Supply Chain Complexity

Stephen DeAngelis

November 14, 2011

The Financial Times recently asked three commentators, including good friend, Lora Cecere, to answer the question: “Do complex supply chains make you too vulnerable?” [1 November 2011] The column begins by describing some of the supply chain disruptions that have occurred over the past year as a result of earthquakes, tsunamis, floods, etc. It then asks two more questions: “Do these cases suggest that complex supply chains are the wrong strategy? Should they be unwound and simplified?”

 

The first respondent offering answers to those questions was Bob Lutz, former vice-chairman of General Motors and author of Car Guys vs Bean Counters. He wrote:

“Managing a supply chain is like anything else in business: a careful blend of present state, analysis and that elusive ingredient called ‘gut feel’, aka, the ‘art’ rather than the ‘science’. Trying to optimize cost by buying far afield may look the best on paper (which is important to the ‘bean counters’). But what happens when ‘just in time’ is ‘just plain late’? When disruptions are caused by weather, dock strikes, natural disasters or costs swing the other way due to exchange rate changes? How about the time delay in discovering a batch of bad parts? Running your procurement purely on a short-term, point-in-time, cost-minimization model is like shopping for rock-bottom price home insurance: it looks real smart until your house burns down!”

Can we agree that, if Lutz answered the questions posed by the newspaper, his answers were shrouded in ambiguity? Here’s my best guess at what he was trying to say. Yes, complex supply chains can present challenges; however, lean, just-in-time supply chains can be brittle. A case in point about lean supply chains was published in the paper the same day as Lutz’ answer. The headline read: “Thai floods force Honda to cut US production.” [John Reed, Financial Times, 1 November 2011] Since we receive no definitive answer from Lutz beyond going with our gut, we look to the next respondent for answers. The next commentator, Bob Fischer, comes from academia. He is a professor of technology management at IMD. He wrote:

“Key strategic choices are all about execution and this typically means supply chain competitiveness. Think Benetton, Zara, Dell, Frito-Lay, Li & Fung. Nokia’s amazing run over 20-odd years was partly attributable to supply chain smarts, and Nespresso’s current success certainly is. Being able to quickly implement contingency plans through knowledge, trust and agility along a value chain is much more important than building-in ‘what if’ compromises to anticipate disruptions. Great supply chain performers such as Samsung, Hyundai and Rolex do this by supporting their value-chain partners rather than squeezing them.”

Apparently we are not going to get any straight answers to the questions regarding supply chain complexity. I’m a bit set back by the professor’s dismissal of “what if” planning. You can’t really make good contingency plans without some “what if” planning. That is how you gain the “knowledge, trust, and agility” that he thinks is so important. Although Fischer didn’t answer the questions about supply chain complexity, he did reiterate the importance of supply chain collaboration. Collaboration involves sharing essential information that makes supply chains more transparent. Visibility goes a long way towards making complex supply chains easier to unravel and manage. Lora Cecere, a partner at the Altimeter Group, was the final respondent. She wrote:

“Even when events such as the Japanese earthquake, floods in Thailand, and political unrest make headline news, the great supply chains shift and carry on. However, many others cannot because their tightly integrated systems do not allow supply chain managers to sense and drive an adaptive response. While many will cry that cataclysmic events and subsequent shortages are reasons to ‘near-source’ by shortening the chain, it is important to note that ‘shift happens’ in all parts of the world. The answer lies in better supply chain design and ‘what-if’ planning and suppliers who can sense and adapt to change. Resilience must also be part of the design.”

Finally a more direct response to the questions. You don’t have to read too closely between the lines of Lora’s short write-up to understand her answers. Do complex supply chains make you too vulnerable? Yes, but any supply chain is vulnerable to disruption. Do these cases suggest that complex supply chains are the wrong strategy? No, they suggest that supply chains need to be transparent and agile. Should they be unwound and simplified? Probably. I know that Lora believes that because she wrote a post entitled [“Untangling the Chains,” Supply Chain Shaman, 8 August 2011] In a post entitled Reducing Supply Chain Complexity, I discuss Lora’s thoughts as well as those of other supply chain analysts.

