CHAOS THEORY: CAN WE USE IT TO OUR ADVANTAGE IN SUPPLY MANAGEMENT?

George Harris, President 781-674-0041 geohar1@aol.com

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Comments About Chaos:

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The Internet is chaos management by definition. Its fast paced. Its running a marathon at the speed of a 100-yard dash. David Wetherall (CEO) CMGI Chaos often breeds life, while order breeds habit. Henry Adams At the beginning, there was chaos, nothing but void, infinite space. Hesoid Theogeny But I do love thee! And when I love thee not, Chaos is come again. Shakespeare Othello

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Exploring Chaos:
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In theory, life is supposed to be predictable Prediction depends on how accurately you can measure the initial conditions Complete knowledge of systems is contingent on having position / existence and status of key influences

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Exploring Chaos:
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A description of a chaotic process can serve as a marker or warning of an impending possibility giving us an opportunity to bring a situation under control
Many processes are unpredictable, yet most are not random it is possible to predict what will occur when there are underlying rules that determine the action

Chaos is associated with systems evolving far from equilibrium

Interplay with surroundings keep systems from settling down

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Exploring Chaos: (contd)

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When a system is normally in stable equilibrium, small influences generally disappear When a system is far from stable, small influences quickly amplify and a new state emerges

Stable Equilibrium

Unstable Equilibrium

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Exploring Chaos: (contd)

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Butterfly effect: miniscule influences can cause enormous outcomes

(Beating of a butterflies wings in Brazil can cause a tornado in Texas) Examples of Butterfly effect:
Fire in off-shore chemical plant Environmental report in Germany Failure to receive approval of sale of drug in Asia

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Controlling Chaos
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Chaos implies loss of long-term prediction; short-term prediction is still possible

Therefore any system that obeys rules even if behavior is chaotic can be controlled once the rules are known Examples:
Customer buying patterns Effect on prices, for each quarter point in interest rate fluctuation

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Exploring Chaos:
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Examples of chaos in physics

Use of pendulums epitome of regularity regular as clockwork
2 1.99 Period (sec) 1.98

1.97 1.96 0 20 40 60

Swing Number
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Exploring Chaos: (contd)

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Examples of chaos in physics

Vs.
1.9792 1.979 Period (sec) 1.9788 1.9786 1.9784 0 20 40 60

Swing Number

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Exploring Chaos: (contd)

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Examples of chaos in physics

Use of water faucet: top slightly open

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Exploring Chaos: (contd)

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Examples of chaos in physics

Use of water faucet: top fully open

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Causes of Chaos
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Uncertainty in markets Technology change (experiential) Increased competition Shifts in customer preferences Unbalanced human resources Which results in:

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Complexity Fragmented efforts Slow response

Tom Peters: Winners deal proactively with chaos

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A Better Definition Chaos Theory Defined: The Study of Complex Nonlinear Dynamic Systems
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Complex:
Consider the information technology linkages such as DRP, MRP, Intranet, Internet Products and services are exponentially growing more complex. Entire processes are now being out-sourced

Nonlinear:
Results can't be easily predicted accurately based on logical trends or relationships (forecasts of new products)

Dynamic:
An ever-changing environment considering composition of supply chains, market demands, people, and information flow

System:
Systems are viewed in terms of all the processes required to achieve an end result

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A Chaos System Flowcharted

Dynamic Dynamic Environment Environment

Complexity Complexity

Nonlinear Nonlinear Results Results

Chaotic Chaotic Situation Situation

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Attractors
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Minor events or situations which cause a chaotic situation to occur

Will cause system to converge to a steady state or Will cause system to stay in bounded, but chaotically defined region

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Attractors (contd)
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Minor events or situations which cause a chaotic situation to occur

Will cause system to converge to a steady state or Will cause system to stay in bounded, but chaotically defined region

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Attractors (contd)
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Minor events or situations which cause a chaotic situation to occur

Will cause system to converge to a steady state or Will cause system to stay in bounded, but chaotically defined region

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Examples of Attractors
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Positive:
Specifying education requirements of supply management One Engineering Manager speaks in favor of supply management

