Although we like to think of our business operations as controlled and calculated, supply chains can be chaotic. They are often disorganized and full of tension and stress. But chaos is also about unpredictability in complex systems. One of the most famous aspects of chaos theory is the butterfly effect, which posits that one small occurrence can create a disproportionately large change. In other words, complex systems, like the natural world, are unpredictable.

Importantly, chaos is not randomness. “Almost all chaotic phenomena can vary only within limits,” Peter Dizikes writes for MIT Technology Review. An action or a sequence may seem completely random, but there are only so many ways a butterfly will fly in a cage. As we saw during the pandemic, a delayed shipment can be the butterfly flapping that results in empty store shelves and lost profits; this can lead to downstream effects at other retailers who depend on those same suppliers.

Chaos in the supply chain

In “Six Causes of Supply Chain Chaos Can be Fixed Now,” an ASCM webinar, John Melbye, director of WA Solutions USA, explains that there are six reasons inventory management is so chaotic.

1. Precision dilemma. It’s difficult to determine the exact best right time for the inventory to be in stock. A longer timeframe is less likely to be precise, but a shorter one risks inventory being unavailable when it’s needed. Stakeholders expect an exact match, but it practice, it doesn’t work that way.

2. Process loophole. The questions inventory managers ask most are “how much?” and “when?” But there’s a lack of a standard process that’s “repeatable, reliable and transferable,” Melbye notes. Everyone in the organization will react differently to any required change. He gives the example of a group of disparate professionals traveling to a centralized location for a conference; getting each person from their home base to the closest airport at the correct hour to catch the shuttle bus, while avoiding wasted time in the airport, is a complicated process. If everyone in the group was tasked with creating the schedule separately, each person would likely come up with a different option. Similarly, in supply chain, there are many different methods for getting a product from point A to point B, and there’s no industry standard for making that happen.

3. Cost reduction obsession. Cost is an outcome, and it’s a mistake to focus on changing the outcome, Melbye suggests. It’s more important to focus on the inputs and how those can be changed to save money. For instance, if a consumer receives a high electric bill, their response isn’t to ask the electric company to reduce the charges; instead, they’re likely to focus on turning off the lights or adjusting the thermostat.

4. Push to reduce inventory. Too much inventory ties up cash, but too little causes chaos and increases the cost of expedites, Melbye acknowledges. There’s no consistent formula for target inventory.

5. Target inventory determination. It’s necessary to find the target inventory by part, instead of by product.

6. Confusion on where to focus. Most supply chain professionals are focused on creating a better forecast, but there’s too much variability to be precise, Melbye notes. That leads to the “metric wars,” where one person must fail for another to succeed.

Traditional planning requires stability. “That world is gone,” Melbye says. Instead, supply chains must respond to the “VUCA” world (volatility, uncertainty, complexity and ambiguity) as it exists today.

Applying chaos theory

Forgoing stability and embracing agility and resilience may be a significant mindset shift for some. But understanding that systems can’t be controlled or predicted with certainty is the key, writes Stefan Reidy, CEO of Atexxa Group AG. “Instead, chaos theory focuses on understanding seemingly random processes' underlying patterns and behaviors … This means actively embracing uncertainty and incorporating flexibility into the supply-chain design.”

Melbye suggests the solution to addressing VUCA is demand-driven material requirements planning, which uses “strategic decoupling points to drive supply order generation and management throughout a supply chain.” A decoupled lead time requires exact stock for only a specific element of a product instead of an entire warehouse. He uses the example of a burger restaurant: chaos is limited to the kitchen. The cooks know they have all the ingredients to make one burger or 100 burgers, depending on the order. They only have to worry about how fast the customers come in; they’re not concerned with the lead time on ground beef.

Implementing chaos theory in supply chain management has its challenges, Reidy admits. “It may require investments in new technologies and analytical capabilities to capture and analyze real-time data.” But embracing the methodology can reduce risks, optimize inventory levels and improve responsiveness. For Melbye’s part, he suggests that part of this solution to overcome these problems of chaos is strategic inventory targets to right-size inventory, as well as a change from forecast improvement to operational capability. Much of this shift is a matter of digital transformation or adoption of breakthrough technology. There’s power in transparency and real-time data, Elemica notes: “In a connected and digitized supply chain, not only could we know exactly where our raw materials are at any moment, but we could already be forecasting potential delays to our manufacturing team and reconfiguring schedules to ensure we aren’t losing time simply waiting for the shipment to arrive.”

For example, as I noted in two recent blog posts, prescriptive analytics, rather than future-casting, helps people identify what should happen and then determine the best course of action. And AI-enhanced digital twins can self-optimize and self-configure. As I pointed out, “Together they can run more simulation scenarios than previously possible, run scenarios faster, enhance scalability, forecast more accurately and deliver users with faster and more accurate analysis that supports faster and better decision-making.”

Here’s some more good news: Melbye has a vision for the future. It includes the following:

• Better metric review. Inventory measures should be better aligned relative to the target
• Revised expectations. Instead of using ineffective due dates for suppliers, simply ask them to prevent stock outs. Similarly, operations expectations should be tied to output instead of schedule achievement.
• New job titles. Instead of piling new tasks and responsibilities onto workers’ existing jobs, new positions like buffer manager and constraint manager should be created.

“Question everything!” he concludes. “It’s not that we’ve been doing things wrong; it’s that the world around us keeps changing, and we’ve failed to adapt to those new conditions. So, let’s step back and explore those new conditions and change that paradigm of supply chain.”

Resilience and agility are essential for supply chain success. ASCM’s Certified in Planning and Inventory Management (CPIM) certification equips you with the skills to excel in all supply chain functions. Learn more about how to earn yours today.