The Complexity of the Examined Supply Chains

The internationalization process increases the complexity of supply chains in the examined industries: GEXSO analyzes the structural and procedural factors.

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Die Komplexität der untersuchten Supply Chain_1The process of internationalization increases the complexity of supply chains in the examined industries dramatically. GEXSO analyzes the structural and procedural factors. Structural factors include the number of production sites and the distribution structure (for reasons of simplification the latter is not included in the complexity index). Furthermore, we examine the degree to which production sites are distributed internationally, i.e. the percentage of sites that are located outside of the base or dominant region – in this way we measure concentration of internationalization. In the case of companies whose production sites are located primarily outside of the home region, the region with most sites is considered the base region. For the majority of the companies the base region is the same as the home region, e.g. Western or Central Europe (Germany, Austria, Switzerland).

Die Komplexität der untersuchten Supply Chain_2We analyze the degree of individualization in order to examine product complexity: Are products based on global platforms? Are they differentiated into regions or national markets? Are they globally standardized, or are they customer-specific? We expect complexity to increase according to the degree of individualization, and that standardization (globally consistent products, a global product platform) simplifies the supply chain approach. Another factor are decision-making structures: These are examined by asking how business decisions are delegated into subsidiaries or regional units assuming that the complexity of coordination will increase in the case of decentralized decision-making. The concentration of suppliers as a structural variable was analyzed separately (see below).

Die Komplexität der untersuchten Supply Chain_3We examined different determinants in relation to process complexity, such as the forecast, which becomes more and more complex as accuracy decreases: this could result in the increase of more and more complex ‘rush orders’, and an increase of order frequency will also increase process complexity as well as the number of parts that need to be ordered. In order to guarantee a sample that is as large as possible, the complexity index is limited to rush orders. Forecast accuracy and order frequency are evaluated separately. Inconsistent answers regarding the number of different vendor parts are not considered in the evaluation. The complexity index for all participating companies indicates considerable differences (see figure).
During individual evaluations we compared the results in particular areas with the participants’ individual complexity level to identify possible deficits in the context of respective complexities. Taking into account the results of all participating companies we examined if governance concepts tend to be more established in case of an increased complexity. It is remarkable that companies with established governance do not necessarily have a higher complexity, but show different degrees of complexity.

Die Komplexität der untersuchten Supply Chain_4Apart from this, the majority of companies that do not have a governance concept tend to have a smaller degree of complexity. Regardless of their own level of complexity, one group of participants generally considers governance concepts to be necessary. The data analysis did not enable us to clearly determine why the companies occupy this view. A high process complexity, a high order frequency or a large number of parts could all be reasons, however, these do not apply to all companies. Different motivations also play a role, e.g. being part of a larger, generally better-organized and structured corporation. Companies that need certain governance due to their high complexity also belong to this group. The other group generally has few or no governance measures at all. We were able to determine comparable deficits in companies that have no governance measures but high complexity.

The same applies for existing process standards. In comparison to governance concepts, these were mentioned more frequently. This is surprising since process standards are usually a part of corporate governance. Nevertheless, there are companies that – regardless of their comparably small complexity – have pushed for a process standardization. Then again, there are a few that – due to their high complexity – should have such standards established, especially in comparison to the peer group, but they do not or only partially do. The average forecast accuracy is approximately 80 per cent. However, some are out of line. 35 per cent of the companies state that they have a forecast accuracy of 90 per cent and are consequently best performers. 6 per cent of the companies have a forecast accuracy of less than 50 per cent, which obviously entails the aforementioned issues. At least 18 per cent are able to predict their turnover with an accuracy between 80 and 90 per cent.

Therefore, almost half of the companies have an inadequate forecast figure that is below 80 per cent. This figure considerably increases the process complexity of each respective supply chain. Companies’ reaction to such uncertainties results in a slightly negative correlation with buffer stocks (see also chapter on flexibility), i.e. in case of a decreasing prognosis quality buffer stocks are more likely to occur when there is a negative correlation, while it is not possible to demonstrate any connection to existing capacity reserves. We examined another form of process complexity, in relation to the supplier concentration: Here a higher concentration generally simplifies the management of the supplier interface in the operational process, as well as in strategic purchasing negotiations.

Over a third of the companies (34 per cent) list a maximum concentration of 10 per cent, i.e. a small number of suppliers constitute the majority of material costs (80 per cent). At least, nearly 80 per cent of the participants obtain the majority of their procurement volume from a maximum of 20 per cent of their suppliers, the rest has a broader distribution: The supplier interface is already optimized or consolidated, and complexity reduced. Rush orders (defined as prioritized orders with immediate delivery) that enter the complexity index suggest that a considerable number of the participants of the study are confronted with an increased complexity due to a significant proportion of rush orders. Therefore, 36 per cent of the companies have an order volume that consists of more than 20 per cent of rush orders, 12 per cent of the companies have between 11 per cent and 20 per cent, and 50 per cent have a maximum of 10 per cent. 2 per cent of the companies have no rush orders at all.

Prioritized orders are mostly unplanned and with quickest possible deliveries. Therefore, they increase the process complexity of the supply chain by creating disturbances. As the results demonstrate, they are a matter of routine for many companies, and occur more and more frequently as time goes on. The drivers of complexity in the process of internationalization cause a larger structural and procedural complexity that needs to be met with respective processes, procedures and governance. Evidently, companies already try to manage complexities in the sourcing area through supplier concentrations. However, rush orders and forecast inaccuracies increase the process complexity, which must be particularly considered during the process of internationalization. Structural factors such as the number of production sites, global distribution of production sites, product characteristics, etc. tend to increase the complexity of the whole supply chain. According to the results of the study, supply chain governance concepts, policies, etc. exist in the most complex as well as in less complex companies. Considerations such as the general degree of maturity of the supply chain management approach, for instance, seem to have a greater impact. Still, numerous companies do not have any – or a very poor – governance concept, even if their degree of complexity requires one.

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Successfully leading within a global production network – experiences of European industrial companies during the globalization of their supply chain.

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