What's good is also what's bad: understanding complexity's role in supply disruptions
New research looks at how both the "dark" and "bright" sides of complexity play out when major supply chain disruptions take place
At 2:46 pm Tokyo time on March 11, 2011, the Tōhoku earthquake and tsunami struck Japan. The magnitude 9.0 undersea earthquake lasted approximately six minutes, and its resulting forces killed over 15,000 people, damaged over 4,000 roads, 100+ bridges, close to 30 rail lines, three nuclear reactors, and more than 1M buildings across Japan. It is, to this day, the largest and broadest natural disaster of modern time, and its impact was felt all over the world across many of the world’s most vital industries.
Because of its impact, the Japan earthquake/tsunami (“JET”) has become a natural experiment for researchers wishing to understand the impact of disruptions on global supply chains. An extensive literature has built up examining how the JET affected supply chain design and disaster recovery plans, with often conflicting lessons learned for global supply chain designers and managers. For example, some analysts looked at JET and concluded that complex sourcing models made recovery harder and thus recommended simplifying the supplier base. Other analysts saw a broad supplier base as an edge in recovery and recommended expanding the supplier list to increase resiliency. Similar debates arose in 2020 in response to the pandemic, bringing to the fore a critical question: does complexity in supply chains make recovery in, and after, a crisis easier or harder?
In thinking about this question, it helps to remember two related concepts. The first is something called normal accident theory (“NAT”), which holds that complex systems generate accidents as a “normal” byproduct of their very (complex) nature. Thus, the more complex the system — a supply chain, for example — the more disruptions one can expect to see. This view is countered by classic portfolio theory from finance, which argues that having a multiplicity of positions yields lower overall risk — a theory that has many proponents in the operational world. Back to the main question, then. What’s the better supply chain risk management strategy: simplify your operation, or add multiple options to limit the damage when the inevitable NAT events appear?
New research from Robert Wiedmer (ASU), Zachary S. Rogers (Colorado State), Mikaella Polyviou (ASU), Carlos Mena (Portland State), and Sangho Chae (Tilburg) set out to resolve the paradox between the seemingly competing benefits of simplicity and complexity. Using JET as their basis, they examined the hard-hit Japanese automotive sector, which suffered a massive 12.8% decline in production in 2011 due to the disaster. In addressing the challenge, the authors note the reasons for the conflicting previous conclusions:
This paradox, in our view, remains unresolved for at least two reasons. First, researchers have often conceptualized the relationship between supply network complexity and resilience as being either negative or positive. These unidirectional conceptualizations have thus far precluded a more nuanced examination of the relationships between distinct facets of complexity and resilience. Second, researchers have primarily examined resilience as a monolithic construct. They have overlooked the possibility that supply network complexity might have a distinct influence on each component of resilience, namely the avoidance or resistance component and the recovery component.
In other words, the reason for the seeming contradiction could be that analysts have not considered the idea that complexity might help and hurt resilience depending on what aspect of resilience is in question. Thus, their critique of past work is based on their suggestion that both complexity and resilience have multiple parts that should be analyzed independently.
Complexity, for the authors, involves three elements:
Supply complexity (the number of nodes in a supply network)
Logistics complexity (the number of arcs in a supply network), and
Product complexity (the number of components moving through a supply network)
Resilience, furthermore, has three stages:
Pre-shock (what existed pre-disruption)
Disruption-impact (what happens in the immediate aftermath of the disruption)
Disruption-recovery (medium-long term recovery back to the pre-shock state)
Definition of the three JET disruption phases (Source: Authors).
Their definition of resilience, by the way, is a supply network’s ability to “recover from disruptions and return to the original or improved steady-state performance”.
To put their ideas to the test, the team analyzed data for “over 45,000 shipments of vehicles and vehicle parts for 1,164 unique US buyers importing from Japan and Germany before, during, and after the JET.” They collected data for “the top 300 US buyers of vehicles from Japan, the top 300 US buyers of vehicles from Germany, the top 300 US buyers of vehicle parts from Japan, and the top 300 US buyers of vehicle parts from Germany. They then used “difference-in-differences estimation, defining US. buyers that source from Japan and Germany as treatment and control groups, respectively, to test how three facets of supply network complexity (i.e., supply, logistics, and product complexity) exacerbate disruption impact and enhance disruption recovery.”
With respect to the timeline, the authors defined the three phases as such:
The preshock phase includes weeks 2–14 of 2011, during which the trade flow was unaffected by the JET. The disruption-impact phase includes weeks 15–27 of 2011 and captures the impact of the event based on the declining shipment volumes. Finally, the disruption-recovery phase includes weeks 28– 40, during which the shipment volumes of vehicles and vehicle parts from Japan started to recover.
Average shipment volume per week in 2011, weeks 2-40 (Source: Authors).
Below are the major findings reported in their study.
