April 10, 2023 | Supply Chain Strategy
Businesses across industries have had to contend with unforeseen disruptions. They have realized that their supply chains are far more complex than earlier. This complexity has created more challenges than benefits.
As they look to navigate the rising uncertainty and adapt to the changing business landscape, breaking down this complexity is a key priority.
But first, what does supply chain complexity mean? When we say modern supply chains are extremely complex, what does it indicate?
Complexity of the supply chain describes the interdependence of supply chain entities. It means that different elements in the supply chain are intricately connected and dependent on each other. Any event or change in one element can impact all the other elements of the supply chain.
Many businesses have global supply chains where raw material suppliers are often located in different parts of the world. And when an unprecedented event, like the COVID-19 pandemic, occurs, they are left stranded because of supply disruptions.
For a large enterprise, the sheer size of the supplier base can be overwhelming. While it may communicate directly with tier 1 suppliers, it may not even know its tier 2 and tier 3 suppliers.
In addition to globalization and huge supplier base, supply chain complexity can be caused by many other factors.
For example, a lot of data and information is exchanged between different entities in the supply chain network. Because a vast amount of data is generated, there is a high possibility of this data being interpreted differently by different stakeholders. This results in inaccurate forecasts and analysis. Also, a lot of useful data may not be captured and therefore not leveraged.
Product design can also add to supply chain complexity. Many products need several raw materials and components. Shortage of a critical component can impact entire operations. The semiconductor chip shortage during the pandemic, for example, affected several industries including automotive, consumer electronics and renewable energy. Production in many automotive plants came to a standstill during this period.
Complexity also increases when companies in the supply chain form strategic alliances and partnerships. It may also increase when a business diversifies its product range and adds new products and services for competitive advantage.
So, what is the way out then?
How can businesses reduce supply chain complexity and ensure they are better prepared to deal with potential disruptions?
Here are 5 ways to address growing complexity:
1. Visibility: An effective way to deal with complexity is to gain end-to-end visibility. A ‘fully visible’ supply chain automatically becomes less complex. It helps a business map its supply chain, identify suppliers operating at different tiers and spot bottlenecks.
2. Convergence: The convergence of procurement and supply chain has become vital to mitigate risks and build resilience. Such convergence boosts cross-functional collaboration, thereby breaking down silos. When procurement and supply chain functions work in tandem, a business can be better informed of potential threats as well as better prepared to deal with them.
3. Reshoring: To combat growing uncertainty, businesses are evaluating their sourcing strategies. Many believe it is time to implement alternative sourcing strategies such as nearshoring. This can reduce their dependence on far-off suppliers and bring operations closer to end-users. For example, sourcing raw materials and supplies from a neighboring country can be a winning strategy for American companies. It can also reduce the time and money spent in goods transit.
4. Forward planning: Engaging in demand planning and forecasting can help a business get its supply in sync with demand. Demand planning technology can ‘sense’ demand by analyzing real-time data and market conditions. It’s a good idea to share demand forecasts with key suppliers to help them prepare beforehand.
5. Supplier base consolidation: Businesses must also consider rationalizing their supplier base. For example, the retail industry can adopt this strategy by cutting down the supplier base and reduce supply chain complexity.
A key thing to keep in mind while dealing with complexity is to differentiate between necessary and unnecessary complexity. Necessary complexity is something that adds value to the supply chain and the customer is willing to pay for it.
On the other hand, anything that does not add value or has no real benefit and involves additional costs can be classified as unnecessary complexity.
Before framing a plan to deal with complexity, a business must dig deeper to understand its nature, value addition and benefits. The plan should aim to eliminate (or reduce) unnecessary complexity and effectively manage necessary complexity.