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The Paradigm of Supply Chains as a Complex Adaptive System

Albert Vazquez-Agusti: partner at Sway Ventures, specialized in supply chain tech.

Albert Vazquez-Agusti: partner at Sway Ventures, specialized in supply chain tech.

Much of global economic production is organized around a complex system of interdependent supply chains.

As an example of a product and supply network with high complexity, the Boeing 787 has about 2.3 million physical parts and 7 million lines of software code. Boeing has a relationship with 5,400 supplier factories (including sub-tier suppliers). There are suppliers to the 787 program in 38 US states and 19 other countries. Besides 140,000 Boeing employees, there are 500,000 more people employed throughout the entire Boeing supply chain. Supply chains have the characteristics of complex adaptive systems in which a perfect understanding of the individual parts does not automatically convey a perfect understanding of the whole system’s behavior.

Over many decades, these supply chains which were built to deliver everything from planes and cars to food and garments, have been honed to deliver maximum efficiency and speed.

As we have seen with COVID19 such a quest for efficiency generates fragility. Sometimes the effect of disruptive events is a little nuisance to the consumer, but in other cases, they can be life-threatening. For businesses, the impact of supply chain disruptive events is much clearer and better understood.

“Once per decade, 34% of Fortune 500 companies experience a supply chain disruption costing them >90 days of output” (survey by Foley)

Disruptive events in Supply Chains have a triple impact. Firstly, on top-line sales. Secondly, on bottom-line profit. And, thirdly, on environmental costs.

According to Munich Re, 60% of companies say supply chain disruptions hit performance indicators by 3% or more. After a major supply chain disruption, shareholder return falls on average by 40%.

Supply Chains are highly fragmented and, often made up of decades-old sub-optimized tradeoffs that are inherently sensitive to disruptive events. The triggers of such disruptions are various but are becoming more frequent with time.

Among the different risks supply chains face, climate change and cyberattacks are the ones that may deserve the most attention. They have been called “Black Elephants”, as defined by Thomas Friedman in his New York Times report, as ‘a cross between a ‘’black swan’’ (an unlikely, unexpected event with enormous ramifications) and ‘’the elephant in the room’’ (a problem that is visible to everyone, yet still no one wants to address it)”.

“Black Swans” are turning into “Black Elephants” as innovative young companies bring us more and more data to prove it.

Let’s take the “Black Elephant” of Climate Change. Supply chains generate the majority of the global greenhouse emissions according to the Climate Watch.

The environmental impact of supply chains contributes to climate change which, in turn, increases the frequency of catastrophic events that disrupt the supply chain. What an irony! If supply chains generate the majority of greenhouse emissions then they perpetuate the problem and put themselves at further risk.

According to Munich Re, extreme climatic events generated $150B losses in 2019.

Have you noticed the number of once-in-a-hundred-year-climate-events that we are seeing? As Bent Flyvbjerg, a leading Oxford academic, describes, we are evolving from a world of regression to the mean — where measurements of a sample mean will tend towards the population mean when done in sufficient numbers — towards a world of regression to the tail.

Regression to the tail depicts a situation with many extreme events, and no matter how extreme the most extreme event is, there will always be an event even more extreme than this. It is only a matter of time until it appears.

"Supply Chains Have The Characteristics Of Complex Adaptive Systems In Which A Perfect Understanding Of The Individual Parts Does Not Automatically Convey A Perfect Understanding Of The Whole System’s Behavior"

Tail risks are becoming increasingly important and common because of a more interconnected and fragile global system of human interaction for travel, commerce, finance, etc., but also because the walls are coming down between natural and human systems, with humans impacting nature at a global scale for the first time in history, not least in terms of climate change.

So… with all these black elephants and tail risks, how should the supply chain look in the future, if not now?

Innovators and builders must contribute with ingenuity to deliver bold solutions for supply chains that:

1. Converge towards Sustainability

Sus·tain·a·bil·i·ty

noun

the ability to be maintained at a certain rate or level:”the sustainability of economic growth”

Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs.

2. Converge towards Flexibility

flex·i·bil·i·ty

noun

- the quality of bending easily without breaking

- the ability to be easily modified

- willingness to change or compromise

Though efforts to prevent disruptive events are required, we know that they will hit sooner rather than later in various degrees of impact, hence supply chains must invest in how to “bounce back”.

3. Converge towards Transparency

trans·par·en·cy

noun

-readily understood

- characterized by visibility or accessibility of information

At Sway Ventures we’ve invested in startups addressing these opportunities for supply chains with companies like Fetch Robotics (acquired by Zebra Technologies), Everythng (acquired by Digimark), Haven (acquired by FourKites), Onscale (acquired by Ansys), Slingshot Aerospace and Relay Payments.

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