Global Supply Chain fragility [Procurement Intelligence Unit]

English: Risk Management road sign

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Back in 1776 Adam Smith wrote about the “specialisation of labour” and, like complexity, this brings enormous benefit to an organisation (or in this case of a nation) BUT the old adage about “too much of a good thing” holds true.

Improved productivity is the holy grail for most CxO’s but, without frequent scanning of the ecosystem (upon which the organisation is reliant), careful measurement and management, the point at which the benefits of specialisation turn negative can, suddenly and unexpectedly, be reached: at Ontonix we talk in terms of “critical complexity“.

Although labour specialisation can increase productivity, overemphasis on the division of labour/product/market would result in overspecialisation. Pashke (2004) explains that the overspecialisation of labour has the tendency to restrict communication between the various areas of (work) expertise and the general public. This then would ensue in communication gaps appearing within and outside the organisation: specialised knowledge becomes exclusive.

In the words of Dupuy (1990), “The average worker’s responsibility has been narrowed to such a degree that he has lost identity with the product; naturally quality has suffered.” Hence, as more jobs get (over)specialised, there is a high probability that information (and knowledge) may get lost during the process. Overspecialisation would then limit employees from seeing the “big picture” – they would not be able to identify with the organisation’s goals and objectives.

Degradation of internal communications  (endogenous) e.g. silo mentality, conflicting strategies, lack of transparency, etc. can add frictional costs and complexity can erode operational structure and productivity making the organisation difficult to manage.  “Overspecialisation”  (like excessive complexity) can add fragility which impairs the ability to adapt to the type of  unforeseen changes (tipping points) in the external environment (exogenous) that typify a turbulent economic climate…

Often, the market structure of an industry drifts inextricably towards concentration. The spill-over effects of pooling knowledge and talent in a location often outweighs the price of competitors’ proximity. In the retail context, consumers often wander streets dedicated to watch-makers, jewellery shops or another collection of stores offering the same service.

The reliance on a single good or service by a country is a strategy advised by the Theory of Competitive Advantage, which advocates that countries specialise as much as possible in the production of one product to ensure the best return on investment. However, this focus also creates an economic vulnerability, where any disturbance in this one sector has significant repercussions for the entire economy.

With such large forces at work, there is little that a single buyer can do to alter the apparently risky structure of a market. In some cases, dual-sourcing may not be possible.

via A shortage of space: innovative risk management in the supply chain – Procurement Intelligence Unit.

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