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Knowledge
Mastering Complexity in the Value Chain

2016 has started with a resounding thud. The U.S. equity market still hasn't recovered from its January meltdown, and the Shanghai stock market is twice as bad. Consumer confidence and demand are down, and this has affected the supply and demand picture, with manufacturing on a temporary slide, based on the latest ISM numbers and many supply markets trading near all-time lows.

A recessionary environment is tailor-made for cost reduction, but CEOs want growth, especially since emerging markets are stalling and digital business strategies may offer some hope (or risk) to CEOs desperate to improve top line performance and brand multiple performance. However, this is more than a story of reducing spend volumes and increasing sales volumes. It’s also about how to deal with variability and volatility. From 2012 through the first half of 2015, with all the chatter about risk and volatility, volatility indexes, such as the VIX, have been fairly stable. But recently, the bedfellows of currency risk, interest rate risk and commodity risk are making for a very complex operating environment.

So, this creates a challenge for procurement organizations to help the organization reduce spend, improve cash flow, impact top line performance, increase brand multiple (with innovation being key to these last two) and reduce risk. But it also creates an opportunity. The best procurement groups never let a good crisis go to waste but rather run to the proverbial fire and, like one of my favorite animated movies, say, “Bring it on.”

Procurement had seen this before in 2008–2009, and the challenge now is how to do more than just harvest the benefits of deflationary input costs. The challenge becomes how to use the current environment to improve resiliency, agility, innovation, sustainability and digital reinvention in supply chains to deliver more evolved supply management services rather than just performing well against traditional, narrow procurement metrics.

One of the most effective transformation strategies I’ve seen implemented within the enterprise is complexity management. The world is clearly becoming more complex, and the more that companies can understand:

  • the dimensions by which this complexity is increasing,
  • what complexity is created internally versus externally, and
  • which types of complexity they should prioritize

the more they can be masters of that complexity and be able to systemically improve the capabilities mentioned above to prepare for a business environment that will drastically change with the emergence of digital disruptors such as cognitive computing, social, mobile, IoT, and so on. These technologies will become increasingly important to taming this exploding complexity, a point that is the driving force behind our upcoming ISM and Spend Matters Global Procurement Technology Summit March 14–16 in Baltimore.

But before we talk about technology, we need to have a better vocabulary about complexity itself. This is much more than a Porter-esque view of supply market complexity on a Kraljic 2x2 matrix. So I’m going to write a multipart series on complexity where I’ll talk about a way to develop complexity management competencies that go beyond lean, six sigma, supply chain risk management, IT systems projects and other traditional approaches in a way that actually enhances and integrates them.

In the next post, I’ll share a complexity management framework that I think CPOs will find useful, including those CPOs who’ve even pursued complexity management before. In particular, I’ll highlight how new digital strategies and technologies that can greatly enhance this complexity management approach.

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