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June 12, 2008 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Supply Chain Complexity Crisis

“Complexity is like a cancer that destroys supply chain efficiency.”

Gilmore Says:

" Among the many persuasive arguments that Mariotti makes is that a factor in all of this is that our accounting systems are simply not designed to “cost out” complexity."

What do you say?

Send us your comments here

That quote, or something quite close to it, was from a supply chain executive at Pepsi several years ago, whose exact name I can’t find, but it has stuck with me ever since. (If anyone has the exact source, please email me at the Feedback button below).

I also had the pleasure a few weeks back of hearing John Mariotti memorably speak on complexity at the combined meeting of the CSCMP Atlanta Roundtable and Georgia Tech Supply Chain Executive Forum. John, Pat Sinnott (VP of Supply Chain for Canadian Tire) and I followed that with a spirited discussion at dinner that night on similar themes.

Mariotti, in fact, just wrote a book he titled The Complexity Crisis, and he is a lot more than just an author. He was previously president of Rubbermaid’s Office Products Group and, before that, Huffy bicycles, and now spends his time doing a lot of consulting with CEOs. (As a quick aside, Mariotti said that when Huffy’s board wanted to shut down the world’s largest bicycle plant in Dayton, OH, he offered a plan that would have used postponement and other strategies to keep much of the final assembly in the US, but the idea fell on deaf ears).

While Mariotti’s focus isn’t on the supply chain directly, it’s obvious that’s where, in fact, most of the complexity is in the end expressed.

“Companies are starting to realize that this Complexity Crisis is crippling them, destroying their profits, and draining their resources,’’ Mariotti says.

He sites an example from his own career. Mariotti, at the time, was president of Huffy’s mass retail division, which sold bikes to large store chains. At some point, the company decided to grow - it needed to penetrate the small dealer channel, which required changes across everything from product design to marketing to pricing management and collections. It added killer complexity to what had been a relatively simple business.

“This complexity came in layers,” Mariotti writes in the book. “A different, more fragmented distribution system; a much less price-sensitive elitist consumer base; different products focused on high spec, light weight, performance and “snob appeal,” etc. What seemed like subtle market and product differences at the outset “added unseen complexity – layers of structure, process, cultural, and relationship differences that would be hard to even imagine until you encountered them.”

Sound familiar?

Mariotti says this complexity is simply destroying the profitability at many companies, and that executives often can’t see what the true cause is. They blame poor execution of what, in truth, are strategies doomed by the complexity it adds, especially in the supply chain. More suppliers, more parts, more forecasting, more customers to ship to, more returns to manage, etc.

Yes, companies need new products and new markets to grow, but there are limits – the complexity created in chasing those markets, especially if there is not a rigorous parallel effort to minimize the level of complexity created, can simply rise to a level beyond which the company can profitably handle.

“It’s usually the best of intentions that lead to a complexity crisis,” Mariotti said.

Among the many persuasive arguments that Mariotti makes is that a factor in all of this is that our accounting systems are simply not designed to “cost out” complexity. There are obviously no general ledger entries that capture it directly.

Instead, “the costs of complexity are hidden in all sorts of accounts – variances, allowances, overhead, scrap, rework, inventory obsolescence, expedited transportation, etc.,” Mariotti said.

And as these new products, markets and channels are developed, those of us in the supply chain “are like the ones who have to clean up after the parade,” Mariotti said to the audience in Atlanta, which elicited a strong chorus of knowing laughs and nodding heads, as did his comment that no company seems to have “un-marketing departments.”

He also makes this great point – complexity is most often the result of trying to goose high growth from what are fundamentally low-growth markets. In other words, niche the products even further in these areas to try to capture a bit of share; penetrate these new, but small channels, etc.

Mariotti also asked the crowd if anyone really knew what it costs their companies to process an order.

“If you do, you will be about the first,” he said.

The point was that those costs alone make it very difficult to be truly profitable for small volume customers – whose numbers are often a key dimension of complexity.

