By Ann Grackin
Over the last few years, we have evolved supply chain practices
and systems from industrial age concepts to the information
age—an age rich with connectivity and data. This has
allowed us to change the foundational structure on how we
manage the enterprise. The information age that brought us
supply chain systems has allowed us to begin to control the
chaos that we have found about us.
Scientists define a chaotic system as one that appears to
behave randomly, but is, in fact, governed by rules. Chaotic
systems are highly sensitive to initial conditions, the seemingly
insignificant and arbitrary events that ultimately can have
profound and seemingly unpredictable results. But in reality,
the results are fairly predictable if our measurement devices
sense these inputs.
Market formulation is like these chaotic systems, where
the confluence of many activities ultimately creates an organized
storm or system. What is true is that many of these events
are understood and the outcome of them can be predictable.
But today, these are not modeled in the systems we have.
Supply Chain systems to date have represented the back-end
of that process of servicing markets, which heretofore appeared
to be the tail end of the chaotic system—the least
powerful and uncertain.
Managing Uncertainty: The Third Paradigm
The supply chain, in embracing the digital world, has taken
us a long way in replacing assets with information. But the
fact is, building products still takes a long time. Contrastingly,
markets require short response times—days. So far,
the game plan is still to hedge with assets—people,
plant and materials. Leaner, yes—but we are still victims
of the uncertainty created by the gap—between market
uncertainties and the expectation for definitiveness.
Firms have tried various methods to deal with this—outsourcing
many processes to dump risk down the chain, reduce product
selection and specialization, and charge more (when they
can) for customizations. Some of the thought process around
this is healthy, since it forces firms to think about their
differentiation. If the customer is going to wait, it had
better be worth it—like handcrafted components in a
Rolls Royce vs. an assembly line created Toyota Corolla.
Yet even in this mid-market, some customization is expected.
And the expectation is fast response to the customer chosen
feature. Here of course, is the first key to managing uncertainties.
It is the ability to design products and service delivery
models that isolate what will be customizable, and the rest
is off the shelf. But even within the narrowing of choices,
the risks are wide and large.
Risk Management Supply Chain Application
For the last few years, we have been beginning the process
of trying to understand the unplanned event, the introduction
of the so-called event management software. This begins to
allow us to see out of plan activities. But this technology
provides a system of alerting, based only on known models.
However, we are just beginning this new capability, (figure
1) the Third Paradigm.
So, we are planning for the unexpected—reducing risk!
Again, even in our chaotic model, the early stages have many
of the same elements that we are oh so familiar with.
I will spend the rest of the article briefly describing
the concepts. There are algorithmic underpinnings to these
concepts, but here we only have space to introduce the topic
and illustrate the positive impact that applying this can
have to your business .
So what does it mean to plan for uncertainty?
The first and second paradigm systems deal in knowns—this
is what I think I need and therefore this is what I will
buy. The Third Paradigm focuses on the uncertainty elements
(figure 3) to understand risk. This is the key. Isolate,
understand and organize the chaos—creating an operational
and financial model.
What is the co-relationship between those uncertainties
and burdens—additional costs, time, the changing of
agreements or relationships? If there are shortages, for
example, we might pay increased costs or try to lock down
supply partners with inflexible terms. But if we have a game
plan, we may not have these penalties.
A simple example will clarify the concept. Firms are reluctant
to overbuy stocks. We might wind up with too much inventory,
and that capital investment can have a huge opportunity
cost—preventing us from making other critical investments.
With products where we have a fair knowledge (low risk)
of their behavior in the market, we can set up contracts
that build in volume discounts, set lead times, and manage
a lean inventory model. But in new product introduction,
for example, there is much uncertainty. If the product
does not take off, we have huge inventory losses. However,
if it does take off, we can miss the market timing, and
lose revenue. Even worse, our competitors are watching,
and determine to introduce a similar product. They will
seek out suppliers—maybe our suppliers—which
will create shortages and higher prices. There goes your
market leadership, your margins, and maybe your market.
A paradigm of two systems would not identify or isolate
these issues. It would help you to pick a course—one
you would procure against that. In the Third Paradigm,
we can isolate the issues; build options that create the
most favorable plan, including the uncertainty factors—not
Conclusion: Making it a Process
Another aspect of the Third Paradigm is to make managing
uncertainty part of the business process where the organization
contemplates and codifies these assumptions about how the
business will behave. This takes us from hallway conversations
into management of the risk. I find that so many organizations
have many stories and fears about these issues, but they
never actually take the steps to rationally and deliberately
build a plan to master these dynamics—and win. If
markets are risky, and you manage risk better—are you
not, therefore, ahead of your competitors?
Technology and process can take us a long way to entering
this Third Paradigm. As Aristotle said: “It is through
knowledge that I gain understanding…and understanding
lets me do by choice what others do by constraint of fear.”
more in-depth understanding and discussion of these concepts
go to: http://www.chainlinkresearch.com/parallaxview/V2_03/home.htm.
©2005 ChainLink Research, Inc.