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Complexity in Supply Chains

Prof. Jaume Ribera

Professor, IESE Business SchoolPort of Barcelona Chair of Logistics, CEIBS

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Supply Chain Complexity

"If you are in Supply Chain Management today, then complexity is a cancer you have to fight. Process management is the weapon. Understand that Supply Chain Management is too important to be simply a function. It is everybody's job.“

Tom Blackstock, Vice President Supply Chain Operations Coca-Cola North America

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Performance measurement - The SCOR Model (Level 1)

• Supply Chain Reliability– On time delivery Percentage– Order fulfillment lead time Days– Fill rate Percentage– Perfect Order Fulfillment Percentage

• Flexibility and Responsiveness– Supply Chain Response Time Days– Upside production flexibility Days

• Expenses– Supply Chain Management Costs Percentage– Warranty Cost / Revenue Percentage– Value added per employee Euros/RMB

• Assets / utilization– Total inventory days of supply Days– Cash-to-Cash Cycle time Days– Net Asset turns Turns

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Complexity• Complexity is simply destroying the

profitability at many companies, and executives often can’t see what the true cause is.

• More suppliers, more parts, more forecasting, more customers to ship to, more returns to manage, etc.

• Our accounting systems lack the ability to well capture the true cost of this complexity, keeping it hidden.

• One major reason for increasing complexity is that companies do not do a realistic cost/benefit analysis on adding complexity.

“Complexity Factor” (CF) index. CF = # of suppliers

* # of customers * # of employees * # of SKUs * # of markets * # of SC locations * # of countries

/total company revenue

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Elements of complexity• Network complexity (nodes, links, tiers, distance, potential for unexpected

disruptions, …)• Process complexity (process steps, ownership, darwinian evolution, …)• Variety complexity (natural tendency to grow, impact on forecasting accuracy, …)• Product complexity (number of products, components, interactions, novelty,

technology, no commonality in BOM, …)• Customer complexity (customization demands, ordering patterns, frequency, size,

delivery requirements, …)• Supplier complexity (number of relationships, level of cooperative work, …)• Organizational complexity (silo organizations, not sharing info, tendency to create

intricacy, …)• Information complexity (tendency to opacity, systems not talking to each other, info

filtering, …)• ….

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Characteristics of complexity

Numerousness Variability

Interdependency

Diversity Variety

UncertaintyFiliz Isik, Complexity in Supply Chains

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Drivers of Supply Chain ComplexityConfiguration andStructure

• Number of suppliers• Number of manufacturing locations• Number of distribution channels

• Number of distribution centers• Number of ship-to locations• Number of customers

Products and Services

• Number of products/services• Number of direct materials

• Number of shipments• Number of orders

Processes and Systems

• Supply chain processes and practices• Supply chain organization

• Manufacturing strategy• Number of legacy information systems

Deriving Benefit From Supply Chain Complexity, Vickers & Kodarin, 2006

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Steps in Complexity management

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Impact of complexity reductionEffectiveness(customer related performance)

Efficiency (cost related performance)

Complexity

reduction

levers

Complexitymanagementlevers

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An example of complexity: bullwhip

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Understanding bullwhip: the beer game

Send order day D Order received day D+1

Shipment day D+1Available day D+3

SupplierCustomer

Retailer Wholesaler Distributor Factory

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Orders

-10

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40

Retailer

Wholesaler

Distributor

Factory

Demand

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Period D-2 D-1 D D+1 D+2 D+3

Initial Inventory 8 8 8

Receptions 4 4 4

Available Inventory 12 12 12

Demand 4 4 5

Shipment 4 4 5

Final Inventory 8 8 7

Order 4 4

How to make the best decision

1.- Surprise demand !!

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How to make the best decision2.- Forecast future periods (no forecasting

error)

Period D-2 D-1 D D+1 D+2 D+3

Initial Inventory 8 8 8

Receptions 4 4 4

Available Inventory 12 12 12

Demand 4 4 5 5 5 5

Shipment 4 4 5

Final Inventory 8 8 7

Order 4 4

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How to make the best decision

3.- Fill expected evolutionPeriod D-2 D-1 D D+1 D+2 D+3

Initial Inventory 8 8 8 7 6 5

Receptions 4 4 4 4 4

Available Inventory 12 12 12 11 10

Demand 4 4 5 5 5 5

Shipment 4 4 5 5 5

Final Inventory 8 8 7 6 5

Order 4 4

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Period D-2 D-1 D D+1 D+2 D+3

Initial Inventory 8 8 8 7 6 5

Receptions 4 4 4 4 4

Available Inventory 12 12 12 11 10

Demand 4 4 5 5 5 5

Shipment 4 4 5 5 5

Final Inventory 8 8 7 6 5 10

Order 4 4

How to make the best decision

4.- Determine desired final safety inventory

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Period D-2 D-1 D D+1 D+2 D+3

Initial Inventory 8 8 8 7 6 5

Receptions 4 4 4 4 4 10

Available Inventory 12 12 12 11 10 15

Demand 4 4 5 5 5 5

Shipment 4 4 5 5 5 5

Final Inventory 8 8 7 6 5 10

Order 4 4 10

How to make the best decision5.- Complete the table and determine

order now

So, the retailer gets a demand of 4, 4, 4, 5 and passes orders for 4, 4, 4, 10. What will happen to the wholesaler?

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Computer modeling

Exponential smoothing

11111 )1()( iiiiii fxfxff with = 0.25

Forecast 4.00 4.00 4.00 4.00 ??Real 4 4 4 5

4.25

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Orders

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35 40

Periods

Qu

anti

ty

Customer

Retailer

Wholesaler

Distributor

Factory

= 0.25

Complexity behaviour

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The Barilla case

Final customer pasta consumption

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Barilla - JITD

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Conclusions

• Competition occurs at the level of supply chains• Complexity is increasing in supply chains• There are many types of complexity. They all factor into an overall system

complexity• There are two approaches to deal with complexity:

– Reduce complexity– Learn to how to handle it

• To improve it, there are some intermediate working stages

ObserveDescribe

MeasureAnalyze

ManageImprove

Control