Of course, companies are generally loath to cut off any customers, even small ones. Mariotti said when he was at Huffy, he came very close to ending shipping to the now defunct Caldor’s chain, because it was so late in its invoice payment to Huffy. The cost of, in effect, floating that inventory – actually, the entire supply chain - to Caldor’s destroyed the profit it made from the sale. Only when Mariotti went to the Caldor CEO and said he was prepared to stop shipping to what was, at the time, a very large customer did the payment situation get resolved.

Globalization, information flow, brutal competition, are all adding to the natural tendency to add complexity.

So, here is the problem, and one that is acute at many companies, from my conversations with supply chain executives. What I think Mariotti has done brilliantly is articulate the impact, not just on the supply chain parade cleaners, but on corporate profits.

What do to? Mariotti has some suggestions, but we’re out of room, and I’d love to hear your ideas too. More soon.

Do you agree many companies have a “complexity crisis?” Do accounting systems lack the ability to capture the impact on profits? What are steps that companies and supply chains can take – or should supply chain simply try to clean up the parade? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

Want a printable version? Go to:


Dan Gilmore


Upcoming Videocast

Inventory Optimization Series - Part 2

How to Mitigate the Impact of Global Sourcing on Inventory Levels

June 17, 2008


Featured Megatrend:
Push to Pull

Watch Gilmore, Tyndall, Collins Discuss and Debate the Issue

View Supply Chain Megatrends Focused Web Page, Download the Executive Brief


This Week’s Supply Chain News Bites – Only from SCDigest

June 12, 2008
Supply Chain Graphic of the Week - Automation, Not Offshoring, Real Source of Manufacturing Job Loss

June 12, 2008
Supply Chain by the Numbers: June 12, 2008


It was a down week for Wall Street and consequently, our Supply Chain and Logistics stock index finished the week with 19 out of 22 stocks losing ground.

In the software group, Logility was down 4.9%, followed by Descartes (sliding 4.4%). In the hardware group, Intermec managed a 6% climb despite the overall market’s slip; however, Zebra fell 2%.  In the transportation and logistics group, Canadian National fell 7.3%, followed by Prologis, Union Pacific, and CSX – all with a loss of 5.3%.   

See stock report.


Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
June 10, 2008

By Erv Bluemner
RedPrairie Corporation

The Complex-
ities of Global Trade Require a New Genera-
tion of Transportation Management Solutions

The Problem is Large; Specialized Technology is Needed

By Jim Preuninger
Management Dynamics, Inc.

Next Genera-
tion of Global Trade Manage-
ment Software Navigates Complex Trade Rules to Streamline the Import Supply Chain

Majority of Companies Still Lack Automation to Management Global Supply Chains

By Dawn Salvucci
JDA Software

Leveraging Supply Chain Optimiza-
tion and Transporta-
tion and Logistics Management Solutions to Manage a Complex Global Environment

The Three Myths of Outsourcing


What was the most commonly used logistics metric among respondents to the annual WERC DC metrics survey for 2008?

A. Click to find the answer below


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New feature - feedback is also published right on the story page, in near real-time. Take a look! Add your comments!

Catching up as always on the many emails we receive.

Focus this week is on a few of the several letters we received from our report on The American Trucking Association’s presentation to Congress on ideas to help rescue us from the fuel crisis (see What’s the American Trucking Associations’ Answer to the “Fuel Crisis?”). That includes our feedback of the week from Ken Allen, a supply chain exec in Texas. You will find other letters on this topic, plus feedback from Met vriendelijke groet of PriceWaterhouseCoopers, an early EPC pioneer who says it should be no surprise that closed-loop RFID systems are where the action is right now.

Also, David Macleod of Learn Logistics Limited is one of several who enjoyed our “Unplugged” interview with Nick LaHowchic of The Limited Brands – part two of this great discussion coming soon.

Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week - On ATA Recommendations:

I salute Mr. Card's ideas to reduce consumption (demand) and increase the supply of diesel - Economics 101 says this will cause prices to fall.

I think it is crazy to be filling the Strategic Petroleum Reserve at this time.  The Feds just increased the target for reserves from a lower level, which keeps the USA pumping more and more oil into the reserve.

