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Global Supply Chain Players
Whether a company is responding to macro-economic events over which it has little control or pushing the global envelope via strategic maneuvers, globalization has forced SCM into the primary role of making or breaking a company's sales, gross profit and net income. At its most fundamental level, SCM is about the movement of goods, information and funds around the world.
There is no doubt that strategic decisions about target markets, product portfolios and pricing schemes determine to a great extent the success of any company. This being recognized, as competitive playing fields continuously even out over the medium term, it is the company that can execute on the tactical components of strategic SCM that will maximize its return on investment.
A look at the components of a basic international transaction illustrates the complexities that globalization has wrought on supply chains. At the risk of oversimplification, consider an international purchase made between a supplier in Hong Kong and a manufacturer in Warsaw, Poland.
This two-entity buyer/seller relationship does not include all of the departments from each organization engaged in the transaction. Also, this stripped-down exchange does not consider the input of banks, insurance firms, inspection agencies or other non-delivery-related entities. Finally, the example considers only the potential lines of communication that exist across the supply chain but not combinations involved in the handoff of goods, documentation or funds. The use of mathematical combinations will illustrate the complicated nature of global commerce, substantiating once and for all the importance of communication and execution to successful SCM.
In order to make the above point, one must first identify the nine entities involved in the Hong Kong to Warsaw exchange. The players in this simplified transaction are listed below and shown graphically in Figure 4.1.
Figure 4.1: Supply Chain Players in a Basic International Transaction
Hong Kong supplier
Origin trucker
Origin third-party logistics firm
Origin customs
Airline
Destination customs
Destination third-party logistics firm (customs broker)
Local trucker
Warsaw buyer
The essence of combinatorial math revolves around the use of factorials, an exercise designed to count the number of ways that a set of distinct objects can be arranged (or, in this case, communicate with each other). In the above example, those objects are the participants in the international transaction. If the order in which the objects are arranged is important, that arrangement is called a permutation. If order is not important, the arrangement is called a combination. Because communication on a given supply chain issue can be initiated by any entity in the process and in any order, this example will be considered a combination.
Finally, it is important to observe that both permutations and combinations operate under the assumption of non-replacement, which means that any object can appear only once in a given ordering scheme. This is an important point for supply chain communications, as it implies that once a communication chain is initiated, an object cannot be counted again (when objects are used more than once, that is called an arrangement). In the real world, supply chain communications, and the people who initiate them, do reappear often in the form of callbacks, follow-up e-mails, etc. Even with this point in mind, the use of combinations remains a compelling method to illustrate just how challenging SCM really is.
The simplest use of factorials is to consider the total number of combinations of all objects in a group. For example, the number of ways to arrange ten people in a line is ten factorial, stated in mathematical terms as 10!. Expressed in longhand, the total number of possible combinations is the product of:
10 9 8 7 6 5 4 3 2 1 = 3,628,800
In this case, there are 3,628,000 possible ways to arrange ten people in a line. Needless to say, application of this math to the referenced international transaction creates a scenario where the possible lines of contact seem endless. With nine entities in the most basic international transaction, the possible combinations are 9!, or 362,880. No wonder mathematicians use an exclamation point to express factorials!
The first observation one should make regarding the above calculation is that the number of times every player in the supply chain communicates with every other member is infinitesimally small. That statement is 100% correct under normal conditions, but in the case of disaster recovery or contingency plan execution, all parties would have to communicate with each other. What is not unusual is for several supply chain entities to be talking to each other at any given moment about dozens of different issues. Fortunately, combinatorial math recognizes this type of situation and offers a formula to measure a more reality-based scenario.
Consider for a moment a situation that is played out in supply chains around the world every day. The buyer's factory in Warsaw is about to go down for lack of a critical component sourced from the supplier in Hong Kong. Because the shipment is super hot, the normal ocean mode of transportation is upgraded to airfreight, which makes the exercise more expensive and puts unneeded pressure on gross margins.
Of the nine players in this supply chain, four will engage in direct communication to move the goods from Hong Kong to Warsaw, clear the shipment through Polish customs and deliver the components to the factory floor. They are the buyer, seller, origin freight forwarder and destination third-party logistics firm (forwarder and broker are unrelated). The number of ways in which these four entities can communicate is 4!, or 24 different combinations.
This may seem like a manageable number, but keep in mind that it applies to an isolated circumstance. This situation, when extrapolated to the hundreds if not thousands of communication lines established every day in a company's global supply chain, adds quantitative support to the prose surrounding the multi-dimensional nature of SCM.
As a final point, it is reasonable to state that at any given moment at least four out of the nine supply chain entities will be engaged in some form of communication with each other. This common situation creates the mathematical need to quantify a much more robust set of circumstances. The combinations formula used to quantify the possible number of combinations (C) that (r) objects can take from a set of (n) objects is
C,n,r = n!/r! (n - r)!
In the case of the Hong Kong to Warsaw supply chain, this means:
C = 9!/4! (9 - 4)!
For purposes of a nine-entity supply chain, there are 126 possible sequences in which any four entities can communicate amongst themselves.
As previously pointed out, the above examples do not include other players in the supply chain, nor do they include the various departments within each company. The reality of global supply chains from both a communications and operational perspective is that an organization would be hard-pressed to find a more troublesome operating environment.
If the number of supply chain players is a driver of the complexity of a business model, it would be prudent for management teams to identify all participants in their model and support that study with a definition of each player's role in the supply chain. Activities that are vital to minimizing the inevitable variances between planned and actual results include process design, task ownership, communication paths, documentation flows, technology links, escalation mechanisms and output measurement. As variances are identified, measures can be taken to continuously improve upon current structures and processes, hopefully leading all participants to supply chain excellence.
One such example of how companies have endeavored to improve upon supply chain structure while maximizing tactical performance is through the outsourcing of manufacturing and service activities. The study of outsourcing and its potential for improving supply chain performance must form an integral component of any SWOT (strengths, weaknesses, opportunities and threats) analysis or cost/benefit exercise undertaken by companies seeking innovative ways to improve their operating and financial performance.
