Embracing Complexity

May 21, 2020

STRATEGIC THINKING – CALL TO ACTION

How do we answer the call to action? Where do we begin? Let’s talk about strategy and strategizing as the key differentiator.

“Strategic Planning is an oxymoron.”

- Ann Latham, What The Heck Is A Strategy Anyway? Forbes, October 29, 2017

A strategy is a framework for making decisions about how you will play the game of business. These decisions, which occur daily throughout the organization, include everything from capital investments to operational priorities to marketing to hiring to sales approaches to branding efforts to how each individual shuffles his/her To Do list every single morning. That shuffle is reorganizing your thoughts and setting new priorities for the day. It is strategic thinking.

This Blog is Part 2 of the Series. Click to read Part 1 first.

Designing, developing, and managing efficient processes that reduce costs and support customer satisfaction is what we do to increase margins/profits when running our businesses. That is process planning. Designing and developing strategies that deliver value in domestic and global markets, and differentiate our companies from competitors is why we do what we do. That is strategic thinking. Process planning attempts to master innovation in the development of new products and services:

Design the right business processes that enable you to out-innovate your competition, combining quality and speed;
Reduce inherent risks in innovation while making the right investment decisions in new ideas;
Generate ideas that are better than everyone else’s by effectively engaging a larger group of people as co-ideators .

In the face of the current global pandemic, process planning can effectively mitigate and even manage risk at all levels of human enterprise: economic, geo-political, social, global. The strength of global supply chains and logistics is evidence of effective process planning. Despite panic hoarding, supply is sufficient to meet demand so long as end users do not needlessly exceed that demand. Of course, I am not referring to the exceptional case of excessive demand that overtook support systems such as hospitals, medical and other help professions. We cannot deny that the current pandemic is exceptional in many ways, and we cannot ignore the fact that short term capability does not guarantee long term recovery and sustainable regeneration. Process planning has only a limited effect when it comes to recovery. Recovery and regeneration are inherently rooted in strategic thinking. Recovery and regeneration demand a resilience strategy. Panic and Fear: In the face of any crisis, we encounter this divide: supply chain logistics either works effectively or it fails to work at all. Ironically, the general population does not know what supply chain or logistics is until it breaks down. I suggest that while still in the throes of this pandemic, supply chain logistics is working well enough, and is even recognized for its essential contribution to survival. Yet, organizations seem to be in panic retreat: instead of touting the strategic importance of supply chain logistics to economies, societies, nations and people as demonstrated by supply chain logistics capabilities, there is talk of assuming defensive postures focused on cost reductions achieved through process planning. We are tempted to ignore the strategic value of service, even as we benefit from it. One of the ill effects of the current pandemic that I fear the most is the retreat from globalization. Going local is hardly the route to take because it is expensive to recapture and even more expensive to sustain . Yet there is a panic reaction afoot and people are pushing an isolationist agenda. At best, at-home developments could/might be short term solutions, especially if they are supported by significant government subsidies. At worst, however, they will fail because they will be unsustainable and once again the world will have gone backwards. If we retreat to safer and surer grounds, then Supply Chain Logistics will stop being positioned at the C-level as the strategic differentiator in global markets. We will once again focus on inventory optimization and internal processes to reduce costs, and we will fail to develop global networks that differentiate one company from another, one economy from another, one supply chain from another. The tension between IO and ND will once again revert to the lowest common denominator – IO. We need to build the new future in the face of the new normal and not retreat to past comfort zones. We need to build supply chain logistics as a resilience strategy and not simply relegate it back into a process management focus. How do we build supply chain logistics on a global level as a national and business resilience strategy in the face of crises?

BEING RESILIENT – STRATEGIC LEADERSHIP CHALLENGE

How do we build supply chain logistics on a global scale as a national and business resilience strategy in the face of crises? First, we need to foster strategic thinking capabilities not simply to mitigate the impact of this crisis and to recover from it, but to regenerate our economic well-being at macro- and micro-economic levels as well as at corporate, business, social and environmental levels. We need to ensure we are resilient as companies, societies, nations, and people. We need to define a new future to deal with the new normal. Resilience is a leadership imperative: despite the urge to retreat into isolationism and protectionism, we need to continue transitioning from primarily bureaucratic and transactional groups to organic networks with the ability to navigate complexity, uncertainty, and ambiguity. This is the strategic lesson to learn from the pandemic. Resilience is firmly rooted in the ability to quickly and intuitively

recognize and diagnose the dynamic contextual variables inherent in an event or circumstance and
results in intentional adjustment of behavior in order to
exert appropriate influence in that context.

