The Six Levels of Supply Chain

Six levels of supply chain: Not long ago I was giving a talk about the current supply chain crisis—or perhaps I should say about the supply chain crisis of the week. After the talk an executive who came in late approached me.

He seemed rather new to supply chain concepts—all he appeared to take away from my talk was the notion that the current crisis was just a matter of shipping bottlenecks. “If ports are crowded, why don’t the ships just go to a different one? That should solve any supply chain issues.”

I tried to point out that the matter was considerably more complicated than that. Aspects of supply chain such as prices and production and sourcing came into play. There were changing national and international policies and regulations, unexpected crises, pandemic shortages, all sorts of factors. Entire levels of the supply chain were involved.

“Levels of the supply chain?” he said. “Supply chains are just about getting something from point A to point B. Isn’t that right?”

No. It’s wrong. I began to explain why, but I couched my explanation in terms of professional terminology, and I could see that I was losing him. The different levels of supply chains are easy enough to grasp, but when speaking to non-professionals one has to put them in concrete language and real-world situations for them to be properly grasped. I was tempted to point him to the most recent novel I’d written, which is my second attempt to do exactly that. Unfortunately, the cheese and champagne for the event arrived at that point, and his interest waned.

The idea of clarifying the various levels of supply chains in simple language stayed with me, though; and as I took a flight home later that evening, I made a number of notes that crystallized into what follows. I trust readers at every level may find it helpful.

Understanding The Six Levels of Supply Chains

In Chaotic Butterfly, the second of the novels in my Supply Chain trilogy of business thrillers, I used different characters in the business environment to explore different aspects of the supply chain process in a single embattled firm. Nearly every firm has a roughly similar process, and that process is rather like a five-story corporate building: every department dynamically interacts with the another and with the whole: each function is ultimately connected and touches in one way or another all five levels, though some parts of the business are naturally focused more on one aspect than another.  

The First Level may be thought of as the physical level. It’s the level that most non specialists think of when they think of supply chains. This is the process by which businesses produce ‘stuff’—the bundle of processes by which raw materials are unearthed, collected, shipped to processing plants, treated, assembled, tested, and sent to distribution hubs, where they are then sold to the consumer.

Farming is an example: seeds are planted, harvested, shipped to packaging plants, vetted for flaws and blemishes, sent to groceries, and sold. This process invites close measurements and step-by-step description. In many respects it is a narrative process, an unfolding story, which in real life is never perfectly optimized, but in which unique individuals play parts that deliver exceptional or substandard execution.

Studying this level provides a detailed map of how all the man-made things that surround us got here, and how individual businesses create and distribute their products, profit, and survive. In Chaotic Butterfly, Jacob Anan (who teaches Introductory Supply Chain at a Learning Annex) addresses and describes this level in simple direct language. 

The Second Level might be called the digital level. The digital level isn’t really the technological level—robotics and drone technology remain in the realm of the physical—though it overlaps strongly with technology. The digital level is the level where computer processes and communications modify Supply Chain operations. Simulation modeling, artificial intelligence, blockchain ledgers, digital products, Zoom conferencing, cybersecurity, social media marketing—all these testify to ways in which globally networked computation is changing how all Supply Chains at all levels operate.

The digital level can be as simple as a small family business having a web site and using Excel spreadsheets, and as complex as Amazon selling completely non-physical products like ebooks, music mp3s or full-blown smartphone applications over wholly automated web pages to a public that receives its purchase instantly over the net—there is no physical product, no physical sales force, no physical storage, no physical delivery. What there is is a great deal of corporate profit, and a great deal of customer satisfaction.

The digital level has its dangers: it both accelerates and enhances the physical supply chain, but also (in the form of AI and automated processes) threatens to remove it from human oversight entirely, and transform existing processes utterly, unknowably, and uncontrollably. In my novel, Edward Warped, a designer of AI-driven blockchain software, pushes these goals to an extreme, trying to drive the business to a point where the software makes business decisions autonomously, indifferent to human input or restraint.

Johanna Anan, the firm’s CEO and a Supply Chain analyst with deep roots in the First Level, appreciates the power of Edward’s innovations, but remains convinced that human judgment and leadership is needed to lead her company safely through its experiment with this Second Level. She enters and explores this area and does indeed use it to enhance her firm’s supply chain processes—but critically and cautiously. 