Finding: having many suppliers is a problem at first but helpful in the long run
From their analysis, the authors concluded that companies sourcing from multiple suppliers suffered greater disruption during the disruption phase than those with fewer suppliers. This is a surprising finding since companies often think that having an ample supply base makes source switching easier in a time of crisis. The authors found that the opposite was true:
It seems that switching to alternative suppliers to secure capacity, even if a buyer’s supply base is large, appears to be difficult during this phase. One explanation for this result is that a larger number of suppliers may have experienced a disruption; hence, buyers experience an enlarged effect. Moreover, buyers may find it more challenging to diagnose the situation and coordinate a larger number of suppliers during this phase, resulting in an aggravated disruption impact.
Interestingly, this outcome changes during the recovery phase where “buyers that source from more suppliers recover their sourcing volumes to a greater extent in comparison to buyers that source from fewer suppliers.” Potentially, the authors suggest, “a larger supply base allows buyers to recover because they can secure additional capacity by flexibly sourcing from different suppliers during the disruption-recovery phase.”
Finding: having many logistics partners does not make much of a difference (at first)
The authors find that “the number of carriers does not significantly aggravate a disruption’s impact on a buyer.” Even when large networks of carriers were available, “carriers could not ship products out of disrupted areas because their operations or logistics infrastructure may have been impacted.” In other words, disruptions that are severe enough to hurt suppliers are probably bad enough to affect carriers as well, so having redundancy in logistics did not prove to be of much help in either the disruption or recovery phases.
Conversely, utilizing a higher number of carriers in the disruption-recovery phase helped companies move freight out of Japanese ports to the United States. In this phase, buyers gained flexibility by allocating their cargo across different carriers. Consequently, being able to call upon expanded logistics options once the initial shock is over would appear to be the best strategy.
Finding: product complexity is a major problem in the disruption phase (only)
Product complexity is a real problem during the disruption-impact phase, “such that buyers that source complex products (i.e., vehicles) are more severely affected by the disruption in comparison to buyers that source less complex products (i.e., vehicle parts).” An explanation for this result, note the authors, “is that the high interdependence of components in complex products aggravates disruption impact and results in a larger decline of shipment volumes.” The good news is that once the disruption phase was over, product complexity did not make much of an impact on progress during the recovery period.
Based on their researchers, the authors suggest the following recommendations to supply chain managers:
Develop a capability to flexibly increase or decrease the relevant complexity facets (e.g., supply or logistics) to withstand a disruption’s impact and facilitate their recovery from a disruption
Be aware of the disadvantages of having many suppliers when disruptions occur and of the benefits of a diverse, flexible supply base when recovering from disruptions. Firms may be able to balance this trade-off by limiting the number of key suppliers while maintaining a loose network of potential suppliers to ensure diversification after disruptions.
Be cognizant of the flexibility-enhancing role of logistics complexity during disruption recovery and compare its benefits with the costs of managing a larger pool of logistics service providers. Firms might consider using redundant carriers or maintaining backup, emergency carriers that can be activated when a disruption occurs.
Consider, when possible, the characteristics of their products because more complex products may increase vulnerability to supply chain disruptions. Our results emphasize the importance of product design to ensure supply network resilience. Our results suggest that firms should be mindful of the undesirable effects of product complexity on resilience and plan accordingly.
My main reason for selecting this particular paper today is that it provides leaders with a nuanced view of concepts that are often presented simplistically or as unilaterally good or bad. As the authors note, the reality is that “supply network complexity can have both positive and negative impacts on disruption impact and disruption recovery.” The key is to “understand the nuanced way in which the complexity facets impact a firm’s ability to avoid and recover from disruptions.” This viewpoint is correct, and “we can, therefore, conclude that both the “bright” and “dark” sides of supply network complexity co-exist, depending on the situation and the complexity type under consideration.”
As this new research indicates, it’s important to understand how supply chain design decisions impact resilience at different stages of disruption and recovery. Thus, any seeming paradox in previous analyses is probably “the result of key differences in the impact of the various facets of supply network complexity on both resistance and recovery. Supply complexity is both detrimental and beneficial, for example, since it “intensifies disruption impact but also enhances recovery from disruption.” Logistics complexity, furthermore, won’t make the disruption any easier to handle, but it will aid in disruption recovery. Finally, product complexity will increase disruption impact but won’t affect disruption recovery. These findings provide managers “a more nuanced understanding of the relationship between supply network complexity and resilience to supply chain disruptions.”
This new study offers several important implications for future research on supply resilience by reconciling the paradoxical findings in the extant literature. More importantly, it provides solid advice to buyers seeking to manage their supply networks to withstand or recover from increasingly common operational disruptions.
Wiedmer, R., Rogers, Z.S., Polyviou, M., Mena, C. and Chae, S. (2021). The Dark and Bright Sides of Complexity: A Dual Perspective on Supply Network Resilience. Journal of Business Logistics. https://doi.org/10.1111/jbl.12264