Supply Chain Complexity: Challenges and Opportunities

Stephen DeAngelis

June 25, 2012

“Are these the most complex and challenging supply chain times ever,” asks Dan Gilmore, editor-in-chief of Supply Chain Digest. [“The Most Challenging Supply Chain Times Ever?” 24 May 2012] With supply chains being stretched across the globe and the clock speed of businesses spinning at an ever increasing rate, I’m surprised the question even has to be asked. Gilmore, however, is apparently not alone in wondering whether supply chain complexity increases the challenges businesses face. He indicates that he asked himself that question “after reading a recent blog post from one of the analysts at IDC Manufacturing Insights, who said that there is at least anecdotal evidence that this was the case.” To follow-up on that topic, Gilmore interviewed another IDC analyst, Kimberly Knickle. Gilmore writes:

“She said that because the level of globalization continues to rise, this almost by definition makes the supply chain more challenging and complex each year, among other factors. Now, there is a natural tendency to think we are living in the most challenging times for everything, supply chain or not, so we have to recognize that internal bias when discussing this question. Nevertheless, it does objectively seem to me that our supply chains really do grow more complex every year. Why? As Knickle said, the fact that almost every company is getting more global, not less so, is a key factor, but far from the only one. For example, companies are trying to optimize supply chain performance while at the same time increasing their focus on risk management year over year. This adds complexity, with risk a new dimension that clearly is growing in importance. I sometimes wonder if this [is] a new supply chain trade-off curve: cost versus risk?”

I think that most analysts agree that there are costs associated with supply chain risk management; but, they also agree that there are even greater costs associated with ignoring supply chain risks. Hence, Gilmore’s musing that a cost versus risk trade-off curve needs to be explored is probably a good idea. He continues:

“As I started to write this, the back of my brain was thinking ‘We need a way to measure supply chain complexity.’ Then I remembered that several years ago, former Huffy bicycle president turned consultant and author John Mariotti, in his excellent book ‘The Complexity Crisis,’ had suggested one approach an individual company might use to gauge its own level of supply chain complexity. Mariotti said a company’s Complexity Factor (CF) might be calculated as follows:

CF = # of SKUs * # of Markets Served * # of Legal Entities in the Company * # of Facilities * (# of Suppliers + # of Customers)/Divided by Sales Revenue

“Mariotti noted this might have to be changed for different types of businesses, and that it was only a rough calculation, but that it was certainly a reasonable place to start.”

Although such a rough calculation would provide a reasonable way to compare complexity between companies, you don’t really need a mathematical formula to know that a company with thousands of suppliers offering hundreds of products to millions of customers requires a very complex supply chain. The challenge is not recognizing that complexity exists but how to deal sensibly with it. Gilmore continues:

“At a high level there are two schools of thought on complexity: (1) that it must be ruthlessly rooted out, as Mariotti argues, else the company is doomed to underperform; (2) companies need to learn to ‘master complexity,’ since it is here to stay, and use the superior ability to do so to gain advantage over competitors less able to gain such control. In fact, a notable report from Deloitte a few years ago called top performing companies ‘complexity masters,’ which it said was comprised of just 7% of firms and which enjoyed outsized financial performance.”

I agree with Gilmore when he writes, “I suppose as usual the right path is a strong mix of both.” Although I suspect that the best strategy will lean more heavily on mastering complexity than trying to eliminate it. Gilmore continues:

“Where to draw the line? That is the real question. Do any companies formally consider this balance between mastering complexity and reducing it? None that I know. And recall that a bit more than a year after it took thousands of SKUs off its store shelves to reduce its own supply chain complexity, Walmart restocked them all and then some in 2011 (more than 8500 SKUs in total) , promoted with ‘It’s Back!’ signs throughout the store. So I think it would be interesting to develop some measure for both the supply chain as a whole (macro view) and at an individual company level (micro view) of the level of complexity. The former would probably only be really useful for analysts and various other pundits, but might be interesting to note each year. But the latter, if done well, might be beneficial for companies to analyze their own supply chains, as Mariotti suggested. I also believe the right approach would be an index, not a raw score. In other words, you would pick some point as the baseline year – maybe the current year if just starting. So then if a company added SKUs this year, that would push the complexity score up. If it consolidated distribution centers, that would bring the complexity score down versus the baseline year, so you could track progress up or down. Similar to what Mariotti proposed, maybe just a little more sophisticated. I will work on it.”

