Blog: Are complex supply chains bad?

Supply chains are getting utterly complex. With most production offshored and outsourced to organisations located in different parts of the world, supply chains are getting longer. Other factors play a role as well, such as changing customer demands and disruptions emanating through the chain. Supply chain complexity is the extent to which the supply chain of an organization is made up of many varying elements that interact in unpredictable ways. This complexity of the supply chain is considered one of the most pressing concerns for contemporary supply chains and managers, even before the fall-out from Covid-19. Recent insights from practice illustrate that supply chain professionals associate complexity with “trouble”(1) and aim to reduce its perils(2).

But is supply chain complexity always bad? We recently investigated this question with a team of researchers, including Melek Akin Ates (Sabanci University), Davide Luzzini (EADE Business School) and Dan Krause (Portland State University), and myself. As there is already a lot of literature that has studied this question before, we wanted to take stock of the knowledge out there to derive an answer. Using data from 48 studies, spanning roughly 13,000 supply chains, we were able to dissect the effects of supply chain complexity on different aspects of performance.

On the one hand, we find that supply chain complexity indeed has a negative influence on operational performance, particularly cost and delivery performance. Managing more complex supply chains is expensive and takes a lot of work, and shorter supply chains are better able to stay current in a dynamically changing world.

On the other hand, we also find certain benefits of increased supply chain complexity, particularly in innovation and financial performance. Firms with more complex supply chains are better able to leverage knowledge from their supply base and design and develop novel products that the market wants. In turn, extended product lines and more complex internal supply chains generally, lead to improved financial performance.

All in all, it depends.

Complexity is not always detrimental. In situations where cost is the main driver of performance, reducing the complexity of the chain makes sense. Simpler supply chains can be constructed by focusing on fewer product lines, creating modular components for multiple products, supply base reduction or reduction of the number of countries sourced from, or by reducing the number of sales channels. Shorter and simpler chains, with fewer partners, can lead to cost savings and improved delivery performance.

But it comes at a cost (pun intended).

A firm with fewer customers and suppliers is typically less innovative because it cannot leverage the diverse knowledge bases of its partners. Customers can have good ideas for new products and suppliers might already work with the technologies required to develop them. Leveraging supply chain knowledge and expertise is beneficial for a firm’s innovation potential and long-term financial performance.

The full article is available in The Journal of Supply Chain Management: https://onlinelibrary.wiley.com/doi/10.1111/jscm.12264 (no paywall).