Complexity, uncertainty and ambiguity have always been with us, but now they are the nexus of the new normal that stares us in the face. Agility, flexibility and innovation are the ingredients of a resilience strategy that will allow us to handle complexity, uncertainty and ambiguity. We begin by better understanding all the dimensions and variables of complexity and learning to lead strategically. Resilience requires that we develop strategic leadership competencies that involve the ability

First, to recognize and diagnose the multi-dimensional complexity of contextual factors inherent in a situation, such as the COVID-19 global pandemic;
Second, to adjust, both intentionally and intuitively, our behavior and capability to influence, as well as make decisions in, that context.

We begin by parsing the situation – we can apply these general principles to COVID-19:

Context: all the external, internal, interpersonal and intrapersonal factors that contribute to the uniqueness of each situation and circumstance. How do we understand the situation?
Intelligence: the ability to transform data into useful information, to convert information into knowledge, and to assimilate that knowledge into practice. What can we do?
Experience: the ability to extract wisdom immediately from different experiences and not necessarily from the passage or accumulation of time. How can we do it - what will work?

We need to hone Three Awareness both individually and collectively:

Intuition: the awareness of relevant past events: All situations came from somewhere….
Insight: the awareness of present contextual variables: All situations are complex….
Preference: the awareness of the preferred future: All situations need to be dealt with….

Resilience is not about better process planning; resilience demands strategic thinking; resilience is an ethos establishing a leader’s authority to lead:

That is real and perceived, psychological, social, physical, and metaphysical.
That includes a multiplicity of such things as: geography, genders, industries, job roles or titles, attitudes, beliefs, values, politics, cultures, symbols, organizational climate, the past, the preferred future, and personal ethics.
That recognizes these contextual variables in self as well as in external and internal stake holders.

Resilience is a call to action. Resilience demands strategic thinking capabilities and the capacity to lead strategically.

Intuition: the awareness of relevant past events: All situations came from somewhere…. As logistics practitioners and professionals we recognize that well-run global supply chains can and do aid and abet the spread of crises such as pandemics. Let's drop the narrow thinking of cause and effect that leads to scapegoating and blame. We created the global economy, so now we need to learn to live with the good, the bad and the ugly. Pandemics are not caused by global Supply Chains, but they are all-inclusive vehicles for them. Supply Chains are the international highways for pandemics as well as for global economies.

THE BRUTAL FACTS ABOUT RISK

Risk is not a simple thing. Understanding risk is to engage in complexities. Our contextual focus is on Global Supply Chains and Logistics . When considering risk we will work within the SCL context. The following statements are excerpted from the book Supply Chain Risk Management: An Emerging Discipline written by G.L. Schlegel and R.J. Trent and published in 2017. Global Supply Chain Logistics as Risk: Before we can begin to mitigate risk and develop resilience strategies, we need to recognize that

The financial impact of Supply Chain Logistics disruptions can be devastating but is often not understood until it is too late.
SCL has become too comfortable with deterministic models and tools, such as forecasting models, sales and operations planning, and other processes that never take uncertainty into account.
SCL processes and procurement strategies primarily driven by cost management and delivery improvements are no longer comprehensive enough. Cost management and delivery processes cannot handle complexity, and complexity is normative in the face of risk.
Global SCL growth has resulted in uncertainty, complexity and risk growing in frequency and severity, with the need to utilize probabilistic tools to account for these factors.
Risk heroics must give way to risk management in modeling, anticipating and preventing risk occurrences, and ultimately to resilience strategies to recover and bounce back from such events.
SCL leadership must master the 4 stages of developing a 21st Century Risk and Resilience Maturity Model: visibility, predictability, resiliency and sustainability.
SCL Risk and Resilience affects an entire organization’s culture. It is a cultural affair, not just a process issue.

Why are global supply chains and logistics operations riskier? Because

Globalization stretches end-to-end supply chains.
Regulatory Compliance complicates international trade.
Increased economic uncertainty and market volatility create variability in demand and supply and greater difficulty to do supply-demand forecasting.
Shorter product life cycles and rapid rates of technology change increase inventory obsolescence.
Demanding customers create time-to-market pressures for better on-time deliveries, higher order fill rates and improved service level efficiencies.
Supply side capacity constraints create difficulties to meet demand requirements.
Natural disasters, environmental events, and pandemics disrupt global supply chains.
Complex networks of suppliers and service providers create inter-dependencies among multiple organizations and increase the need to coordinate risk plans.

