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Chaos Theory: Can We Use It to Our Advantage in Supply Management

Author(s):

George Harris
George Harris, President, Harris Consulting, Inc., Lexington, MA 02420, 781-674-0041, harriscon@aol.com

85th Annual International Conference Proceedings - 2000 

Abstract

Many supply management professionals find themselves in a chaotic environment, trying to react to market and customer behavior, internal production or service problems, loss of staff, introduction of new technology and products and changing organizations. Since the majority of any organization's budget is spent with suppliers who provide critical products and services, supply management also has to consider potential chaotic situations in their supplier organizations. Suppliers mirror their customers - in fact, much of the chaos evident in supplier organizations may be caused by wild fluctuations of schedules, quick introduction of new products, and increasing pressure to reduce total costs.

What are Examples of Chaos: An assertion can be made that supply management success lies primarily with managing chaos effectively. Indeed, supply management is a service organization in the first place, and beyond that, organizations depend on supply management to manage the following elements of the chaos pie:

Figure not available in text-only version of this article.

To be certain, the configuration of this "pie" will vary based on the scope and size of a particular organization, but the issues themselves are fairly consistent across organizations.

Chaos Theory

Most people who saw the movie "Jurassic Park" remember the discussion on chaos theory. Why? Because we all experience chaos in our lives and we strive to make sense of it. Chaos

Theory is defined as the study of complex nonlinear dynamic systems. Let's consider the elements in more detail in the language of supply management:

  1. Complex: Consider the information technology linkages such as DRP, MRP, Intranet, Internet Purchasing products and services are exponentially growing more complex. Entire processes are now being out-sourced. The work of supply management requires more knowledge, skills and scope than ever before.

  2. Nonlinear: This means that it can't be predicted accurately based on logical trends or relationships. For instance, prices of personal computers follow a linear trend based on technology. Sales of a radically new product or service does not follow a linear trend.

  3. Dynamic: This refers to an ever-changing system such as composition of supply chains, market demands, people, and information flow.

  4. System: Systems must be viewed in terms of all the processes required to achieve an end result. For example, the specific supply chain for procuring parts from China must be viewed as a total system beginning at first blush of a customer need and ending when the final end product is used.

A Chaos System Flowcharted

Figure not available in text-only version of this article.

As the preceding flow chart indicates, chaotic situations result from a chaotic system. If you can recognize the genesis of the chaotic event, then you'll be in a much better situation to respond to the crisis or chaos.

Diagnosing Chaos

The first step of managing chaos is collecting data. Data can be exceedingly valuable in evaluating and managing chaos because:

Chaos Theory is not about disorder - the very essence of Chaos is order

  1. Chaos can be predicted
  2. Minor changes in the system can cause huge fluctuations in system results; chaotic systems are sensitive to change.
  3. The behavior of Chaotic systems can be modeled
  4. Chaotic systems follow the well-held observation of the "domino" effect
  5. Events that occur can be evaluated as potential "causes" of chaotic system results

Data needed to evaluate a chaotic situation relate to the observed results such as missing shipment dates, poor supplier quality, higher manufacturing or service costs, wrong inventory mix or high inventory levels, shortages, and general customer dissatisfaction.

Data Analysis

Supply management teams should follow the standard Plan-Do-Check-Out cycle when evaluating the data. The data provides the current situation. The next step is for the teams to flow-chart the process and develop pareto charts to arrive at potential root causes. Remember that a minor event, in combination with other previous events, may have caused the system to become a chaotic event.

An example from a major engine manufacturer may provide some clarification.

In the spares organization, buyers/planners/materials personnel were constantly reacting to shortages. Over 20% of their demand was not forecasted on a weekly basis. Many of their orders were received from the U.S. Government and Airlines, and since the company published a 30 day lead time for all parts, many parts immediately became overdue on the date of order receipt. Suppliers lead times ranged from 12 - 44 weeks. Morale was low and customers were unhappy.

When asked to address this chaos, staff decided to flowchart the supply chain and attempted to diagnose the cause of the problem. The resultant flow chart was as follows:

Figure not available in text-only version of this article.

In the preceding case, the criticism of the Defense Department's inventory practices by the General Accounting Office and the concern over poor profitability caused the chaotic situation. The solution was to provide company personnel on-site at key customer facilities to better understand customer needs and concerns.

Another example illustrates the effect of quality practices on a chaotic condition in an electronic assembly manufacturer.

This company severely missed its quarterly revenue goal which was document in the Wall Street Journal. Suppliers account for 80% of manufacturing costs and provide at least 70% of the items on the Bill of Materials. Plant staff identified an increased number of supplier quality defects as the primary cause of the shortfall. A cross-functional team also flowcharted the flow of this chaotic situation, with the following results:

Figure not available in text-only version of this article.

In the preceding situation, the increased stress on on-time-delivery by the company's Vice President during a recent supplier conference, created the chaotic situation.

Attractors

In chaos theory parlance, the minor events or "attractors" cause the chaotic situation to occur. Under certain conditions these events will either cause the system to converge to a steady state (positive) or it will cause the system to stay in a bounded but chaotically defined region or area.

An example of a positive attractor is elevating the educational requirements of supply management within an organization. An example of a negative attractor is the abandonment of training or loss of a key manager. It requires careful analysis and investigation to find the factor that "broke the camel's back" or is positive enough to keep this system in relative disarray.

To apply the chaos theory effectively, supply management must recognize the chaotic situation, diagnose it, collect data, and arrive at the root cause of the current conditions. Then, corrective action can take place. This can apply to the most common chaotic situation in supply management such as:

Figure not available in text-only version of this article.

Remember that there is a defined order in chaos. Don't resist it or curse it. Take an objective, assessment based approach. Use the chaos situation as an opportunity for improvement.


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