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April 2, 2001

RADICAL SIMPLICITY
Behavior Change For Supply Chains

Companies turn to complexity theory to improve business processes

By Rick Whiting (rwhiting@cmp.com)

Illustration by Nicholas Wilton

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n ant colony might seem like a strange role model for managing the supply chain of a huge consumer packaged-goods company. Yet, following the precepts of complexity theory, Procter & Gamble Co. is experimenting with new supply-chain practices and software that incorporate a few lessons from the insect world.

Ants' rules of collective behavior are as adaptable and efficient as they are simple. Block the path of a line of ants with your shoe, and they'll quickly find a new route. But the new course is determined by individual ants seeking the most efficient route--not by orders from ant-colony high command. "The big idea is that most systems are made up of interactive components," says Van Parunak, chief scientist at the Environmental Research Institute of Michigan, a think tank in Ann Arbor, Mich. "Complexity science is all about understanding those interactions."

Complexity theory examines complex systems, such as P&G's supply chain, and builds mathematical models of individual components to understand their behavior. Change the behavior of one component--an agent, in complexity-theory parlance--and you can change the behavior of the entire system. By understanding and organizing complex systems in a predictable way, designers can tame complex systems and bring a strong element of simplicity to them. Complexity theory also provides the underpinnings for software tools to model business processes and IT architectures.

By employing complexity theory-based modeling tools, the $40 billion P&G hopes to change the behavior of its supply chain. "At every junction or hand-off in the supply chain, decisions need to be made," says John Lewis, VP of worldwide customer-service logistics. Those decisions involve variables such as the price, quality, and availability of materials, supplier reliability, and projected need. If the price of a raw material drops, P&G purchasing managers weigh the savings of buying more material against the costs of warehousing it.

The problem is that each trade-off affects all other decisions along the supply chain. "There's an endless stream of decisions that are interdependent," Lewis says. Decisions are made by dozens of purchasing, transportation, and manufacturing managers who see only a small piece of the supply chain. That means purchasing agents who know nothing about demand for finished products are buying raw materials without regard for how much is really needed.

For 18 months, P&G has experimented with complexity theory-based software and practices to optimize the flow of raw materials for several of its laundry detergents and shampoos. Lewis says the technology and related practices could ultimately cut half the time and cost out of the company's supply chain through reduced inventory, lower transportation costs, and fewer purchasing managers.

P&G's trials include MarketProwess applications from Prowess Software, a division of the BiosGroup. The server-based apps, which use a Web-browser interface, collect information input by users about material availability and prices, analyze that data by using complexity-theory algorithms, then produce a three-dimensional graphic that pinpoints the best deals for the purchase of raw materials.

Eventually, P&G envisions placing a programmed agent at each decision point along the supply chain, including linking the software to its suppliers' IT systems. Not only will each purchasing decision be automated, but all decisions along the supply chain will be made in concert, rather than sequentially. "There hasn't been a way for a company to deal with that level of complexity on a daily or hourly basis," Lewis says.

Resolved To Conquer The trial run has produced benefits. To cut shipping costs, P&G previously sent only full trucks of finished goods. But managers now realize this method not only increased inventory costs for customers, but also caused stocks of the company's products on store shelves to sometimes run out while half-full trucks were held at P&G's loading docks.

Business practices and technology incorporating complexity theory concepts have been gaining favor in recent years as a way for companies such as P&G to gain control of their increasingly complex manufacturing systems and supply chains. The idea behind complexity theory--a distinct discipline that's about 15 years old--is that complex systems such as production lines can be modeled using mathematical algorithms, and those models can help predict how changes to one aspect of a system, such as an increase in orders for blue cars on an auto assembly line, affect the whole production system. This, in turn, can help managers find ways to improve the efficiency of the entire system.

Complexity theory includes concepts from scientific and mathematical disciplines ranging from statistical analysis to molecular physics. But its modern roots are in the biological sciences, ranging from the study of genes within a human cell to the examination of wildlife in a large ecosystem.

In recent years, businesses have been trying to apply these academic notions in the business world. That means building software models to simulate a company's operations, then using those models to make changes in business processes and designing custom software to support those processes. Southwest Airlines Co. uses complexity-theory modeling to analyze and make its freight operations more efficient. The BiosGroup, a Santa Fe, N.M., company that leading complexity theorist Stuart Kauffman founded with Ernst & Young in 1996, built agent-based software models that simulate all aspects of the airline's cargo operation, including aircraft, packages, and personnel. "We needed some simple business rules," says Chuck Thomas, the airline's financial analysis director.

The models showed that the $5.6 billion Dallas carrier was obsessively transferring many packages to the most direct flights, leading to unnecessary handling and storing of packages. By letting some cargo take more roundabout routes, the airline has cut the cargo transfer rate by 70% at its six freight hubs--saving millions of dollars.

A few vendors sell agent-based software packages modeled on complexity theory, particularly for shop-floor applications. One of the first was an assembly-line scheduling program called Optiflex from Optimax Systems Corp., which was acquired by i2 Technologies Inc. in 1997.

Photo by Jeff Sciortino Deere & Co., the $13 billion agricultural and construction equipment manufacturer in Moline, Ill., is an early adopter of Optiflex and uses it to schedule work on a half-dozen agricultural equipment production lines. The software, which is used by managers of teams that build subassemblies, calculates the configuration of every product two weeks before it's built. "We're able to build much closer to customers' orders and keep finished inventory under control," says technical consultant William Fulkerson at Deere. "We're also better able to meet our shipment windows for customers."

How is this different from mainstream supply-chain technology? Most supply-chain apps can't handle the huge numbers of variables that complexity-theory software can. Agent-based apps recognize that supply chains are dynamic, and the software can adapt quickly to changes in a supply network.

Other companies use concepts from complexity theory to design their own software. Chipmaker Advanced Micro Devices Inc. is deep into a multiyear project to develop agent-based scheduling applications for its semiconductor production plants in Austin, Texas. The software will provide each production machine with its own scheduling rules. The result, AMD hopes, will be a system that's adaptable and self-adjusting to change, such as when a rush order of semiconductors must move through a plant at a faster-than-usual pace.

"The distributed aspects of this are very appealing," says Larry Barto, a staff project manager who's been overseeing the development project at AMD, a $4.6 billion Sunnyvale, Calif., company. Barto says the project's goals are to reduce production-cycle time, improve on-time delivery, and use production equipment more efficiently.

P&G's Lewis says that as more companies outsource business operations, such as manufacturing or transportation, the level of complexity will grow as companies deal with a greater number of business partners, which will increase the demand for technology and strategies based on complexity theory.

Some, however, see limits to complexity theory's applicability. Stephan Haeckel, director of strategic studies at IBM's Advanced Business Institute, says complexity theory is a good fit for specific applications such as simplifying the management of supply chains and production lines. But the co-author of Adaptive Enterprise: Creating And Leading Sense-And-Respond Organizations (Harvard Business School Press, 1999) is skeptical that complexity theory can be a model for organizational design, given that people--as agents--are unpredictable.

But complexity theory's backers see its adoption as part of the evolution of business. Where the efficient machine was once the dominant metaphor for businesses, they see that metaphor as outdated, given the need for flexibility and adaptability--attributes more associated with the biological disciplines from which complexity theory emerged. "The biological metaphor is finding its way into the business world," says Kauffman, a founding member of the Santa Fe Institute, a complexity-theory think tank. "I see this evolving to the point where companies can 'co-evolve' with their suppliers, their customers, and their competitors to adapt to changing business environments."