Any understanding of risk must be multi-dimensional. How many kinds of risk are there?

Risk: we all face everyday risks and they are relatively harmless, until they actually happen . Then a risk becomes a risk event.
Risk Event is a discrete, specific occurrence that negatively affects a decision, plan, firm or organism. Risk events can be episodic and temporary , or long-term and continuous .
Risk Exposure involves the quantified potential for loss that might occur as a result of a risk event . Applied to global supply chains, risk involves disruption and loss.
Vulnerability tends to be less quantified in that one is generally susceptible to harm or injury . Vulnerability is inherent in globally extended supply chains simply because of their extension in space and time.
Risk Management is a mitigation plan to control the impact of a risk event as it occurs, and potentially even to avoid risk in the first place.
Resilience Strategy is the bounce back capacity that enables the organization to recover from or adjust to the impact of the risk event.
Risk Appetite is the degree of risk that an organization or individual is willing to accept or take in pursuit of objectives and goals, measured in both quantitative and qualitative dimensions.
Risk tolerance is more often a financial reference to the risk that one will take in pursuit of a desired performance .
Risk Averse characterizes organizations and individuals with a low appetite for risk. Traditionally, most organizations are risk averse when it comes to their supply chains and logistics, because SCL thinking is firmly rooted in cost reduction and process management planning.
Risk Analysis, aka risk assessment, is the process of qualitatively and quantitatively assessing potential risks especially within the supply chain, and involves mapping potential events across two dimensions: the probability of any risk occurring in the supply chain and the impact if the risk should become a risk event.
Risk Response Plan is a logical extension of a risk analysis that defines known risks, includes descriptions, causes, probabilities and the likelihood of risk occurrence, along with costs and emergency responses.
Risk Compliance involves the internal activities taken to meet required and/or mandated rules and regulations, whether governmental, industry specific or internal.
Risk Compliance is a management issue and process that - identifies applicable laws, regulations, contracts, policies; - assesses the current state of compliance; - assesses the risks and potential costs of noncompliance against the expenses to achieve compliance; and - prioritizes, funds and initiates correction actions as deemed necessary.
Risk Governance involves the frameworks, tools, policies, procedures, controls and decision-making hierarchies employed to manage a business from a risk perspective.

We can also identify nine (9) operational functions where risks can occur in global supply chains:

Design: product, process, network
Quality: quality at source focused on product inputs, and quality of process focused on managing network relationships
Cost: product specifications and network functionalities
Availability: who are the suppliers? Are they critical/not critical? How many/few are there?
Manufacturability: can we actually make the product we design to specification?
Supply: where do we source? How do we sustain supply?
Finance: what is the business agenda of each player in the network? Are suppliers financially viable?
Legal: whose laws apply – national, international, local, foreign, and/or domestic? Which laws apply – Customs? Corporate/business? Tax, import, export? Environment? Human rights? Labor?
Environmental-health-safety: at sight? In process? Throughout the network? At arrival?

We need to distinguish between enterprise risk and SCL risk. Thinking more strategically, we can identify four categories affecting the organization and its operations as a whole:

Strategic Risk: those risks that are most consequential to an organization’s ability to carry out its business strategy, achieve its corporate objectives, and protect asset and brand value .
Hazard Risk: random disruptions, including both acts of God, such as volcanic eruptions, tsunamis, floods, super storms, and human interventions, such as fires, product tampering, theft, terrorism and accidents.
Financial Risk: internal and external financial difficulties of participants in global supply chains, where the risk is caused by financial considerations and not the result of risk events.
Operational Risk: daily operations that include internal and external quality problems, late deliveries, service failures, poor forecasting, and how supply chains are structured and managed.

Entering the global and international arena, we categorize risks as

Systemic: risks that are widespread and affect almost everyone globally – currency fluctuations
Event: risks that are narrower and more localized that affect participants selectively - tsunami
Idiosyncratic: risks that are highly localized that affect very few participants – highway gridlock

Analogously, we can also categorize risks as

Hard: risks that are measurable and tangible, and affect assets, inventory, and facilities.
Soft: risks that are imprecise, such as risks identified through total cost models, which blend measurable risks and hidden risks .
Known: risks we encountered before or can reasonably predict and anticipate.
Unknown: risks that are unforeseen, unexpected, or unanticipated – total surprises.

