Improving Supply Chain Performance Using

Volatility, Uncertainty, Complexity and Ambiguity (VUCA) Drivers

Khaled G. El-Sakty1 and Engy Osama2

1
Head of Transport Logistics Department, Arab Academy for Science and Technology, Cairo,
Egypt. P.Box 2033 Horia, Cairo, Egypt. Tel.: +2 0100 8334341; E-mail:
[email protected]

2 Researcher, North Carolina State University (NCSU), USA.

Abstract
Volatility, Uncertainty, Complexity and Ambiguity (VUCA) Drivers are increasingly
used in recent years to describe the current business environment and the impact it has
on the supply chain performance. The VUCA term became increasingly interesting to
the leaders who seek to operate their businesses efficiently and effectively. Hence, the
purpose of this paper is to investigate how VUCA can be applied by companies to
improve their supply chain performance.

Purpose
The purpose of this paper is to explore the VUCA concept and discuss the
relationship amongst the four drivers of the concept (Volatility, Uncertainty,
Complexity and Ambiguity) with the aim of understanding its significance and impact
on the supply chain performance. Also, the paper aims to discuss how companies can
adopt proper strategies for coping with the inevitable effect of the VUCA drivers, in
order to gain a competitive advantage by running the business both efficiently and
effectively. Thus, this paper has sought out to discuss the following problem: How
VUCA can be applied by companies to improve their supply chain performance?

Methodology
This paper adopted a qualitative approach with the aim of exploring a phenomenon
that has a lack of attention in the available literature, which subsequently can induce
developing quantitative research approach in future based on this exploratory
research. In section two, an overview of the VUCA Concept and its drivers are
explained. In section Three, multiple case studies are discussed to highlight the
importance of VUCA concept. In section Four, how VUCA concept can improve a
supply chain performance is discussed. In section Five, the Conclusion and
recommendations are underlined.

Literature Review
There is a significance of the supply chain synchronization approach and
mentioned some possible reasons for the failure of the synchronization process,
within such context. Miles (2011) proclaimed that Volatility, Uncertainty, Complexity
and Ambiguity (VUCA) drivers are considered to provide an accurate description of
the current business environment and it has a direct impact on managing the supply
chains. From the business perspective, Kambil (2008) defined the four drivers of
VUCA. Volatility refers to as the change in states per period across processes, while
uncertainty refers to as the lack of information concerning the present or future states

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of certain processes that most likely will impact the flows of cash and resource across
processes. Complexity refers to as the amount of variety at and across processes, as
processes may vary to the extent it is complex to coordinate among them. Ambiguity
was referred to as the absence of clarity about available information and the suitable
responses.

Sullivan (2012) identified VUCA as an acronym for an environment that is dominated

by the fast change of things, in a non-predictable trend or repeatable pattern which is
known as Volatility, the situation when major disruptive changes occur frequently
which is known as Uncertainty, the existence of numerous causes which are difficult
to understand and mitigating factors involved in a problem which is known as
Complexity, and when the causes and the different circumstances behind the things that
are happening are unclear and hard to ascertain which is known as Ambiguity. Turner
(2012) identified the VUCA drivers collaboratively as “ the a combination of the
magnitude and speed of change, the lack of predictability and prospect of surprise, the
multitude of forces and confounding issues, and the lack of ‘one right answer’ or
single course of action”.

From the leadership perspective, Volatility refers to the rapid rate of change
experienced from the environment, ultimately imposing great pressure on leaders to
respond urgently to such change. Uncertainty refers to how the leaders with a
difficulty to manage and make decisions in a remarkably changing environment.
Complexity refers to the situation where there are a wide range of factors that account
for the situation encountered by leader, thus it is considered significantly difficult to
diagnose a situation and to formulate effective response and actions. Ambiguity refers
to lack of clarity in a way that interpreting or understanding the impact and meaning
of events becomes quite difficult (Ambler, 2012).

From the financial perspective, Volatility refers to the equity, bond and currency
market volatility; the lack of stability and predictability, Uncertainty refers to the
potential change in the inflation index calculation; the lack of ability to foresee what
major changes might come, Complexity refers to the state of understanding to
increasing complexity of new financial instruments and regulation to deal with
increasingly complex markets, and Ambiguity referred to the overall output resulted
from the above mentioned drivers (Gardner, 2013).