The Third Level might be thought of as the irrational corporate level. That might not be an entirely fair label, but, as any supply chain consultant who has wealth with it knows, it does convey the somewhat maddening flavor. This is the level where business decisions are made that are not strictly or principally concerned—or concerned at all—with their impact on the supply chain.

The third level is the sum of all the figures and decisions in an existing real-life business that can detract from or obstruct the desired functioning of a company’s supply chain. For Supply Chains at the physical and digital levels have one thing in common: they strive for optimal or at least high efficiency. Yet abrupt changes at the C-level, the sometimes Machiavellian struggle of office politics, hostile takeovers, financial juggling, false reporting, conglomeration, marketing and public relations decisions—not to say simple ego and stupidity—can lead to a business environment that far from optimizing supply chain operations can block, ignore, disrupt, and even reverse and destroy them.

The chief protagonist and perpetrator in Chaotic Butterfly who stands as a prime example of this is financier Benjamin Anan, Johanna’s brother, whose goal is to expand their family business into an international conglomerate and leverage that expansion for greater financial returns— without any particular interest at all in how well the assembled businesses that make it up function. Businesses to Benjamin Anan are creatures of Excel charts and profit and loss statements: if the numbers appear to work, the business works. To Benjamin a business is a set of fluctuating statements in a portfolio: the actual management and production is left to appointees who are judged solely by those numbers.

Another example is Nicola Cavalcanti in the first novel of the trilogy, Devil In The Chain. Nicola is being pressured by criminals who want to use the firm for their own nefarious purposes. She systematically damages the firm to frustrate and block them.

In theory each member of a business aims to maximize that business’ growth and effectiveness. In reality, malice, ego, ignorance, jockeying for position, thoughtless government interference, social accident, even simple honest error, can impact supply chains radically, even fatally. This third level is arguably the one from which opposition and obstruction, the day-to-day struggle to improve supply chain functions is most likely to come, and the one where the most artfulness may be needed to advance supply chain goals. 

The Fourth Level is the relation of Supply Chains to legality. Certain supply chains operate entirely outside the law or on the very edge of it. These operate along a spectrum. At one end is the outright Criminal Supply Chain: the supply chain that creates, assembles, places and distributes illegal goods and services from drugs to terrorist arms to human trafficking. In many respects these processes follow normal business supply chain procedures but with the significant need to hide or camouflage operations and profits. At the other end are quasi-illegal operations by firms (weapons, pharmaceuticals, sexual or human trafficking) that ‘bend’ laws, engage in international bribery, weaponize legal teams, relocate business processes illegal in one nation to compliant nations offshore, etc.etc.

It is at this level that ethics become a major concern and provide necessary guidelines to steer by. In both novels, an Interpol agent, Duvalier, on the trail of an international criminal and his organization, uses the business acumen lent from his association with the Anans to help decipher criminal and semi-criminal supply chain operations leading to the chief perpetrators.

This level further encompasses high-level market manipulation geared to boost the interests of wealthy cabal members involved more at the higher financial or banking levels or at the NGO level rather than the business process level as such. An attempt is made to draw Benjamin Anan into one such group. Such transnational entities and players, having only the most tenuous connection to particular nations, have no particular allegiance to their laws or their ethical norms. A creeping attenuation begins to taint their activities, resulting in an amoral globalism that often erupts in significant blowback and scandal.

Between crime from below and transcendental globalist interference from above, supply chains can suffer gravitic distortions that deeply affect their operations, and that make regular ethical consideration a front-and-center necessity.

The Fifth Level is the political level, from the local to the global.

Business is a game, and ultimately it is politics that sets the rules of the game. Politics sets the terms and guidelines by which supply chains operate. Astute political actors aim at supporting, defending and enhancing their nation’s supply chains. Sometimes they develop their nations by successfully supplying foreign markets. Sometimes they aim to foster the dependence of other nations on their supply chains. On occasion, they aim to sabotage the supply chains of competing nations.