We need to manage all these risks individually and collectively. Risk Management is a portfolio of actions and opportunities.

HOW CAN WE MANAGE RISK?

Managing risk is complex. Risk Management is a portfolio of actions and opportunities: Risk Mitigation: at the broadest interpretation, risk mitigation refers to any and all actions undertaken as part of risk management. More specifically, to mitigate is to lessen the impact of something, which could be the effect or impact of a risk event after it occurs, or could be actions taken to reduce the likelihood of such a risk event occurring before it happens in an effort to minimize any impact.

The simplest approach is to view risk mitigation as actions undertaken in response to a risk event, rather than as preventive actions prior to any risk event occurring. In this way we separate “responsiveness”, aka mitigation, from “prevention” in our strategic thinking.

Risk Avoidance: avoidance refers to exiting from or eliminating activities that potentially give rise to risk. Having one critical supplier of components, subassemblies or products is a high risk situation. Having multiple key suppliers is potentially a, albeit more expensive, risk avoidance strategy.

A just-in-time delivery strategy may be an effective way to deal with time, but may also be a risky way to ensure product is available when and where needed all the time. Avoidance is about reducing or even eliminating risk exposure.

Risk Prevention: prevention involves taking actions to ensure a risk does not become a risk event, or, if it does become an event, that it will have minimal or inconsequential effect. Unlike avoidance, one does not exit from anything to deal with the risk factor.

Prevention is an “anticipatory strategy”, an attempt to avert risk even before an event occurs, rather than a responsive strategy, which attempts to mitigate the impact of such events after they occur. Anticipatory strategies are key to resilience.

Risk Acceptance: acceptance means to take on and assume risk. Often acceptance occurs by default because preventive and anticipatory strategies are not in place, avoidance has not been implemented, and mitigation is the only recourse after a risk event has occurred. At the more strategic level of corporate planning, a cost/benefit analysis of addressing risk might outweigh the cost of the impact of a risk event.

This is technically called “acceptable risk”. Sometimes there is simply no practical way to prevent, share or mitigate the risk – you just have to live with it and accept responsibility for the risk and its impact.

Risk Sharing: sharing involves transferring a portion of a risk to reduce the full impact on one key player in the business chain. The most obvious form of risk sharing is insurance. In financial arenas, sharing takes on the form of hedging, whether commodities or currencies. Risk pooling is another form of sharing to consider: in insurance there is something called underwriters, who are insurance companies that underwrite the risk of another insurance company when issuing insurance policies.

Risk sharing does not involve avoidance or prevention; it is passing the risk on to others in order to mitigate the full impact on oneself. In effect, it is an “off-loading” strategy as part of managing risk.

A resilience strategy combines prevention and responsiveness. An increase in known risks favors pre-risk preventive approaches, aka process management. An increase in unknown risks favors post-risk responsive approaches, aka agility strategies. A strategic approach to risk and resilience must keep in mind these salient points –

To be effective risk and resilience must be strategically positioned as a company-wide corporate cultural issue: it is not just about good planning; it is about developing a resilience ethos.
Risk and resilience must be operationally supported by effective tools, techniques, measures and skills, so that the organization can engage in thoughtful risk taking, recognizing that risk cannot be eliminated in its entirety. Risk is normal and the impact of risk creates a “new normal”.
While risk generally involves exposure to danger or loss, it more specifically entails the probability of damage, injury, liability or loss caused by external or internal vulnerabilities that may be avoided in a pre-emptive way but cannot be totally eliminated.
We must clarify the distinction and difference between enterprise risk management and supply chain logistics risk management.
Supply Chain Logistics Risk Management is the implementation of strategies to manage every-day and exceptional risks along global supply chains through continuous risk assessment in order to reduce vulnerability and ensure continuity.
A comprehensive approach to Supply Chain Logistics Risk Management must account for such complexities as risk event, risk exposure, vulnerability, risk governance, risk resilience, risk appetite, risk compliance, risk response, risk assessment, and risk analysis.
A Supply Chain Logistics Resilience Strategy must account for strategic, hazard, financial, and operational risks, applied to efforts in mitigating, avoiding, preventing, accepting and/or sharing risk.