 

I found it interesting that folks at the Financial Times described complex supply chains as a strategy (i.e., “Do these cases suggest that complex supply chains are the wrong strategy?”). I can’t imagine a group of supply chain professionals sitting around a conference table insisting that they need to make their supply chains more complex as a matter of strategy. A corporate strategy may be to obtain parts from numerous global sources to make the finished product more acceptable in countries from which parts are drawn; but, in such a case, a marketing, rather than a supply chain, strategy is the driver. Complexity is the consequence of other decisions rather than being a deliberate strategy on its own. A quarter of a century ago, D.J. Bowersox and P.J. Daugherty identified three basic supply chain strategies. [“Emerging Patterns of Logistical Organization Journal of Business Logistics, 8 (1), 1987, 46-60] Daniel Dumke, writing about their study, states:

“Do supply chain strategies evolve over time? Are there the same strategic options nowadays compared to 20 years ago? Since at least the meaning of the term logistics has evolved during the last 20 years, especially due to the emergence of supply chain management, logistics and supply chain management are used interchangeable in this article. In 1987 Bowersox and Daugherty created a logistics strategy framework, concluding that there are basically three SC strategies:

  • Process Strategy — management of the traditional logistics activities with a primary goal of controlling costs.
  • Market Strategy — management of selected traditional logistics activities across business units with the goal of reducing complexity faced by customers.
  • Information Strategy — management as a system, with the goal of achieving inter-organizational coordination and collaboration through the channel.

[“Analysis of Logistics Strategies from 1990 to 2008,” Supply Chain Risk Management, 21 March 2011]

I found it very interesting that analysts were talking about information strategies and collaboration at the dawn of the PC era. The reason they were, of course, is that the cost of computing was starting to plummet. That same year that Bowersox and Daugherty published their study (1987) Al Fasoldt wrote:

“In less than 10 years, the retail price of a 64-kilobyte Atari 8-bit computer and its peripherals has fallen from $4,000 to $250. Computers that are no longer being made offer even more dramatic comparisons; some that cost many thousands of dollars a few years ago are now being sold for a few hundred dollars.” [“Flashback: Computer pricing, 1987,” Technofile]

At the time, Fasoldt mused that a decade later (i.e., in 1997) a computer would cost around $25. He would probably have been correct had people been making 64-kilobyte 8-bit computers. The point is, supply chain collaboration and visibility were perceived as a good thing to achieve even 25 years ago. Why? The answer is: Because supply chain professionals understood that supply chains were going to become increasingly complex and they knew they would need help dealing with that complexity. I don’t think many (if any) companies use one of Bowersox’s and Daugherty’s strategies exclusively. Every company I know uses a combination of those strategies. That is where the “art” comes in that Lutz wrote about. Dumke continues:

“Building on this framework [M.A.] McGinnis, [J.W.] Kohn, and [J.E.] Spillan executed and analyzed four surveys from the years 1990, 1994, 1999, 2008 with the above mentioned research questions in mind. [“A Longitudinal Study of Logistics Strategy: 1990-2008 Journal of Business Logistics, 31 (1), 2010, 217-235] The following hypothesis were designed:

  • Importance of Bowersox framework remained constant
  • Dependent variables (statistical data on the survey participants like: logistics coordination effectiveness, customer service commitment and competitiveness) remained constant
  • Within a logistics strategy, process strategy, market strategy, and information strategy will be of equal importance.

“First, the results show, that the dependent variables and the perception of the strategies did not change too much to make a comparison between the studies impossible. To analyze the results further the authors clustered the respondents into three strategy clusters (intense, intermediate and passive cluster), depending on their propensity for the mentioned strategies. Here is what they found:

  • Intense Logistics Strategy increased — That means that either the importance of logistics strategy in U.S. manufacturing firms increased in importance or the firms were more intensely managed overall, including logistics.
  • Relative Importance — Process strategy (cost control) is generally more important than market strategy (reducing complexity faced by customers), and that both are more important than information strategy (inter-organizational cooperation and collaboration).

Frankly, I found those results a bit surprising. Based on comments from analysts like Bob Ferrari, perhaps I shouldn’t be surprised. In a number of posts, Ferrari has decried the fact that executives look at the supply chain as the best place to cut costs. Those efforts, he insists, have left supply chains more brittle than they should be. The fact that the information strategy was the bottom of the heap explains why so many companies still don’t have very good supply chain transparency. As I concluded in my post mentioned above, “The bottom line is while are some things that can be done to reduce supply chain complexity, like shortening supply lines and segmenting supply chains; however, the biggest gains are going to be made from increasing supply chain understanding rather than reducing supply chain complexity. Good decision tools can make decision choices easier to understand in a complex world by helping make sense of the complexity itself.”