7 Ways Network Theory Is Reshaping Supply Chains

Share this via:

Supply chain management is a booming discipline that’s evolved so fast that it’s actually outgrown its name. Practically speaking, of course, it’s unrealistic to think the term supply chain will ever be replaced with the more accurate supply networks or supply ecosystems. But academics and practitioners who don’t adopt a supply network mentality will find themselves ill-prepared for leading and managing in the future.

Rather than seeing links in a chain that connect each other, we should see the complex and dynamic ecosystems that are making network theory an increasingly relevant component to supply chain management. By applying network theory to the challenges of modern supply chains, we can better understand and manage the information and systems that move products from source to market.

Network theory uses graphs to represent the direct and indirect relationships among objects or actors. It’s used in all sorts of ways by all sorts of disciplines, from computer science and physics to ecology and sociology, but at its core, it’s all about charting relationships.

A simple way to grasp the concept is to think about a graph that would visually represent a game all movie buffs love to play – Six Degrees of Kevin Bacon. The idea, based on six degrees of separation theory, is that Bacon, like all people, is no more than six personal relationships from a connection with every other actor on the planet. So, for instance, George Clooney was in a movie with Matt Damon (Oceans 11), who was in a movie with Jack Nicholson (The Departed), who was in a movie with … Kevin Bacon (A Few Good Men). Thus, Clooney has a “Bacon Number” of 3.

For academics and business leaders, network theory is much more than a parlor game. It provides a way to visualize and study the complicated and dynamic systems in supply chains (networks) and, thereby, makes smarter use of the relationships and connections involved in the network.

There was a time when a supply chain consisted of links that were mostly sequentially connected to one another (like Clooney to Damon to Nicholson to Bacon). Now, most companies, and especially large companies, have complex and dynamic systems of suppliers and customers that are interlinked. Each firm in the systems represents a cluster of contact, some that are useful to other clusters and some that are not. These clusters aren’t just moving physical goods but also money, information and insights.

Network theory provides ways to measure and quantify how those clusters related to one another and, therefore, how information and insights move, efficiently or not, across all the structures that are involved.

Applying this theory to academic research and current business problems offers a variety of benefits to supply chain managers. For instance:

1. Network theory can help leaders identify the critical players in different clusters so they can more efficiently give and receive the best possible information and insights.
2. Network theory can help managers identify and understand both the structures and the interpersonal relationships that either aid or hinder the flow of information. A structural issue involves impersonal aspects such as whether you have access to a key player based on how an organization operates or the geographic location of the player. Relational issues have to do with the history of personal interactions.
3. Given the overwhelming number of interactions and interdependencies among different firms, processes and resources, network theory can help a firm separate signal from noise and thereby make decisions based on more accurate information.
4. Stock analysts increasingly look at firms in the context of their supply networks. They must do so to make more accurate forecasts of the firms’ future performance. Their forecasts can make firms flourish or perish because if analysts see a risky supplier deep in a firm’s supply network, they would alert investors who, in turn, may change their decisions to buy a firm’s stock. (I discussed this in more detail in a Be Epic podcast interview with Walton College Dean Matt Waller.)
5. There are three common symptoms of a structural hole in a network. One, when you are aware that you don’t know something valuable that may potentially affect your operations. Two, when you lack access to important information. And three, when there’s a relatively high cost of accessing the information. The more you can close the gaps and create better access to other members in the other network, the better your information and resources and the greater likelihood that you can use your network connection as a competitive advantage.
6. Network theory also can help academics and leaders identify gaps in systems that can be improved or closed with innovative solutions.
7. Network theory connects indirect partners who previously had relatively no knowledge, thus opening new possibilities of broader visibility, deeper learning and better situational awareness.

The expanding mosaic of supply networks pose unprecedented risks for supply chain leaders, but network theory offers opportunities to mitigate those risks and turn many of them into competitive advantages.