Here Michael Anan is a good narrative example. Anan, the founder of Chococoa, striving to make his Ghanaian-based business, prosperous, productive and efficient, expands its operations to the UK. His ethical Fair Trade practices prove a great success, and, returning to his homeland, he believes he can apply his successful business practices to the economic practices of the entire nation, and to that end decides to enter politics and foster supportive legislation. He soon finds himself in a political environment where goals and ambitions that are anything but supportive and opponents press for policies that threaten to leave the national economy in ruins.

At this level, one views a specific nation, in this case Ghana, as a collection of mutually involved and mutually supportive supply chains. Anan aims at fostering the good of the national whole through general supply chain principles, rather than to a specific enterprise alone. He faces groups and officials ignorant of those principles, and bent on policies that can only lead to negative ends.

At a more complex political level stands Chinese agent-at-large and high-level Party advisor Robert Clark. Clark wants China to have supply chain dominance in its key industries, and to foster profit and dependence upon expanding Chinese supply chains. But at the same time he realizes the need to harmonize with the interests of and foster the healthy functioning of other nations to achieve that goal. He is aware too of the supply chain element of military and intelligence operations, using infiltrated foreign businesses as ‘agents of influence,’ and using them and their supply chain operations to serve covert foreign nationalist ends, efforts he regards as short-sighted.

To see individual and global supply chain processes from these the perspective of all various levels is to see them truly comprehensively, to grasp of the full range of human productive activity from the local to the corporate to the criminal to the financial to the technological to that of grand politics.

But there is arguably also a Sixth Level—a level that at this moment in time may be the most important of all. This level concerns the improvisatory response of businesses to wholly unexpected ‘Black Swan’ events that could not be predicted. It concerns resilience. 

The coronavirus pandemic, striking supply chains across the globe at multiple points, the lockdowns next mandated by various governments, the international rioting and protests that followed in its wake, the mushrooming inflation as nations attempted to shore up the faltering economies, are all recent and vivid cases in point. Similar cases include the 2008 market collapse, the fall of the Soviet Union, the appearance of the internet, the revived nationalism in the wake of Brexit and Donald Trump. In a matter of years, sometimes days, everything changes. It seems that, increasingly, rapid and radical changes can occur seemingly overnight that completely rewrite standard operations. Plans are made, commitments are agreed to, resources allocated, and suddenly the environment in which they were to operate is torn to pieces and thrown to the four winds.

Can this challenge be dealt with? Yes, it can. Simulations and scenario planning can to a degree offset this instability by supplying ‘emergency narratives.’ Far from having a single backup plan, a firm can develop two, three, several backup plans. Alternative sources of supply, alternative routes of delivery, alternative methods and partnerships can all be worked out and made ready to wait in the wings in case or emergency—or even made use of at once, experimentally, as businesses explore wider ranges of options and responses than a stable environment would have allowed.

I have come to see this matter of resilience as a core necessity of the modern supply chain. Too often in my field practitioners strive to describe an ideal, optimal supply chain supposedly aimed at maximum profit and efficiency. But all such perfect ideals are based on the notion of a perfectly stable environment to which the ideal is perfectly adapted. Such an environment simply does not and will never exist in the world of violent and lightning-like change which we now experiencing, and are likely to experience for the foreseeable future.

The optimal response today is not something fixed but something optimally adaptable, optimally resilient. When assessing a supply chain now I ask myself not simply how it functions, but how will it function in response to sudden radical change. For the inability to respond to such changes has completely destroyed businesses however well their supply chains may have served conditions that no longer exist.

All these levels interact. Every business undertaking has legal rules to follow (or which it bends or breaks). Everyone has a physical and digital and ethical component. Each one involves leadership-level decision-making which may be poorly informed or have differing ulterior motives and goals, and each operates in a distinctive political and social environment to which it must successfully adapt.

Indeed, the amazing thing about supply chains and economic processes is  that they do adapt, and that successful supply chain stories abound. Time and again, intricately complex processes of human productivity repeatedly attain their goals, maintaining our world and our societies as we know them. My novels have attempted to relate the stories of a few of these processes and the human beings behind them. But such stories lie behind every such process, and each of these stories teach us lessons—lessons that we can profitably apply to enhance our world, our businesses and our professional and personal success.