@ Supply Chain Management


Learning to manage complexity

In an article titled Learning to manage complexity, Jonathan Byrnes writes about how growing companies succumb to complexity – their own complexity brought about by growth.

“Success often hurts, and even mortally wounds, well-run small businesses.”

In the article, Jonathan recounts a particularly compelling observation by Daryl Wyckoff,

Wyckoff described a rather strange profitability pattern of trucking companies. Both small and large companies were very profitable, but the medium-sized companies were quite unprofitable.

That problem,

Wyckoff found that small trucking companies that were run by strong entrepreneurs, often hands-on managers, did well and grew. They continued to grow and prosper as long as the entrepreneur could see what was happening in the whole company and directly control all the activities. The problem was that as these small successful trucking companies grew, they typically established a network of terminal facilities. At some point, the complexity of this network prevented the entrepreneur from being able to know and personally manage the whole system.

And further more,

Some entrepreneurs figured out that they would have to manage their companies in a different way. They hired strong terminal managers, delegated authority, and managed through planning-and-control systems. These entrepreneurs were able to continue growing their companies and wound up having very profitable large companies. Other entrepreneurs, however, couldn’t let go. They tried to continue managing their growing companies as they always had. Costs went out of control, and profitability plunged. They had to retrench, and once again they found themselves managing small trucking companies.
Because they were strong entrepreneurs and the companies were small again, they were able to regain control of their companies. They once again made their companies prosper and grow, up to the point where they lost control, lost profitability, and had to retrench yet again. And so the cycle continued, causing the “Bermuda Triangle” Wyckoff described.
In later work, Wyckoff and others found the same pattern in the restaurant industry, the hotel industry, and other similar businesses.

This is something that I read about frequently happening in Silicon valley startups as well. Except that in this case because of the influence of VCs (Venture Capitalists) who are quite aware of this managerial competence gap that entrepreneurs and founders often have, they exert considerable influence and power in bringing in managers and technicians who are well qualified to take the firm into the second stage of growth.

So what happens at a fundamental level in the growth of complexity? In my opinion, at the managerial level, as reporting structures evolve, meetings abound and control is delegated, one can reason that decision making gets stratified in some implicit structure. Jonathan notes,

It turns out that complexity causes businesses to change in fundamental ways.

Also, he notes an example from the physical world – of laminar and turbulent flow to illustrate the effect. Now, I don’t think the analogy works except in the very general sense because in the business world, people think and act for many different reasons towards different goals whereas in the physical world, physical laws bound every phenomenon.
What seems to me to be sorely lacking is closed looped feedback. No, that’s overstating it. There is feedback but the entrepreneurs who failed as a medium sized enterprise in the trucking industry described above don’t seem to be able to process the feedback and adapt themselves to the changed reality. To take the analogy from control theory, what really is happening is that the feedback gets diffused within the enterprise such that the forward loop cannot really issue any commands to adapt the system to the new reality. What VC’s have hit upon is that you change the structure of the controller and put the right people in place so that the feedback and forward loops function as they should.
Here’s another example that Jonathan notes which really is up my alley,

In distribution, managers sometimes encounter “full-warehouse syndrome.” When a distribution center approaches capacity, it changes in fundamental ways. After a certain point, it becomes very difficult to find things and to maneuver around the facility. Cushions of time, space, labor, and communication that are critical to smooth operations become too small as activity approaches capacity. Just like the highway, the warehouse’s effective capacity plunges rapidly.

Come on, DC managers, you know this is so true. In fact just the other day, I was in a meeting where DC managers at a very large US retailer asked us to review the planned capacity at one of their large DCs because of the issue of effective capacity – now, that was learnt in a trial by fire for sure.
But that notion of effective capacity is really dependent on the network within which that DC is located. In Supply Chain modeling, I usually come up with a supply chain network which optimizes the system. However, I also advise the client that the system must be frequently monitored and when there is an inflection point (often defined by the effective capacity that one can route through a DC system), the network needs to be changed.
In Lean thinking, you would hear the pithy phrase – “Its all about flow”. And the supply chain network that you put in place to handle the flow must change to keep pace with the flow when appropriate.
Jonathan notes the work of Yossi Sheffi called The Resilient Enterprise,

In a very important new book, The Resilient Enterprise, Yossi Sheffi analyzes how to manage the unmanageable. Sheffi reports on his extensive study about supply chain disruptions. Some of these disruptions are so serious that they can cause a company to “change states,” threatening its ability to survive and requiring fundamentally different management techniques.

Here are three major areas identified by Yossi Sheffi in order to minimize the impact of supply chain disruptions:

  1. The manager should focus carefully on understanding the company’s supply chain vulnerabilities. This includes analyzing the types of disruptions that can occur, assessing their likelihood, and estimating their probable effects.
  2. With this understanding the manager can create a concrete program to reduce the company’s vulnerability. Ways to do this range from reducing the likelihood of intentional disruptions, to intercompany and private-public collaboration for security, to systematic detection of disruptions, to resilience through redundancy.
  3. While vulnerability reduction creates important potential benefits, it is not enough. Managers must build a measure of supply chain flexibility into their companies through process and structural changes. They can achieve this through interchangeability of parts and production facilities, through postponement, which customizes the product late in the production process, through flexible supply, and through customer relations management.

Jonathan also notes the identification by Yossi Sheffi of the importance of corporate culture to solving supply chain disruptions.
The exciting thing about reading outside one’s chosen field is to incorporate insights from another discipline, especially the way their thought is structured and systematized.

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Category: Optimization, Strategy, Supply Chain Management


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November 2006