"Today’s marketplace is increasingly dynamic and volatile. Globalization and its resulting market pressures are forcing a fundamental rethink of the way business is conducted."
Today’s marketplace is increasingly dynamic and volatile. Globalization and its resulting market pressures are forcing a fundamental rethink of the way business is conducted. Trade-offs between factors such as labor costs, transportation costs, inventory costs and response time to customers are becoming increasingly complex. At the same time, it is no longer possible for an individual organization to secure competitive advantages on its own. Increasingly, it is recognized that success is dependent on the performance and reliability of the various suppliers, partners and customers that make up the supply chain.
Coping with uncertainty within supply chains has become a simple fact of doing business. We hope to be able to predict market conditions with some degree of accuracy, thereby enabling us to plan effectively the resources we manage across the supply chain. However, if we expect certainty in the supply chain, we are likely to be disappointed.
Uncertainty in supply chains is often blamed on external events, such as machine breakdowns or bad weather. Though these are common, they may not be the biggest contributor to supply chain uncertainty. Prof. Richard Wilding (The Chair, Supply Chain Risk Forum at Cranfield School of Management) pointed out that the most common causes are “institutionalized” decision-making policies and information systems.
Institutionalized uncertainty is the result of the internal systems and methods our organizations use. For instance, some organizations in the supply chain may have four-week/four-week/five-week accounting periods while others use calendar month periods. This incompatibility between accounting systems can cause deceptive increases in demand, because a schedule for a five-week period may be interpreted as a monthly schedule. Meeting cycles can also generate uncertainty in demand. For example, a monthly sales meeting may result in sales representatives overselling in the preceding week in order to have some “good news” to present at the meeting.
Uncertainty in supply chains, according to Prof. Wilding, is frequently generated by a phenomenon called “deterministic chaos”, which refers to dynamics within supply chains that are determined by fixed rules but that generate random behavior. A characteristic of deterministic chaos is its sensitivity to initial conditions, which means that tiny changes over time can become dramatically amplified. This is analogous to the famous “Butterfly Effect”, whereby the flagging of a single butterfly’s wings generate a tiny change in the state of the atmosphere. Over time, this becomes amplified into a major disturbance to weather systems, such as a tornado in another part of the word.
In the context of the supply chain, something similar to the Butterfly Effect can be observed in our use of decision-making and information systems. Over time, small alterations to these systems can have a significant impact on the supply chain. In theory, these changes should be predictable, because chaos is generated by fixed rules that involve no element of chance. But in practice, the non-linear effects of many causes make the system less predictable. Decision-making and information systems are also extremely sensitive to initial conditions, so an infinitesimal change to a variable can result in a completely different response.
The key to the removal of chaos is the use of systems that do not have direct feedback loops. This is the approach taken by many just-in-time manufacturing systems. The basis of these techniques involves focusing on the uninterrupted flow of products “pulled” by the customer and then matching the demand. In doing so, feedback is eliminated and, as a result, so are the conditions that generate deterministic chaos. However, the misapplication of just-in-time, using techniques such as wholesale reduction of inventory and lead times, can result in the system exhibiting increased deterministic chaos.
Effective management of uncertainty requires communication between all organizationswithin the supply chain. Once this has been established, companies should consider taking the following steps:
▪ Look for new data sources and leading indicators
▪ Use common components in products to reduce complexity and keep things simple
▪ Compress lead times so you do not have to forecast too far ahead
▪ Increase flexibility by producing to order and configuring the product at the last minute.
If these efforts do not reduce uncertainty to satisfactory levels, then there are two main options left. First, companies can buffer with inventory – remember that too much inventory is far less costly than too little. A second option is to carry excess capacity, which in some environments may be the most cost-effective solution.
When planning for uncertainty within the supply chain, managers should consider the following:
▪ Dramatic change can occur unexpectedly. Spikes in demand can be generated by the system and not as the result of external events
▪ Long-term planning is very difficult. If long-term plans are made, they need to be reviewed on a regular basis
▪ Supply chains do not reach stable equilibrium – small changes will always prevent this state being achieved
▪ Because long-term forecasts cannot be accurately made, it is better to allocate resources to the development of effective short-term decision-making processes
▪ Treat the supply chain as a complete system. Small changes made to optimize one part of the supply chain can result in massive changes in other parts
▪ Driving down inventory and lead times may not always improve performance. It could result in the system slipping into chaotic behavior
▪ Remove uncertainty by focusing on the customer
▪ Communicate demand information as far upstream as possible
▪ Use simple just-in-time approaches
▪ When changing critical hardware or software platforms, undertake detailed validation because computers are prone to deterministic chaos
▪ Simulation of systems and analysis of key outputs should be a mandatory part of any supply chain re-engineering proposal.
Before blaming uncertainty on external events, managers would do well to look more closely at their business. Although uncertainty in the supply chain can be generated by external events, it is the ghost in the machine of top management decision-making and information systems that is more likely to be at fault.
Dr. M. L. YAKUBU
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