Complexity in three-echelon supply chain network and manufacturing firm’s operational performance

Abstract

The purpose of this paper is to understand the combined impact of supply chain structural complexity and operational complexity on the operational performance of manufacturing firms in a three-echelon supply chain network. The paper uses Shannon’s information entropy theory and agent-based modeling to find the intended relationships. The structural complexity is represented by the numbers of customers and suppliers associated with the focal manufacturing firm, whereas the operational complexity is represented by demand variability experienced by the manufacturing firm. The operational performance of the manufacturing firm is measured in terms of its capacity utilization, demand fulfillment, and inventory level. The paper finds that increasing the number of customers reduces capacity utilization and demand fulfillment, and increases inventory level whereas increasing the number of suppliers increases capacity utilization, demand fulfillment, and inventory level for the focal manufacturing firm. The results also show that increasing the number of customers and suppliers together initially improves the capacity utilization and demand fulfillment of the manufacturing firm but these deteriorate subsequently. Furthermore, increasing operational complexity reduces the operational performance of the firm. Thus, the paper finds how the operational performance of the focal manufacturing firm changes with the changes in supply chain structural complexity and operational complexity in a three-echelon supply chain. The results imply that manufacturing firms need to carefully orchestrate their supply chain network as increasing the number of customers and suppliers in the network does not necessarily improve their operational performance.

keywords: Agent-based modeling; Operational complexity; Operational performance; Structural complexity; Supply chain