Battling Complexity and Winning

BATTLING COMPLEXITY—AND WINNING (DRAFT)

A revealing way to appreciate how supply chains have changed over time is to visit a supermarket.  During your visit be sure to stop by the Mediterranean bar, the florist, the bakery, the pharmacy, and the organic and gluten-free foods sections.  Don’t forget to visit the parts of the store that feature fruits, vegetables and seafood brought in daily from around the world, the pre-made and gourmet meals section, and the products targeted to the Hispanic, Asian, and Kosher community.  Do you need toothpaste?  One analysis found that consumers can choose from over 350 different SKU’s of toothpaste.  And, any parent knows that a trip down the diaper aisle with its dozens of choices can be a daunting experience.  Supermarkets today typically stock 40,000-50,000 items, up from around 15,000 in the 1980’s.  Welcome to the world of supply chain complexity, a condition that affects virtually all industries, not just retail supermarkets.

Why should anyone be concerned with complexity?  The short answer is that most CEO’s expect the internal and external complexity that their organizations face to increase.  A study by the IBM Institute for Business Value revealed that 60% of CEO’s say their organization currently experiences high or very high levels of complexity.  Almost 80% say they expect to see high or very high complexity as they look out over a five-year horizon.  A second finding is that more than half of CEO’s express concerns about their company’s ability to manage increased complexity.  

        This chapter addresses the increasingly important topic of complexity by defining the concept, describing why it can be a problem, and explaining why we have business complexity.  It  also presents strategies for addressing an emerging topic that supply and supply chain professionals must confront, whether they recognize the need or not.

WHAT IS COMPLEXITY?

Let’s agree on something important before we define complexity.  Few rational people wake up in the morning and say, “My goal today is to make my organization more complex!”  Things usually do not work that way.  But yet, we often find ourselves consumed by unhealthy levels and kinds of complexity.  

What, then, is complexity?  While we can define business and supply chain complexity in a variety of ways, a general perspective views something as complex if it is hard to separate, analyze, or solve.  Another perspective views complexity as something with many parts in an intricate arrangement.  Perhaps more revealing are the synonyms that describe the word complex.  These descriptors include complicated, intricate, and involved.  While there are academics and consultants who have attempted to define this concept, the word complexity, at least conceptually, should not be that complex.^[1]  It is often something that we know it when we see it.  The sidebar titled “Where do we see Complexity?” provides a diverse set of examples that shows the many faces of complexity.  Most of these example present clear challenges to supply chain professionals.

[Insert sidebar—Where do we see Complexity? about here]

McKinsey researchers have studied the topic of complexity probably as much as anybody.  They have concluded that two broad categories of complexity exist.  The first category, institutional complexity, stems from strategic choices, the external context (such as regulations), and from major choices about organizational and operating systems.^[2]   The second major category is individual complexity.  Individual complexity deals with how hard it is for employees to perform their jobs.  Employee role ambiguity, conflict, administrative burdens, duplicate roles, and ill-defined tasks and processes all contribute to individual complexity.  

More specific types of complexity can characterize industries and organizations:

• Designed complexity—this results from choices about where the business operates, what it sells, how it sells, to whom its sells, etc.  
• Inherent complexity—this is intrinsic to the business and can only be removed by exiting a portion of the business
• Imposed complexity—this includes laws, industry regulations, and interventions by external organizations
• Unnecessary complexity—this results from a misalignment between the needs of an organization and the processes in place to support it.  This is probably the easiest complexity to address

Some have argued persuasively that organizations that learn how to manage and exploit complexity can generate additional sources of profit and gain competitive advantage.  When managed well, complexity can also increase corporate resilience by enhancing the ability to adapt to change.  On the individual side, McKinsey research has determined that companies reporting the lowest levels of individual complexity have higher returns on capital employed and returns on invested capital compared with companies that indicate high individual complexity.^[3]

Offshore oil exploration in the Gulf of Mexico provides an ideal example of the need to manage designed, inherent, and imposed complexity.  It became obvious that following the explosion at BP’s Macondo well an array of new and complex regulations would emerge addressing offshore drilling safety, all of which would increase the complexity of offshore oil production.  And, that is exactly what happened.  Some observers predicted that drilling in the Gulf of Mexico would not recover for years, if ever.  But that does not seem to be the case.  In the words of one analyst, “Bottom-line, Gulf of Mexico oil production is in considerably better shape than even the most ardent optimists envisioned following Macondo.”^[4]  Part of the reason for this optimism is the oil industry says it is learning to live with the stricter safety oversight and slower permit reviews that resulted from the catastrophe.  Estimates indicate that by 2022 oil output from the Gulf of Mexico will be almost 30% higher compared with 2012 levels, much of it due to increases from deep water wells.  Learning to manage institutional complexity can create competitive strength.  Complexity at the individual level is not so easy to overcome.  

A second example of managing complexity comes from the retail world, where something called omni-channels is suddenly big news.  Major retailers such as Toys ‘R’ Us and Wal-Mart are turning their stores into order-fulfillment centers where workers pick and ship online consumer orders, part of a complicated plan to grow their business.  While filling online orders from stores instead of distribution or fulfillment centers adds channel complexity, these retailers expect to gain a competitive edge over online-only rivals by providing customers with greater ordering flexibility and service while offering the retailer an opportunity to better manage its inventory, service levels, and order delivery times.^[5]  Perhaps most importantly, these retailers hope to stay relevant to consumers.