1 Complexity in Supply Chains Prof. Jaume Ribera Professor, IESE Business School Port of Barcelona Chair of Logistics, CEIBS

2 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

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4 Performance measurement - The SCOR Model (Level 1) Supply Chain Reliability – On time deliveryPercentage – Order fulfillment lead timeDays – Fill ratePercentage – Perfect Order FulfillmentPercentage Flexibility and Responsiveness – Supply Chain Response TimeDays – Upside production flexibilityDays Expenses – Supply Chain Management CostsPercentage – Warranty Cost / RevenuePercentage – Value added per employeeEuros/RMB Assets / utilization – Total inventory days of supplyDays – Cash-to-Cash Cycle timeDays – Net Asset turnsTurns

5 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

6 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, …) ….

7 Characteristics of complexity NumerousnessVariability Interdependency Diversity Variety Uncertainty Filiz Isik, Complexity in Supply Chains

8 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

9 Steps in Complexity management

10 Impact of complexity reduction Effectiveness (customer related performance) Efficiency (cost related performance) Complexity reduction levers Complexity management levers

11 An example of complexity: bullwhip

12 Understanding bullwhip: the beer game Send order day DOrder received day D+1 Shipment day D+1Available day D+3 Supplier Customer Retailer Wholesaler Distributor Factory

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14 How to make the best decision 1.- Surprise demand !!

15 How to make the best decision 2.- Forecast future periods (no forecasting error)

16 How to make the best decision 3.- Fill expected evolution

17 How to make the best decision 4.- Determine desired final safety inventory

18 How to make the best decision 5.- Complete the table and determine order now 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?

19 Computer modeling Exponential smoothing with  =

20  = 0.25 Complexity behaviour

21 The Barilla case Final customer pasta consumption

22 Barilla - JITD

23 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 Observe Describe Measure Analyze Manage Improve Control