Supply Chain Architecture and VUCA Drivers

Volatility Formulation and Bullwhip Effect

The literature shows that the type of the volatility inherited within supply chains may
be represented by economic or macroeconomic volatility, and by demand volatility.
The supply chains of companies across industries have increasingly affected by the
level of economic volatility. There are a wide range of factors that have contributed to
such disruption occurring and moreover placing unexpected pressure on the way these
companies source, manufacture and distribute their products. These factors include
rapid change in the availability and price of key commodities, major currency
fluctuations, disruptive geopolitical events and continued development of customer
channels on a global basis.

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In this dynamic environment, such economic volatility can be used as a competitive
advantage (Russell et. al, 2009). It becomes clear that the main attributes that
accounts for internal supply chain volatility include both shifts in demand and supply.
In other words, the volatile market that companies are deemed to face nowadays, is
forcing executives to consider the ability of their firms to be more agile in a way that
will turn volatility into an opportunity rather than a threat. And they will have to find
those areas where this economic volatility creates opportunities for their business to
survive in markets. There are few strategies that can aid in managing volatile demand
efficiently in supply chains:

a) Gangadharan (2007) claimed that companies traditionally used to maintain

high levels of buffer inventory in order to meet with any fluctuations in
demand which may occur. However, this is no longer feasible as high level of
inventory would drain the supply chain resources, cost and time. There are
two options for companies have to consider; firstly is the evaluation of the
tradeoff between the cost of using the capacity buffer strategy and the cost
associated with the lost sales due to missed service targets. Secondly, if the
companies decide to follow that strategy of capacity buffer they have to
maintain reliable relationships with their subcontractors.
b) A strategy of reduction in the total supply chain cycle time is an essential
ingredient to increase the pace of the flow of information across the supply
chain. Consequently, a firms can respond faster to changes. Gangadharan
(2007) defined total supply chain cycle time as the cumulative sum of the
physical cycle time (production time and transportation time) and planning
cycle time across supply chain.
c) Postponement strategy can be applied to enable companies to dramatically
reduce inventory while improving customer service (Muzumdar et al., 2003).
It entails companies to shift from Make-to-Stock production to Assemble-to-
Order production Gangadharan (2007).
d) Collaborative processes strategy aims to cope with fluctuations in demand. It
refers to information sharing among supply chain partners. The ability of
responding quickly and effectively to continuously changing demands requires
an accurate and fast flow of information among the supply chain players. Such
visibility can be attained through collaboration between the supply chain
players and most importantly with the suppliers and customers.

In a supply chain context, demand volatility refers to unpredictable rate of changes

affecting the demand side of supply chains, and consequently it is focusing on the
demand variability and the bullwhip concept. A bullwhip effect is defined as the
amplification of demand variability from a downstream site to an upstream site, where
Cachon et al. (2007) defined it as the phenomenon of increasing demand variability in
the supply chain from downstream echelons (retail) to upstream echelons
(manufacturing). One of the tools to deal with bullwhip effect is using a production
smoothing Model. This where it is assumed that by using inventory as a buffer a firm
can smooth its production relative to its sales. However, production is more variable
than sales in most industries. Hence, negative findings on the production-smoothing
model were reported (Kahn, 1992; Krane and Braun, 1991; Mosser, 1991; Rossana,
1998).

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Moreover, bullwhip that refers to the upstream amplification of order variability
driven by changing retailer demand is the exogenous supply chain volatility that is
referring to the amplification of steady- state. While, temporary cyclical oscillations
in orders and inventory levels at the retailer and its upstream suppliers generated by
non-cyclical and non-random retailer demand is known as endogenous supply chain
volatility (Springer and Kim, 2010). These endogenous and exogenous supply chain
volatilities present an introduction of two metrics for evaluating supply chain
performance. The first metric is the presence and nature of any oscillations in on-hand
and pipeline inventory levels. A supply chain architecture design is thereby
considered to be volatile if it is possess tendency to respond to oscillations within the
system. The second metric is the factor of time. A supply chain is exposed to demand
shocks while operating, where the ability of rapid converging to its new equilibrium
will enable the supply chain to be more stable and less volatile.