To sum up his thoughts, Gilmore writes, “We must seek to master the inherent complexity that the macro world throws on us, and do so in part by reducing our internal complexity wherever possible.” Getting back to his original question — Are these the most complex and challenging supply chain times ever? — Gilmore concludes:

“I do believe this is the most challenging year in supply chain history – and that next year is likely to be worse still. It really is getting harder. We need some way to quantify that a bit. Will we ever reach a peak point? Not sure on that. What I do know – and which we often don’t want to admit – is that with the pain of rising complexity and other challenges comes greater importance and visibility for supply chain as a whole and for individual performance. A lot more executives care about transportation management today with rising fuel costs and concern about CO2 emissions than they did a decade ago, as just an easy example. Complexity must be eradicated. Long live complexity.”

Steve Brooke, Chief Technology Officer at CombineNet, agrees with Gilmore that the supply chain is getting more complex. He rhetorically asks, “When did the supply chain become so complex?” [“Complexity in the Supply Chain, And the Opportunities Therein,” SupplyChainBrain, 2 April 2012] At least for procurement, Brooke looks back at least 20 years for an answer. He writes:

“The global economy’s major shift from plant-based sourcing to global corporate-wide sourcing, starting in the 1990s, has created a new demand for expressive bidding, in which a more comprehensive conversation takes place between buyer and supplier. Today, bid collection often requires a new level of flexibility, complex cost models and robust bid analysis. Similarly, the spends we’re considering involve event sizes and scale heretofore unprecedented. The complications of a weak economy and its resulting supply chain risks create additional challenges. Supply chain professionals who will win in this race must navigate this increasing complexity, while keeping mindful of their strategic goals.”

What are those strategic goals? Brooke notes that the obvious ones are maximizing revenue and decreasing costs. He writes:

“Supply chain is critical to these general strategies because it can decrease risk while also decreasing costs. … Suppliers can and should be more creative in meeting the needs of procurement teams, and once buyers and suppliers have a window into the creative thinking that can make the difference between a good supply chain and a great one, they can usually find places for improvement.”

Brooke notes that there is no single strategy that works for all companies or industry sectors. “Some sectors of the supplier community,” he writes, “are not as creative as others – these sectors may represent an area where a strategy toward fewer suppliers makes the most sense.” He continues:

“In this way, buyers can reward suppliers that are presenting innovative ways to meet the procurement teams’ needs, whether through creative cost-savings measures on the manufacturing side, conditional offers or innovations in risk management. The buyer must be careful to keep the supplier base diversified, however, to minimize risk. Companies may need to expand their supply base in response to growth, risk management measures or a variety of new corporate policies. It’s important to be able to track the costs of such changes. … Whether expanding or reducing, measuring the costs of each potential change is crucial.”

I believe that both Gilmore and Brookes would agree that complexity requires a certain amount of technology to achieve the visibility required to address the challenges supply chains face. Brookes, however, believes that convincing some executives to invest in such technologies could be a challenge because “most companies look for quick return on investment.” As a result, he suggests that procurement teams look for technologies that can provide quick wins and a measureable ROI. “With an immediate success story to point to,” he writes, “procurement teams find they can convince internal leadership that technology is worth the effort.” He continues:

“Supply chain technology has come a long way. On the procurement and sourcing side, for example, it was only recently that the buyer would simply write the rules and then solicit offers from suppliers. This approach worked but had a major flaw in that it ignored suppliers’ alternative capabilities – or left suppliers unable to bid because of constraints that couldn’t be communicated. Today expressive bidding and analytics have allowed for a more robust and collaborative RFP process, one that can produce answers in minutes – sometimes seconds – regarding not just buy-side business rules but also those from the supply side, such as conditional offers, alternative item specifications and discount schedules. These supplier-driven scenarios can give buyers a window into significant cost and risk reductions, while allowing suppliers to compete on their strengths.”

Brookes believes that an “advanced sourcing analytics solution” can be leveraged to ensure that “procurement teams are realizing faster, better decision making.” One of the key benefits of a good analytics solution is to allow decision makers to act inside the industry’s standard decision window. Brookes concludes:

“What may be most interesting about the changes today is that the technology used for the increasing complexity is equally effective for a non-complex spend – and with increased adoption it’s become more accessible. Usually available as a web-based or Software as a Service (SaaS) solution, e-sourcing products with expressive bidding can be used by procurement teams to get more value out of the most complex to even the simplest of spend categories.”

Although Brookes focuses on the procurement side of the supply chain, Gilmore clearly pointed out that complexity is found throughout it. That’s why I believe that Gilmore was on target when he notes that the strategy most likely to be adopted by successful companies is one where they “master the inherent complexity” in the external supply chain and reduce their “internal complexity wherever possible.”