Vehicle productivity: we have the opportunity in 2009 through the Federal Highway Bill reauthorization to remove the FHB moratorium from 1991 that prohibits states from increasing the length or weight limits for trucks.  Not only should states be allowed to decide if tandem or triple trailers should be legal on certain roads, the states should also be allowed to decide if maximum weight limits should rise:  97,000# - 6 axle vehicles will produce the same axle weight limits as now, but up to 15% more efficient trucking for heavy loads.

U.S. Representative Oberstar (D) Minn. - as chairman of the House Committee on Transportation and Infrastructure - is the primary author of the 2009 Federal Highway Reauthorization Bill.  Every trucking executive should write or call him (and your own U.S. Senators and Representative) to express your opinions on this subject.  The bill will not come up for reauthorization again until 2015.

Speak now or forever hold your peace.

Ken Allen
Supply Chain Executive

More On ATA Recommendations:

Regarding the congestion issue, look at reducing volumes in addition to expanding surface roads. Maybe more businesses can go to four (4) ten-hour days instead of five (5) eight-hour days? Or at least stagger shift starting times to minimize rush hour in the major metropolitan areas.

All of Mr. Card's suggestions are good for the short term. However, we are facing a supply-demand imbalance that will grow worse with each passing year until a viable alternative energy source is implemented. The Congress of the United States is not great at enacting long-term solutions. They adopt short-term solutions to get through the next election cycle with a minimum of pain for their constituents. That's why we have a $9 trillion national debt, and Social Security is inadequately funded, to name just two examples.

I wouldn't wait for Congress to solve what may become the biggest crisis since World War II or the Great Depression. The business community is going to have to act on their own.

Mark Wilder
Distribution Manager
T. Marzetti Company

All good ideas that unfortunately don’t address the main issue. Oil prices are going to continue going up as the oil reserves in our planet are going down. Remember the law of demand and supply? What about implementing incentives for our bright engineers to develop the next generation of truck engines?

(1) A hybrid truck engine.

(2) An all-electric truck engine.

(3) A hydrogen fuel cell truck engine.

Hernan Medina

On Closed-Loop RFID:

It is absolutely no surprise that closed-loop, RFID-based systems are easier to implement. The main reasons for this are:

  • In most applications, RFID tags in closed-loop systems can be re-used. This makes the business case for RFID more interesting.
  • In closed-loop systems, you may not have to worry about standards and compatibility first. You can choose whatever technology suits your application best, or you may even tune solutions to your specific business needs.
  • Closed-loop systems offer the opportunity to 'trial-and-error' your solution and test different scenarios or technologies, without burdening your trading partners.

I've been involved in standardization and implementation of RFID systems since the 1990s, when I was working for GS1/EPCglobal. Also I acted as the secretariat of the Global Commerce Initiative's working group on EPC. In 2003, already this working group together with IBM, issued a document called 'GCI's EPC Roadmap' that can be downloaded at:

This document describes on pages 9 and 10, a strategy towards 'the EPCglobal vision,' which is, in fact, open networks. And, surprise surprise, it states that the best strategy towards this vision is starting with a closed-loop system and an internal EPC-based infrastructure.

Because the business case benefits from closed-loop systems, and closed-loop systems act as a basis for open systems, it is, however, important that the user company starts with a long-term vision and then reasons this vision back to the short-term implementation. If the long-term vision is that RFID will be applied in open systems, the investments that are made in the closed-loop system should be based on standards and technologies that are being used in the supply chain of its trading partners.

Met vriendelijke groet

On LaHowchic Unplugged:

Thanks for the report back on LaHowchic interview – I look forward to the next one.

It reminded me of a change that has happened over the years in my own presentation of what supply chain is about.

I also try to leave a message when I can which says that we might all be better off if we just had more managers who think in a supply chain way than managers with supply chain in their job title!

David Macleod
Learn Logistics Limited


Q. What was the most commonly used logistics metric among respondents to the annual WERC DC metrics survey for 2008?

A. On-time shipments to customer, used by 87% of respondents. Order picking accuracy was number 2.

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