Complexity in Supply Chains
Prof. Jaume Ribera
Professor, IESE Business School
Port of Barcelona Chair of Logistics, CEIBS
1
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
2
3
Performance measurement - The SCOR Model
(Level 1)
•
Supply Chain Reliability
–
–
–
–
•
On time delivery
Order fulfillment lead time
Fill rate
Perfect Order Fulfillment
Percentage
Days
Percentage
Percentage
Flexibility and Responsiveness
– Supply Chain Response Time
– Upside production flexibility
•
Days
Days
Expenses
– Supply Chain Management Costs
– Warranty Cost / Revenue
– Value added per employee
•
Percentage
Percentage
Euros/RMB
Assets / utilization
– Total inventory days of supply
– Cash-to-Cash Cycle time
– Net Asset turns
Days
Days
Turns
4
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
5
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, …)
….
6
Characteristics of complexity
Numerousness
Variability
Variety
Diversity
Interdependency
Uncertainty
Filiz Isik, Complexity in Supply Chains
7
Drivers of Supply Chain Complexity
Configuration and
Structure
• 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
8
Steps in Complexity management
9
Impact of complexity reduction
Effectiveness
(customer related
performance)
Complexity
reduction
levers
Complexity
management
levers
Efficiency (cost
related performance)
10
An example of complexity: bullwhip
11
Understanding bullwhip: the beer game
Retailer
Wholesaler
Send order day D
Distributor
Factory
Order received day D+1
Supplier
Customer
Available day D+3
Shipment day D+1
12
Orders
70
60
50
40
Retailer
Wholesaler
Distributor
30
Factory
Demand
20
10
0
0
5
10
15
20
25
-10
13
30
35
40
How to make the best decision
1.- Surprise demand !!
Period
D-2
D-1
D
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
14
D+1
D+2
D+3
How to make the best decision
2.- Forecast future periods (no forecasting
error)
Period
D-2
D-1
D
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
15
D+1
D+2
D+3
5
5
5
How to make the best decision
3.- Fill expected evolution
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
Shipment
4
4
5
5
5
Final Inventory
8
8
7
6
5
Order
4
4
16
5
How to make the best decision
4.- Determine desired final safety
inventory
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
Shipment
4
4
5
5
5
Final Inventory
8
8
7
6
5
Order
4
4
17
5
10
How to make the best decision
5.- Complete the table and determine
order now
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
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
f i  f i 1   ( xi 1  f i 1 )  xi 1  (1   ) f i 1
with  = 0.25
Forecast
Real
4.00
4
4.00
4
19
4.00
4
4.00
5
4.25
??
 = 0.25
Orders
35
30
Complexity
behaviour
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Customer
Retailer
Wholesaler
Distributor
Factory
Quantity
20
15
10
5
0
0
5
10
15
20
25
Periods
20
30
35
40
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
Manage
Analyze
Measure
Observe
Describe
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Improve
Control