that says lets stick to what we do and focus on doing it a little better.

By building in diversity and having the information systems that allow you to sense what is going on deep within the supply chain you can move much more quickly across the changing landscape. CEOs should be asking themselves a number of key questions: How locked in are we to existing strategy? Are we in a competency trap and if so, how do we get out of it? Do we have diversity in the business and if not, how do we build it into the business? Do I have the information systems necessary to sense what is happening in the supply chain and industry sector community, the capability to process that information quickly and the ability to react accordingly?

Research indicates that the future is unlikely to follow the orderly pattern of the past, but this opens up new opportunities for realising competitive advantage. By investing in the technology to gather, understand, and react to events across the whole extended supply chain as they co-evolve with their partners businesses can embrace and master complexity. Those companies that can succeed in this will be the winners.

Biography: Phil Greening is the Solutions Architect for Manhattan Associates, based in the UK. In this role, he draws on both his academic role and considerable experience as a supply chain/logistics/distribution consultant. In recent years he has combined his role as Solutions Architect with that of a Doctoral Researcher at Cranfield University