The Demand Driven Adaptive Enterprise. Carol Ptak
times. Many supply chains are ill prepared for this storm intensifying.
Add to this an increased amount of regulatory requirements for consumer safety and environmental protection and there are simply more complex planning and supply scenarios than ever before. The complexity comes from multiple directions: ownership, the market, engineering, and sales and the supply base. Ultimately, this complexity manifests itself with a high degree of volatility, uncertainty, and ambiguity. It is making it much more difficult to generate realistic plans and maintain the expectation that things will go according to plan, especially when those plans are based on GAAP-derived drivers.
The key to protecting and promoting flow at the system level is to understand and manage variability at the system level. What then is the key to managing variability? In order to answer that question we will need to expose another key component of the flow equation, the component that eludes most companies in today’s complex and volatile supply chain environments.
There is an important factor in managing variability that must be recognized; without it, the quest to reduce or manage variability at the systemic level is a quixotic one at best. This missing element is labeled as “Visibility” in Figure 1-9.
FIGURE 1-9 Adding visibility to the equation
Visibility is defined simply as access to relevant information for decision making.14 This provides an extremely important caveat to Plossl’s Law. A company cannot just indiscriminately move data and materials quickly through a system and expect to be successful. Today organizations are frequently drowning in oceans of data with little relevant information and large stocks of irrelevant materials (too much of the wrong stuff) and not enough relevant materials (too little of the right stuff). Furthermore, sophisticated real time analytics of bigger and bigger databases will not solve the problem but instead will create a deeper, wider, and stormier ocean of data and materials unless we understand how to better sift through that ocean to determine what is truly relevant for decision making now and in the future.
Note that this formula now starts not with flow but with what makes information relevant. If we don’t fundamentally grasp how to generate and use relevant information, then we cannot hope to manage variability and consequently facilitate flow. Moreover, if we are actively blocked from generating or using relevant information by systems, then even if people (adaptive agents) understood there was a problem, they would be essentially powerless to do much about it.
What makes the flow of information, materials, and services relevant is its relationship to the required output or market expectation of the system now and in the future, not what was accomplished (or not accomplished) in the past. To be relevant, the information, materials, and services must synchronize the assets of a business to what the market really wants now and in the future; no more, no less.
Thus, we have reached the core problem plaguing most organizations today: the inability to generate and use relevant information to effectively manage variability to then protect and promote flow and drive ROI performance. Without addressing this core problem, there can be no systemic solution for flow.15 Figure 1-10 shows the core problem area of the equation versus the area associated with Plossl’s Law as first stated.
FIGURE 1-10 Core problem area of the equation16
Having visibility to the right information is a prerequisite to effectively managing variability and ensuring the flow of the right materials at the right time. With this is mind, Plossl’s Law now must be amended to:
All benefits will be directly related to the speed of flow of relevant information, materials, and services.
A New Appreciation for the Bullwhip Effect
But this core problem is not confined to individual organizations. As discussed previously, complex systems (organizations) interact collectively with other complex systems to create an even larger complex system. What is happening at this higher level?
There is a phenomenon involving the stated core problem that dominates most supply chains and complex systems. This phenomenon is called the “bullwhip effect.” The fourteenth edition of the APICS dictionary defines the bullwhip effect as:
“An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. Inventory can quickly move from being backordered to being excess. This is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain. The bullwhip can be eliminated by synchronizing the supply chain.”17
A massive amount of research and literature has been devoted to the phenomenon known as the bullwhip effect, starting with Jay Forrester in 1961. However, very little, if any, of that body of knowledge has been devoted specifically to its bidirectional nature. Most of the research has been dedicated to understanding how and why demand signal distortion occurs and how to potentially fix it through better forecasting algorithms, tightly synchronizing the supply chain.
The bullwhip is really the systematic and bidirectional breakdown of information and materials in a supply chain. Figure 1-11 is a graphical depiction of the bullwhip effect. Distortions to relevant information go up the chain, growing in size and causing wider and wider oscillations both in terms of quantity and timing requirements. The wavy arrow moving from right to left represents that distortion to relevant information in the supply chain. The arrow wave grows in amplitude in order to depict that the farther up the chain you go, the more disconnected the information becomes from the origin of the signal as signal distortion is transferred and amplified at each connection point.
FIGURE 1-11 Illustrating the bidirectional bullwhip effect
Distortions to relevant materials come down the chain as delays and shortages accumulate. The more connections that exist, the more pronounced the delays and shortages. The wavy arrow from left to right depicts that distortion. Lead times expand, shortages are more frequent, expedites are common, and flow breaks down.
Creating visibility to relevant information and managing the risks to coherence and resiliency is no trivial task, but it is the only path to sustainable organizational success as measured by ROI. The more relevant information our organization has, the more immediate and enduring success it will have—it is really that elementary. Intuitively, people in organizations know that they must find and use relevant information for decision making. Yet many of those people recognize that their information systems are not giving them the visibility that they need. What will it take to get more relevant information throughout the organization? This question is explored in Chapter 2.
The Prerequisites for Relevant Information
The search for and use of relevant information to control variability, promote flow, and ultimately drive ROI begins with an understanding of four basic prerequisites. The absence of one or more of these prerequisites