Why Supply Chains are Getting More Complex – And why This is not Necessarily a Problem

Complexity is continuously increasing. This poses a growing threat to our economy and logistics processes, in particular. These threats are far from new, and since the world economy is somehow still running, they seem like empty threats. It does not mean that they are completely unfounded, but people tend to deceive themselves in this matter. In the end, we manage to somehow cope with the current complexity levels and do not exceed the catastrophe threshold, thanks to the development of new methods and tools. But what exactly is complexity? In many cases complexity is confused with the idea of something being complicated. Why supply chains are complex and not necessarily complicated can be explained using the following two examples:

Complex or complicated?

If you buy a wardrobe and have ambitions to assemble it yourself, then this task can be more or less complicated, depending on the thickness of the instruction manual, your experience with this particular undertaking and your mechanical skills. In any case, you can be sure that the wardrobe will be standing in your bedroom within a finite amount of time. However, this task is not complex, because the instructions lead you in a linear fashion, step by step, to the eventual completion of the wardrobe.

In contrast, a complex task is highly dynamic, consisting of a mutable amount of elements with unforeseeable inter-dependencies, which do not emerge linearly, but simultaneously. Soccer can be called a complex game: at the time of kickoff, no one knows where the ball will be on the field in the next ten seconds. Inter-dependencies between elements are the heart of the game: the players, the ball, the pitch, the weather and so on. In complex systems, elements are arranged in a way that they realize a comprehensive process, which would not be possible only by the chaotic sum of the particular parts. For example, Mario Götze needed the support of the whole team and (not only) the right pass by André Schürrle in order to score the winning goal in last year’s World Cup final.

The supply chain is a complex system

This is very similar to supply chain processes. Here we also have particular “players” like procurement, production, distribution or sales, which do not work as stand-alone processes. The players are complemented by external factors like the market, customers and suppliers. Only by aligning these elements in the right way, will the product take a profitable course from producer to customer. Easier said than done, since the particular processes involved typically pursue contrary goals.

A classic example is procurement aiming for low stock levels, while the sales department wants to guarantee a high service level for their customers. Transferred to the soccer image, the defense would be guarding their own penalty box, while the attacking players would be waiting for passes at the opponent’s penalty box. Both strategies don’t work together very well (at least in the supply chain, and the good times of the English kick-and-rush are also long gone).

The basic conditions have changed

Besides partly contradicting goals within the internal supply chain, there are external factors which further complicate planning, such as fluctuating demand, changing customer expectations and higher cost pressure through increasingly globalized competition.

As globalization spreads even further, moving into new markets does not only unlock new customer groups, but also includes the factor of regional variability into the already complex system. In important emerging markets, like India or China, the deviation between expected and actual demand amounts to as much as 40 percent within particular product groups. Needless to say, new markets also mean new competitors, who are also fighting for market share.

Another factor driving complexity is the trend of online shopping, which is closely connected to increased customer expectations. Comparing online prices leads to a price war, and new delivery models lead to logistic challenges like same day delivery or multi-channel strategies.

On top of everything else, a strongly individualized customer demand calls for broad product ranges with many variants and a constant output of new products. The development of the product life cycle with all consequences for the supply chain (and its complexity) can be described by the changes in the automotive industry. While the product life cycle in the 70s covered an average of 7 years, it shrunk to only 3 years in the 90s. Today, the models are substituted every 2 years.

If you take all these factors together, it is safe to say: yes, supply chain complexity has increased (very much)!

Integrated planning used to combat complexity

Now, how can we counteract complexity in the supply chain, in order not to read gloomy articles in the papers about the increased complexity, which already has suffocated economic growth? There are already many software tools offering solutions to particular problems in the supply chain, e.g. production planning based on forecast algorithms. What these tools very often cannot do, is include the different influencing factors outside the specific planning area. Today, mapping supply chain processes with software can be compared to an accumulation of silos with the respective data hardly connected to each other. By totally concentrating on a specific problem, complexity is seemingly reduced and you can achieve more or less good results for the differentiated problem (e.g. an optimal utilization of capacities). With regard to the complete supply chain, this is not an optimal solution.

Companies need software that actually includes all relevant factors into their supply chain planning process. Only by using an integrated approach, supply chain managers are able to face the complex tasks within their companies. Well, this is not really news, but the degree of suffering has now reached the threshold. This is backed by several studies, like “Trends and Strategies in Logistics and Supply Chain Management” by the BVL (National Logistics Association), where integrated planning is mentioned as one of the top-3 strategies of the coming years.

Complexity can become a problem for logistics, but it does not have to. If companies start with a holistic planning strategy in time, complexity will be acknowledged as what it really is – a defining characteristic of a modern supply chain.

What do you think? Which other factors are responsible for increasing supply chain complexity? Do you have your own strategy for coping with complexity?

This article was originally written by Ludger Schuh in German and was published on the BVL (National Logistics Association – Germany) blog. It was was translated by the Inventory and Supply Chain Blog Team. The original blog can be read here.