Uncertainty Management
Supply chain uncertainty can be viewed in different forms, including situations in the
supply chain in which the decision makers lack information about or understanding of
the supply chain system (Van der Vorst and Beulens, 2002), as the state of total
absence of information or awareness of an upcoming event potentially occurring,
irrespective of whether the outcome will have a positive or negative impact (Ritchie
and Brindley, 2007), as the lack of information concerning the present or future states
of certain processes that most likely will impact the flows of cash and resource across
processes (Kambil, 2008; Adamson, 2012). In 1993, Davis proposed an identification
of three sources of supply chain uncertainty, including demand, manufacturing
process, and supply uncertainty. Trkman and McCormack (2009) classified
uncertainty into endogenous uncertainty and exogenous uncertainty. Endogenous
uncertainty refers to the source of uncertainty/risk that initiated internally from the
inside of the supply chain and can propagate into changing the relationships between
focal firm and suppliers. Exogenous uncertainty refers to the source of
uncertainty/risk that initiated externally from the outside of the supply chain and it
was further divided to include discrete events and continuous risks.

For managing uncertainty, Mason-Jones and Towill (1998) developed the uncertainty
circle model which classified supply chain uncertainty into four levels: process,
supply, demand, and control. For process uncertainties, it refers to the internal
reliability of the analysis of a specific process within the supply chain. For supply
uncertainty, it arises as a result of unreliable suppliers and it occurs due to the poor
performance of the organization’s suppliers who can’t meet the organization’s
requirements. For demand uncertainty, it refers to the gap between the actual end-
marketplace demand and the customers’ orders placed to the organization. For control
uncertainty, it impacts the supply chain capability to transform customer orders into
satisfactory deliveries and requests for raw materials from suppliers.

Davis (1993) proposed three strategies to reduce the supply chain uncertainty,
including total quality control, new product design, and supply chain redesign. Geary
et al. (2002) and Gerwin (1993) argued that the strategies of total quality control and
new product design can be utilized in attempt to reduce process uncertainty and the
supply chain redesign strategy to achieve supply uncertainty reduction. Jones and
Towil (2000) recommended that uncertainty reduction can be achieved through
implementing two basic decisions. The first decision is to improve the performance of

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the value added process through lead time reduction and the application of lean
thinking to significantly improve quality levels. The second decision is to coordinate
work closely with the suppliers which will improve supplier quality, reduce supplier
lead times and promote for much more consistent delivery patterns. Jones and Towil
(2000) proposed that uncertainty reduction ought to involve strategies that manages
the uncertainty sources in both the material flow and the order information pipelines.
Simangunsong (2012) proposed different ways for coping with different sources of
uncertainties, including postponement, volume/delivery flexibility, process flexibility,
customer flexibility, multiple suppliers, strategic stocks, collaboration, Information
and Communication Technology (ICT) system, lead time management, financial risk
management, and quantitative techniques.

Complexity Management

Ivanov and Sokolov (2009) argued that the global supply chains systems are regarded
as a representation of complex adaptive systems that possess no distinct boundaries.
Hence, complexity was viewed as a coherent feature of supply chains. Accordingly,
complexity management is a crucial aspect in order to avoid any exacerbated
uncertainty, risk or unnecessary cost (Christopher, 2011). Bozarth et. al (2008) claimed
that the Supply Chain Complexity (SCC) can be classified into two types of complexity detail
complexity and dynamic complexity, where detail complexity referred to the exact number
components or parts composing a system and dynamic complexity referred to the lack of
predictability in the system’s response towards a given set of inputs, driven by the
interconnectedness of the many parts that compose a system.

In a supply chain context, complexity has many aspects that need to be managed in
order to improve a supply chain performance. First aspect is diversity where it is
related with the homogeneity or heterogeneity of a system. A high or low level of
diversity of any component of the supply chain leads to the system`s heterogeneity or
homogeneity and results a high or low level of complexity. Second aspect is
interdependency. It refers to the extent to which the states within the supply chain
system are interdependent. Thus, complexity increases directly proportional to the
increase of interdependence (Isik, 2011). Third aspect is variability: and it represents
the rapid change of elements over a period of time. Variety is the fourth aspect where
it represents the dynamic behaviour of a system, as variety refers to the state of being
various. The causes of the SCC can be classified as inbound and outbound logistics,
sales processes, production engineering production process and new product
development (Perona and Miragliotta, 2004). Another approach classified the SCC
into three aspects including, downstream complexity, internal manufacturing, and
upstream complexity (Bozarth et al., 2009). Blecker et al. (2005) elucidated that the
SCC complexity classification can be between structural complexity and dynamic
(operative) complexity. However, most of researches classified supply chain
complexity according to its origin: internal and external/environmental SCC (Mason-
Jones and Towill, 1998; Wildemann, 2000; Childerhouse and Towill, 2004; Blecker
et al., 2005; Isik, 2011).

