Supply Chain Systems Thinking

Few months back I met one of my friends who happened to be the Supply Chain Director of a company. At that point of time I was contemplating to start my independent venture to support the businesses with supply chain capability and talent development. I casually asked him if he had to choose one capability that he wanted to improve within his team, what would it be? I was expecting a usual answer e.g. demand forecasting, inventory management, cost reduction, service etc. He thought for a moment and I used that moment trying to read changing expressions of his face. And then, he surprised me with his response, “if I can somehow inculcate supply chain thinking within my team, it would significantly take frustration off my head.”

The answer got me into thinking, what does “supply chain thinking” mean? How can people be trained to think “the supply chain way“? Is this gap widespread or one-off? It was good enough to motivate me to dive deep into this topic. In this article, I have put together the summary of my findings on all of the above questions.

The answer to the first question – “what supply chain thinking means”, was easy and most of the supply chain practitioners can easily relate to it. It means that every supply chain decision is a trade-off between numerous drivers that exists across the value chain. For example, a purchasing decision is not just about material cost, lead time and quality but also about production cost, flexibility and end product quality as well as working capital management. Alternatively, one can conclude that a purchasing decision is about the whole system consisting of Supply, Manufacturing and Financing sub-systems. Using it as a case in point, I modified the term to “supply chain systems thinking”.

According to the Institute for Systemic Leadership, systems thinking is a management discipline that concerns an understanding of a system by examining the linkages and interactions between the components that comprise the entirety of that defined system. A very close analogy is human digestive system whose behavior depends entirely on the interplay between various organs constituting the system. Any imbalance between the activities of the organs can impact the health of the whole system.

Supply Chain is a complex system for two reasons:

1. Anything that happens within or outside the business, directly or indirectly, impacts the supply chain behavior.
2. Where do you draw boundaries of the supply chain system – within the firm; or in
   clude suppliers and customers; or include suppliers’ suppliers and customers’ customers? The farther you move the systems boundaries, the decision making is more robust but more complex and time taking. Therefore, one needs to carefully balance the speed and accuracy of decision making.

We jump to the 3^rd question – “is the gap in systems thinking widespread or one-off?” Speaking to various people in the supply chain fraternity, it became apparent that the gap is not one-off. In one of the articles on Systems Thinking and the Supply Chain by David Schneider, the author states, “yet while nearly all of us recognize the supply chain as a system, I will maintain most managers and executives do not really operate that way on a consistent basis”. The root cause of the gap lies in poorly defined supply chain system boundaries and lack of understanding of the cause and effect relationships between supply chain and other business drivers.

To begin with, supply chain people define their system boundaries too narrowly, usually at the beginning and end of their specific roles i.e. purchasing, manufacturing, logistics etc., commonly known as silo thinking. Or, at best they may extend the boundaries one or two steps upstream and downstream of their specific roles. Secondly, they lack either the motivation or capability to zoom out of a problem within a specific area to have a helicopter view of the problem in overall business context.

We now come back to the 2^nd question – “How can people be trained to think the supply chain way?”. The first intervention that is required is to develop the business acumen of the supply chain people. They should have a clear understanding of how each action and decision impacts the Return on Investment (ROI) or the Economic Value Added (EVA). Once this capability is developed, people will evaluate their decisions on the business criteria instead of the functional criteria. It will also enable them to dynamically play with the systems boundaries depending on the complexity of the decision making.

Second important intervention that is required is to make supply chain people master the interplay of various business drivers. They should see every decision in supply chain as a trade-off across the value chain and not just within the focused firm. For example, a high customer service commitment can result in high product expiry or obsolescence of a perishable product (I challenge the readers to plot the cause and effect relationships to prove it). Such interventions can be carried out neither by conventional training in the classroom nor by pointing out on the job (that may have a long learning curve and high cost of making errors).

The most appropriate way to make people learn supply chain systems thinking is using the experiential learning within a simulated environment – that provides the ability to make, evaluate and improve decisions in a real life business case. At Advanchainge, we have taken a mission to change the way supply chain talent development has been conventionally looked at. We use world’s best value chain learning simulation, The Fresh Connection, to develop capability on supply chain systems thinking.

If you have any suggestions or thoughts, feel free to pen down your comments below.

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