The quirks and quarks of the supply chain?

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While driving around town on Saturday doing some errands I had the radio tuned into a CBC program appropriately called Quirks and Quarks.  Luckily my daughter wasn’t in the car otherwise the radio would have been tuned into one of the pop music channels and I would have missed a really interesting discussion by Lisa Randall, whom the NY Times describe as “… a professor of physics at Harvard and one of the more original theorists at work in the profession today.” What caught my attention, and made me late for an appointment, was when the discussion turned to what was right or wrong about Newton’s Laws of Motion and Law of Gravity, which are so apparent in our everyday lives. I am an engineer by training and therefore I have a greater interest in the pragmatic than the theoretical, so when Prof Randall challenged the interviewer’s comment that Newton’s Laws have been proven to be wrong I was very interested. Prof Randall’s comment was that it isn’t so much that Newton’s Laws are wrong, but rather that they do not apply in all circumstances. In the scale of everyday life – time, size, distance – they are extremely good at predicting, for example, the flight of a football out of Tom Brady’s arm, to the distance a car will take to stop given its speed and the surface area of its tires on the road. Prof Randall went on to explain that it is at large distances (universe scale distances), high speeds (approaching the speed of light), and very small distances (micro-atomic sizes) that Newton’s Laws fall apart. The pragmatic engineer in me scoffed “who cares?!”  But she had a really interesting point that at high speeds, the more fundamental theory that emerges is Einstein Law of General Relativity. And if we go to really small distances, the more fundamental theory that emerges is Quantum Mechanics. She went on to say that while we wouldn’t ever calculate the trajectory of a ball using anything other than Newton’s Laws, these other theories are more fundamental. Of these, Prof Randall says that Quantum Mechanics is “…more violating to our intuition…the idea that there are probabilities rather than definite predictive statements.”  Perhaps most intriguing to me is “dark matter”, which Prof Randall says is “…defined by the property that it interacts weakly. It interacts gravitationally, but it doesn’t interact with light…so it can’t be detected.” So what has this all to do with supply chains?  Well little directly, but there are analogies that bring out concepts that aren’t necessarily new, but are not that well understood. First and foremost is that for the most part, we treat the supply chain as if it conforms to the APICS definition of Manufacturing Resource Planning (MRP II), which I see as the equivalent of Newton’s Laws, meaning that MRP II certainly has merit but does not necessarily apply or is sufficient for all circumstances, and I contend that the number of circumstances in which MRP II is relevant is diminishing. I include the Oliver Wight standard supply chain planning processes in this perspective. For the most part MRP II can be used to generate a good plan.  But, and it is a big but, the business context in which we operate supply chains has changed sufficiently so that we need to reevaluate some of our approaches to the topic. So what is different?

  • Large Distances/Dark Matter Globalization and outsourcing have extended supply chains to the point that many products have circled the world several times by the time we buy them from a retail shelf.  And the full effects and costs of moving materials such large distances are only recently being understood with concepts such as Total Landed Costs (TLC), but as the article referenced points out, TLC is not easy to calculate because of constantly changing fuel prices and labor costs, but more importantly because there are so many factors that go into getting an accurate measure of TLC that the author states “I wondered if it was even possible to accurately calculate a company’s true landed costs.” If you can’t measure it, you can’t manage it. Well, not to the degree to which we would like to think we can manage it.  And I contend that the degree to which we can measure and manage TLC decreases exponentially with an increase in globalization and outsourcing, which is consistent with Complexity Theory. This is because not only is it difficult to get a good initial/annual measure of TLC, but also that the variables that go into calculating TLC are changing constantly and, in some cases, are barely recognizable from the assumptions made a year ago during a budgetary cycle.
  • High Speed/Relativity Ok, so I am a late Boomer, and every generation has thought that life progresses more quickly, but few can argue with the fact that especially since 2008 we have seen huge and frequent swings in business cycles compounded by natural disasters.  In fact, we can extend this observation to the mid-1990’s as the internet began to take root.  As an aside, I had a great-grandmother who died at the age of 98 in 1974, so she would have been born in 1876.  In her life time, she experienced the advent of electricity, cars, steam ships, television, telephone, x-ray, penicillin, … Wow.  Back in modern life, we see the ever shrinking product lifecycles coupled with the ever shrinking dominance of companies.  Who would have predicted in 2005 that by 2010 Microsoft would be a “has been” in terms of driving innovation and change?  Oh, I know there are lots of people that will raise their hands now and say “I did. I did.” But these voices were few and far between in 2005. Perhaps we haven’t reached the point of warping the time and space continuum, but it does feel to me that we have reached the point that the speed of business has increased to the point that we need to examine the processes and manner by which we operate companies.  I am definitely hearing a lot more about rolling budgets, quarterly budgetary cycles, and even ad hoc or continuous budgetary cycles. I am definitely hearing and reading a lot about the merging of Financial Planning & Analysis (FP&A) with Sales & Operations Planning (S&OP). Perhaps I am hearing about these two processes being executed in lock-step whereas in the past there was minimal interaction. By warping, I mean changing processes to accommodate the speed of business. We cannot accommodate new scales of speed using organizational structures and business processes designed in the mid-1900’s.
  • Small Distances/Quantum Mechanics This is the one that is really near and dear to my heart, because, as Prof Randal says, this is the one that challenges our intuition because of “…the idea that there are probabilities rather than definite predictive statements.” Most of us who work in supply chain management or operations are engineers, if not by training, then at least by nature.  We believe in things that are tangible, measurable, predictable.  So what do we do with systems that are not fully predictable?  We assume that they are predictable, and, even worse, we act as if they are predictable. The most obvious of this phenomenon in business is the uncertainty related to the revenue/sales forecast.  We use terms such as demand variability or demand volatility instead because they imply that yes, demand is variable/volatile, but it is predictable, if only we knew all the variables required to predict demand exactly. But the term uncertainty makes us feel, well, uncertain. How can we have confidence in our models if we are uncertain about a key input variable? But uncertainty permeates supply chains and operations. From yield uncertainty, to cycle time uncertainty, to transportation lead time uncertainty, to new product adoption uncertainty.  And many more. I contend that we are far better advised to focus on the skills and processes required to be agile in the face of uncertainty than in the effort to understand “all” the causes of uncertainty and, by extension, to try to remove all uncertainty from our understanding of the market conditions in which we operate. Planning is important, but the skills and processes for early detection of discrepancies between reality and what we predicted, and the agility to respond quickly and profitably to these discrepancies should be equivalent skills. Let us learn how to absorb and respond to uncertainty rather than thinking we can design it out of our operations and processes.

My take is that each of the concepts that Prof Randall described as challenging Newton’s Laws have an equivalent not only in supply chain management, but more importantly in the more general concept of Business Operations, which, in Wikipedia, is defined as: The outcome of business operations is the harvesting of value from assets owned by a business. Assets can be either physical or intangible. An example of value derived from a physical asset like a building is rent. An example of value derived from an intangible asset like an idea is a royalty. The effort involved in "harvesting" this value is what constitutes business operations cycles. As we can see from this definition, supply chain management is a more specific definition of Operations applied to companies that have physical products, but even in these companies Operations is a broader concept that relates to the business activities that even manufacturing organizations carry out in order to satisfy customer demand and, hopefully, make a profit, including Marketing, Product Design, etc. In other words, balancing supply and demand of anything is everything. As always I welcome comments, arguments, and contrary opinions.  They drive our collective learning.

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