Negative:
Key Managers Abandon training Small supplier seeks increased prices due to raw material market increases

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Chaos Theory Point

If a system is operating near an attractor, it tends to evolve toward that state. What are the attractors?
Generic example Firefly attracted to light Procurement professional providing timely results Procurement example Planner who can accurately diagnose the market, translate into requirements Supplier is meeting level of internal customers need
Quality Manager Expediter

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Diagnosing Chaos: For Supply Management

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First step: Collect data

Use time series
Delinquent shipment rates Poor supplier quality Higher service costs Wrong inventory mix Shortages Internal dissatisfaction

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Examples of Chaos in Procurement

Chaos Pie
15% 10%

Technology & Market shifts Fluctuating Schedules/Demand 30% Quality & Delivery Uncertainty Internal Process Problems

20%

25%

Organizational Change

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Obvious Chaos Candidates

Attractor
Major new Major new product of product of competitor fails competitor fails Customer Customer demand demand increases increases independent independent Customer Customer shortage shortage situations situations

Major supplier Major supplier places customer places customer an allocation an allocation

Supplier delivery Supplier delivery performance performance

Missed Missed revenue revenue

Minimum order Minimum order levels increased levels increased by distributor by distributor

Inventory Inventory levels levels

Lost Lost profitability profitability

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Less Obvious Chaos Candidates

Attractor
Low Low unemployment unemployment reports reports Increased labor Increased labor turnover or turnover or absenteeism at absenteeism at suppliers suppliers Capacity Capacity concerns at concerns at remaining remaining suppliers suppliers Cutback in quality Cutback in quality engineering, engineering, reduction in training reduction in training budget budget

Poor quality Poor quality

Bankruptcy of Bankruptcy of lower-tier lower-tier supplier supplier

Missed revenue, Missed revenue, higher inventory higher inventory

Budget concerns Budget concerns

Lower Lower productivity productivity

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Examples of Chaos in Supply Management

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Change manufacturing systems Asking suppliers for 2 or 3 times improvements in current years pricing Demanding a 10% price reduction Displacing a long-standing Supplier Your key manager or individual contributor leaves the organization Sole source suppliers quality or delivery hits rock bottom Fire at a key suppliers factory HOW SHOULD THE CHAOS BE HANDLED?

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Chaos in Manufacturing
1. Non-linear flow of work
The Hockey Stick

2. Work-arounds
Missing components Workmanship Poorly written specifications

3. Over management
Ignore process capability Address output, not causes of problems

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Chaos in Manufacturing (contd)

4. Win / Lose situations
conflicting interests

5. Poor communications
poor instructions lack of operational information

6. Blaming others 7. Difficult to understand systems

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The Chaotic Situation: Spare Parts

Forecasts Forecasts

Sales Sales Targets Targets

Reduced Reduced Defense Defense Budget Budget

Change in Change in Airline Airline Profitability Profitability

Customer Customer Order Order Receipt Receipt

20% 20% Shortage Shortage

Criticism of Criticism of Inventory Mgmt. Inventory Mgmt. Practices Practices

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The Chaotic Situation: Supplier Quality

Increased Increased pressure on pressure on On-TimeOn-TimeDelivery Delivery High Number of Supplier Quality Problems

Order Order Release Release

Dip in Dip in Stock Stock Market Market

Supplier Supplier Conference Conference

Conversion Conversion to Ship to to Ship to Stock Stock

Reduction of Reduction of Quality Staff Quality Staff

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The Key Questions

How to find the attractor? How to find the attractor? How to predict behavior? How to predict behavior? How to predict impact based on behavior? How to predict impact based on behavior?

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Process to Find The Attractor

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Potential causes
Data

Evaluate effect on and response of competitors Brainstorm and benchmark Do contingency or scenario planning

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Thrive on Chaos

Recognize apparent disorder find the order Recognize apparent disorder find the order Take the philosophy that chaos can be Take the philosophy that chaos can be diagnosed and can be solved diagnosed and can be solved

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Final points:
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There is a defined order in chaos Dont resist it Take an objective, assessment-based approach Use chaos situation as an opportunity for improvement

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