We cannot eliminate risk. We need to handle risk as it happens (emergency response and mitigation) and recover quickly (resilience strategy).

SUPPLY CHAIN LOGISTICS – EMBRACING COMPLEXITY

To develop competitive and resilient Supply Chain Logistics, we must focus on network design, and not just on inventory optimization. Where the goal of Inventory Optimization is cost reduction and process management, Network Design is strategic to a company’s competitive advantage in global markets. ND is the organization’s differentiator. ND is also the foundation of a resilience strategy. In a competitive environment, products and processes can be imitated by competitors. The relationships established and managed along complex global supply chains, however, are not easily replicated or even replaceable. The key to an effective resilience strategy is not so much about avoiding competition, but about developing the capacity to deal effectively with complexity, uncertainty and ambiguity. That capacity in the face of complexity provides the basis for us to handle and mitigate the immediate impact of risk events, and ultimately to recover from their long term negative effect. To accomplish both objectives – competitive advantage and resilience, we need to rethink Global Supply Chain Logistics as a business eco-system. By doing so, we will embrace complexity as normative. As a business ecosystem Global SCL involves multiple nodal points, effective inter-organization processes, and complementary business strategies that support the financial viability and success of all participants that constitute that network. But what is a business eco-system and what do we mean when we say Supply Chain Logistics is a business eco-system? All ecosystems are, by definition, unique. In the 21st Century, the fundamental realities faced by all enterprises engaged in Supply Chain Logistics are:

Whether a company is engaged in global markets or is engaged only locally, all supply chain logistics processes are worldwide in their connectivity .
Any understanding of supply chains and logistics that is linear end-to-end from supplier to customer misses the critical reality .
Linear thinking about supply chains and logistics must give way to a more organic approach to our understanding of supply chain logistics .
Core enterprises in global business are nerve centers engaged in multiple actions and transactions involving many participants who themselves are nerve centers of multiple actions and transactions .

Furthermore, the impact of Big Data, Predictive Analytics and Artificial Intelligence forces us to rethink everything about SCL:

From linear supply chains to complex, dynamic and connected value webs ;
From “value based on the production of goods and services ” to “value based on knowledge exchange that drives pro-active production of goods and services ” ;
From transactions as the primary business goal to creating knowledge-sharing networks as the primary business goal .

SCL is inherently complex. To understand SCL as a business eco-system, we need to gain insight into complexity. Only in this way can we hone our capacity for strategic thinking.

Generally, complexity characterizes something with many parts where those parts interact with each other in multiple ways, culminating in a higher order of emergence greater than the sum of those individual parts. Individual components interact in multiple ways and follow local rules, relating to various components outside their immediacy. SCL complexity is illustrated in the diagram to the left. There are three key factors to keep in mind when thinking about complexity in general and the complexity inherent in Global Supply Chain Logistics in particular:

Components: elements or units that are structurally distinct, function independently, generate some form of local behavior, activity or dynamics, and may involve subcomponents, resulting in systems that are complex at multiple levels of organization and forming hierarchies of components.
Interactions: components engage in dynamic interactions, resulting in integration or binding of these components across space and time into an organized whole. Interactions often modulate the actions of individual components, altering their local functionality by relating to the global context. Interactions are mediated by some form of communication or connection. The patterns of these interactions determine how the system functions as a whole.
Emergence/Outcomes: Interactions between components generate effects that emerge as characteristics of the system as a whole. In turn, deconstructing the integrated system into components results in a loss of the total picture and its value add.

Ultimately, complexity involves relationships and managing those relationships is critical throughout the entire complex system. The order of magnitude is itself quantitatively overwhelming:

The number of interweaving relationships in a global supply chain is the total number of options at each level, which statistically can be 2.7 quintillion options . Qualitatively, managing relationships also immerses us in the ambiguity of the interpersonal. Both quantitatively and qualitatively that ambiguity is fraught with risk. Global Supply Chain Logistics is inherently risky. The result is that there is no reasonable way to define or control the various possible interactions or predict their outcomes. Ambiguity is core to complexity. Embracing that ambiguity in Global SCL is the beginning of thinking strategically to sustain competitive advantage and develop a resilience strategy.

Interested in this topic? Check out these programs: Supply Chain Resilience, Supply Chain Strategies, Applied Innovation and more

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