Logistics and Supply Chain Management, 4th Edition

COMPLEXI T Y AND THE SUPPLY C H AIN

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8 Information complexity

Today’s supply chains are underpinned by the exchange of information between

all the entities and levels that comprise the complete end-to-end network. The

volume of data that flows in all directions is immense and not always accurate and

can be prone to misinterpretation. Visibility of actual demand and supply condi-

tions can be obscured through the way that information is filtered and modified

as it passes from one entity or level to another. The so-called ‘bullwhip’ effect is

a manifestation of the way that demand signals can be considerably distorted as

a result of multiple steps in the chain. As a result of this distortion, the data that is

used as input to planning and forecasting activities can be flawed and hence fore-

cast accuracy is reduced and more costs are incurred.

In a sense, information complexity in a supply chain is directly or indirectly

influenced by the preceding seven sources of complexity. Network and process

complexity will impact the number of stages, steps and levels through which the

information must pass; range and product complexity add variety and lead to mul-

tiple Bills of Materials and hence more data; customer and supplier complexity

means that the exchange of data increases significantly and organisational com-

plexity implies more levels through which information must pass as well as more

hand-offs from one function to another.

The antidote to information complexity is firstly a reduction in the other seven

sources of complexity as well as greater visibility. A key to that visibility has to be

a greater level of collaborative working across the supply chain where information

transparency is seen as a vital pre-requisite for a more efficient and effective value

delivery system.

The cost of complexity

It can be argued that an increasing proportion of total end-to-end costs in the

supply chain are driven by complexity in one form or another. Often these costs

may not be readily transparent as they are hidden in general overheads or the

costs of carrying inventory, which as we observed in Chapter 3 are not always

properly accounted for.

Underlying much of the cost of complexity in the supply chain is the Pareto Law

(the so-called 80:20 rule). Vilfredo Pareto (1848–1923) was an Italian industrialist,

sociologist, economist and philosopher. In 1909 he identified that 80 per cent of the

total wealth of Italy was held by just 20 per cent of the population. Thus was born the

80:20 rule that has been found to hold across many aspects of social and economic

life. In Chapter 2 it was suggested that an 80:20 relationship exists with regard to

customers and products, i.e. typically 80 per cent of the profit derives from 20 per

cent of the customer and likewise 80 per cent of the profit comes from just 20 per

cent of the products. Generally this 80:20 relationship applies across most elements

of the supply chain and is a key contributor to complexity and hence cost.

Most businesses will find if they perform an 80:20 analysis that they have a

‘long-tail’ of customers who, whilst significant in numbers, actually contribute very