A four stage of complexity management model is proposed to manage complexity in

supply chains effectively and efficiently which covers identifying, measuring,
analyzing and controlling of complexity. It is worth mentioning that although high
complexity indicates high unnecessary costs to the company, however in some
situations it can add value to the company, as complexity may result in excess

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inventory which can be useful if sudden change in demand occurred at such a time
(Isik, 2011). Wilding (1998) proposed a ‘supply chain complexity triangle’ for
managing SCC where the SCC complexity was classified through the combination of
three independent variables, namely deterministic chaos, parallel interactions and
demand amplification.

Ambiguity Management

In the context of risk or decision-making, ambiguity is viewed as the unknown

possible outcomes. While in an economic context, ambiguity is defined as the lack of
understanding considering the fundamental principles that drive risk (Grant, 2013).
Also, it can be defined as the lack of clarity about the meaning of an event (Caron,
2009). Ambiguity can also be defined as the inability to accurately conceptualize
threats and opportunities before they become lethal.

The relationship between ambiguity and information sharing is illustrated throughout

the context of the definition of the ambiguity driver. Watts (2006) described that
ambiguity represented the lack of knowledge of the decision makers not the lack of
information, capturing both the uncertainty involved in the roles of individuals in a
distributed problem solving activity and the environmental uncertainty. Hence, the
importance of sharing information to enhance the supply chain performance has been
widely acknowledged in literature.

Christopher (2011) as well, argued that the amount of data flowing in all directions
across the supply chain is immense which can prone to misinterpretation by players as
the visibility of accurate relevant data can be interrupted through unnecessary
modification of information as it passes from entity or level to another.

Managing ambiguity requires sharing accurate and correct interpretations across

processes. Some of the key responses to tackle ambiguity other than information
systems are: coordinators who are aware of the languages and systems across
processes; jointly reviewing unexpected variances or information across processes
and ensuring that both sides have a common interpretation of events through proposed
decision frameworks; verifying hypotheses and achieving clarity in ambiguous
situations by implementing joint planning and coordination across processes that
challenges joint assumptions (Kambil, 2008).

Conclusion
The significance of the VUCA term in businesses was elaborated through the
literature gathered and how it greatly affected the supply chain management aspect.
The VUCA drivers best described the challenging environment within which
businesses operates. It was observed by the researcher that, some of the VUCA
drivers were studied by a wide range of researchers; however these studies interpreted
the impact of each driver on the supply chain management independently, where more
recent studies, analyzed the correlated aspects amongst two of the drivers. Hence, this
conceptual paper aims at exploring the VUCA term and its drivers and how can the
drivers of the VUCA concept affect the overall supply chain performance. This paper

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has focused on the relationship amongst the four VUCA drivers and how these drivers
affect the supply chain performance. It was found that businesses have adopted the
concept of agility in their supply chains to cope with the VUCA drivers. However,
additional aspects needed to be considered in order to master managing the VUCA
drivers and moreover enable businesses to convert the challenges imposed by the
VUCA drivers into a competitive advantage.

Findings
First, the VUCA term became a competitive requirement for companies, who had to
be fully aware of its drivers in order to survive in such a scary environment. Second,
integrating the Volatility, Uncertainty, Complexity and Ambiguity drivers in a supply
chain architecture in order to be able to sustain profitably in this challenging
environment. Third, VUCA drivers helps to gain a competitive advantage in the
supply chain. Fourth, VUCA can be used by leaders and managers as a method for
altering the traditional supply chain models.

Paper Value
Such combination became vital in the current situation of the global world; as
companies used to address each force separately with different strategies while
neglecting the interdependence between some of the forces. Hence, this research aims
to design a Supply Chain Architecture based on the VUCA concept in order to
enhance the supply chain performance, to assist the companies to create an ‘end to
end agile supply chain’ to cope with the inevitable effect of the VUCA drivers, and
moreover to gain a competitive advantage by running the business both efficiently
and effectively.

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