Your business can be complex.

How would you attempt to manage your supply chains when it is difficult enough to manage your own business? Too many articles and blogs that talk about ‘managing supply chains’ seem to assume that it can be done, but avoid describing how to achieve success.

The individual supply chains that make up the supply network of your business are complex. This requires a better understanding of the drivers and structures of supply chains through research and analyse; knowledge can improve the management of relationships with your suppliers and customers.

It all sounds good, but how to describe the complexity occurring in your business and supply network without writing a textbook? A colleague, Dennis Hitchens, provided me with a document some years ago that he used in his short course, presented for people trying to grow their small business. He needed to get the essentials of business across to his audience quickly and succinctly, which he achieved. I have extended his document to include the supply network of a business.

How a business works

To be in business requires five necessary conditions:

1. You must Sell items – whether goods or services
2. To sell items requires you either Make or Buy items
3. To sell items requires you to Get and Keep Customers
4. To stay in business requires maintaining a Positive Cash Flow and Making a Profit
5. To stay in business requires being effective and efficient in Operating the Business

Selling provides Orders

• Physical items held in stock but not sold are called Inventory
• Orders taken but not delivered are called Backlog
• Orders become Sales when there is enough Capacity to fulfil the order and/or there are sufficient items taken from Inventory

Income and Costs

• Selling an item derives Revenue
• Sales become Revenue (income) when Orders are delivered and paid for
• Make or Buy items, Get and Keep Customers and Operating the Business have associated Costs
• Cash Flow must be positive
• Money remaining from Revenue after all Costs are subtracted is called Net Profit

Money (Working Capital) is required for a business to work

• Cost elements are called Expenses
  • The Cost to Make or Buy items is largely variable
  • The Cost to Operate the Business is largely fixed
  • The Cost to Get and Keep Customers is discretionary
• Each cost element contains sub-elements which may also be Fixed, Variable or Discretionary, or even a combination of them
• There are no rules linking Cost to Revenue; the outcome is therefore discretionary

Performance Factors 

• Fixed factors are expressed as numbers e.g. sales this period
• Variable factors are primarily expressed as ratios, usually percentages, which provide inferred numbers – that is to conclude or deduce the number is correct
• Discretionary factors are primarily expressed as numbers, but may also be expressed as ratios (typically of Sales) for planning and budget purposes

Performance factors have properties which may not act as planned

• Fixed and Variable factors, unless combined with Discretionary factors, are deterministic – a process whose resulting behaviour is entirely determined by the initial state and its inputs
• Variable factors are constrained by Limits (generally deterministic, but not necessarily), with step function increments, which may be wholly discontinuous. Example: measurement either side of zero for Inventory are characterised by different conventions
• Discretionary factors are subject to outcomes with ‘unknowable’ certainty (i.e. approximation) and require a Decision-Making processes to resolve
• To improve a business requires visibility and simplification
• There is a need to reduce the risks when there are unknown outcomes

A business is complex

• Constraints and variability (within operations) affect outcomes, as properties of the performance factors interact dependently, independently and interdependently relative to positions on a given time line
• Emergent results are therefore created, which are Cumulative
• Control charts rather than absolute numbers should be the basis of management action, with acceptable results and trend lying between the calculated upper and lower control limits

The supply network of a business is complex

• The businesses of suppliers and customers also work as described – they are all complex
• Suppliers and customers provide a supply network for a business; the network consists of multiple supply chains that link tiers of suppliers and customers
• Uncertainty grows as increasing flows of items, money and information interact in a supply network and lead times for items potentially lengthen in response to requirements of a market
• The supply network of a business is therefore a complex adaptive system as it adapts and organises itself without a single entity deliberately managing or controlling it

So, here is a business course on one page! The important point is that inside the business the performance factors, constraints and variability are not working in concert, leading to emergent (i.e. unknown) results. Management is therefore difficult; and this view is extended to the supply network. Therefore if you have a problem managing your own business, the chances of managing your supply network, or even individual supply chains within the network, are nil.

Improve knowledge of your supply chains

Better that effort is expended in gathering knowledge about your supply and sales markets so that you can negotiate contracts and alliances from a strong knowledge base. For example, Rio Tinto research and analysis of demand for iron ore considers trends in more than 800 large and small cities and rural areas in its customer countries. The research considers macroeconomic developments and the effect of share market activity on spending, government policies, consumption drivers, production trends, industry costs and trends in business activity.

If you had this level of knowledge about your industry and the major inputs, would confidence in your business about direction, investments and outcomes improve?