SCComplexity Marie Curie Understanding and Managing Supply Chain Complexity

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1 SCComplexity Marie Curie Understanding and Managing Supply Chain Complexity White paper Introduction Supply chain management became a top priority for companies in the last decades. Successful supply chain management enables companies to stay competitive in today s highly competitive business environments. In achieving competitive advantage supply chain processes and activities contribute to various business performance measures (e.g. cost performance, service performance, etc.). Business trends are leading to higher complexity, especially in the context of supply chain management. Are these the most complex and challenging supply chains ever?, asks Dan Gilmore, editor-in-chief of Supply Chain Digest. The following trends underpin this view: shorter product life cycles, higher product variety, increasing customization levels, more demanding customers, and more geographically dispersed customers. Given these aspects it can be conjectured that supply chain complexity is a key area of managerial consideration in current and future business environments. The purpose of this white paper is to address this issue by exploring the concept of supply chain complexity with special regard to supply chain complexity drivers, strategies to cope with supply chain complexity, and related outcomes. It concludes with important aspects managers have to consider to understand and manage supply chain complexity. Supply chain complexity Supply chain complexity can be determined by numerousness of elements and the interactions between these elements within a given system (supply chain). Consequently the interactions of elements result in uncertainty and mostly imply negative outcomes. Therefore supply chain complexity comprises of structural (number of elements) and dynamic (interactions) characteristics. In order to understand and manage supply chain complexity it is essential for managers to differentiate between supply chain complexity components (see Figure 1).

2 Figure 1: Components of supply chain complexity Several studies showed the impact of specific supply chain complexity components on outcomes (e.g. higher levels of upstream complexity have a negative impact on delivery performance). With regard to supply chain complexity components the identification of associated complexity drivers has to be considered. Table 1 gives an overview of complexity drivers for each supply chain complexity component. Supply chain complexity component Complexity driver Upstream complexity e.g. number of suppliers, number of supplier tiers, geographic dispersion of suppliers, supplier delivery reliability Internal complexity e.g. number of products, number of parts, number of SKUs, variability in manufacturing processes Downstream complexity e.g. number of customers, heterogeneity in customer needs, demand variability Logistics complexity e.g. number of warehouses, number of transportation modes, number of 3 PLs Table 1: Drivers of supply chain complexity In general it can be concluded that supply chain complexity is multi-faceted and multi-dimensional and it is important to incorporate all these aspects, as understanding the functioning of each single part of supply chain complexity does not imply to understand the whole system.

3 Outcomes of supply chain complexity Supply chain complexity has multiple impacts on supply chain performance. Therefore supply chain complexity affects both, efficiency (cost) and effectiveness (service). Examples are: - The way companies handle supply chain complexity has effects on supply chain performance such as delivery times and operational costs - A reduction in complexity is linked to improved performance outcomes such as lower transaction costs and increased supplier responsiveness - Supply chain complexity has repercussions for the environment. High supply chain complexity increases the energy needs and environmental pollution as transportation and other supply chain operations are significant sources of carbon emissions. Consequently managing supply chain complexity is a key issue confronting supply chain managers and should be on the agenda of every supply chain manager. The outcomes of supply chain complexity are often unplanned and/or undesirable. It is necessary to state that not all sources of supply chain complexity are bad. As mentioned earlier supply chains must have a certain level of complexity to attain sustainable competitive advantage (e.g. by increasing the number of products will potentially increase companies revenues; higher number of suppliers can improve supply chain flexibility). In response to this the task of supply chain managers is to examine the trade-offs of managing/reducing supply chain complexity and related outcomes. As mentioned above the identification of supply chain complexity drivers/components is necessary to link them with outcomes due to different impact factors of specific supply chain complexity drivers/components on outcomes. Strategies for supply chain complexity management If you are in supply chain management today, complexity is like a cancer that destroys supply chain efficiency and one that you have to fight. - Companies that are able to manage supply chain complexity make up to 73% more profit - Companies are able to increase their EBIT by 3-5% when they actively manage their supply chain complexity These quotes and study findings illustrates the need for managing supply chain complexity, otherwise it will negatively affects company performance. As part of supply chain complexity management identifying potential trade-offs is extremely important. The following example gives an idea, why this is an essential aspect. A company may take on customers whose

4 demand is unpredictable, which will increase supply chain complexity, as the unpredictability of demand leads to uncertainties. On the other hand sales margins of such orders are considerably higher than orders from customers with stable demand. Therefore a manager has to decide on which kind of orders the company should fulfill. In addition, the manager has to think about the interdepending effect of higher levels of supply chain complexity, e.g. the generated supply chain complexity can have impact on the fulfillment of other orders. Strategies for supply chain complexity management are, e.g.: - Scope and boundary management - Cultural alignment, supply chain integration, collaboration, coordination, partnerships, relationship management - Eliminating non-value steps (rationalization) - Information systems strategy - Knowledge management - Inventory strategies - Product (portfolio) strategy - Postponement In general, it can be concluded that the management of supply chain complexity is an important task of supply chain managers due to various supply chain complexity components that are contributing to supply chain complexity. Therefore the evaluation, design, and implementation of supply chain complexity strategies strongly impacts successful supply chain complexity management, and consequently affects supply chain complexity related outcomes. Conclusion As aforementioned supply chain complexity has the potential to negatively influence business performance. On the other hand companies operations require certain levels of supply chain complexity to stay competitive. Given these aspects it can be concluded that companies are forced to think about managing supply chain complexity. But this means reducing supply chain complexity to a bare minimum is not the answer. Therefore the identification of an adequate level of supply chain complexity is vital for every company. To address this issue, the following questions will help companies to understand and manage supply chain complexity: How to assess company-specific supply chain complexity levels? Which supply chain complexity drivers affect our company? How to operationalize supply chain complexity drivers?

5 Which supply chain complexity drivers are linked to specific supply chain complexity outcomes? Which outcomes are affected by supply chain complexity? Which business strategies should be addressed to manage supply chain complexity? The findings presented in this whitepaper are part of the collaborative research project FP7-People-2013-IIF Supply Chain Complexity (No ) and the authors would like to thank all partners for their contribution. Contact person: FH-Prof. DI(FH) Dr. Markus Gerschberger Professor Supply Chain Management Logistikum University of Applied Sciences Upper Austria Mail: Tel.: Ila Manuj, Ph.D. Associate Professor of Logistics, University of North Texas Visiting Professor, Logistikum Mail: ila.manuj@unt.edu Tel: Patrick Freinberger, MA Research Associate Logistikum University of Applied Sciences Upper Austria Mail: patrick.freinberger@fh-steyr.at Tel.: