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{\info{\title  }{\subject  }{\author Kinko's, Inc. }{\manager  }{\company Kinko's, Inc. }{\category  }{\keywords  }{\doccomm  }{\version1}{\creatim\yr2007\mo10\dy18\hr13\min23}}\deftab720\widowctrl\ftnbj\aenddoc\formshade\viewkind1\viewscale100\pgbrdrhead
\pgbrdrfoot\fet0\subfontbysize\sectd\margrsxn1740\margtsxn1410\margbsxn1410\linex0\sectdefaultcl\pard\plain \qc\sl408\slmult0\nowidctlpar\adjustright \fs24\cgrid {\f10\fs22\b\i\cgrid DRAFT\line Do Not Quote Without Permission of Authors
\par }\sb2052\sl360\slmult1\nowidctlpar\adjustright {\f16\fs26\b\cgrid DYNAMIC LOGISTICS FOR A TURBULENT WORLD:\line ORGANIZING PRINCIPLES
\par }\sb936\sl240\slmult1\nowidctlpar\adjustright {Noel P. Greis}{\super\cgrid l}{\line University of North Carolina at Chapel Hill\line Kenan Institute of Private Enterprise\line Global Logistics Research Initiative
\par }\sb396\nowidctlpar\adjustright {Udo Inden\line University of Applied Sciences Cologne\line }{\f10\fs22\b\i\cgrid Global Logistics Research Initiative
\par }{John D. Kasarda\line Kenan Institute of Private Enterprise\line Univerity of North Carolina at Chapel Hill
\par }\sb1656\nowidctlpar\adjustright {April 2003
\par }\ql\fi216\sb2016\nowidctlpar\adjustright {\fs20\cgrid All correspondence concerning this paper should be sent to Dr. Noel P. Greis, Director, Center for Logistics and Global Strategy, Kenan Institute of Private Enterprise, CB# 3440 Kenan Center, Uni
versity of North Carolina, Chapel Hill, NC 27599-3440, Phone: 919-962-8201, noeLgreis@unc.edu
\par }\fi0\sb0\sl360\slmult1\nowidctlpar\adjustright {\b\cgrid Introduction
\par }{
\par }\fi720\nowidctlpar\adjustright {Companies today are operating in highly stressed and turbulent environments in which even small disturbances to the business system can quickly escalate into major upheavals and headaches. This increasing complexity h
as highlighted two major risks for companies today. The first risk is that of irrelevance. Unanticipated changes in the external environment, from upheavals in financial markets to explosive political events, can render current strategies and tactics inef
fective, rapidly diminishing profitability. The second risk is that of lost opportunity. While the rapid pace of change can destroy a business plan overnight, it also provides new opportunities. Many companies, however, are not prepared to respond to and 
control fluctuations of asset availability, quality or reliability quickly enough, thereby undermining their ability to exploit these new opportunities.
\par }\fi0\nowidctlpar\adjustright {
\par }\li706\nowidctlpar\adjustright {In previous times, these stresses to the business system were not as critical.
\par }\li0\ri70\nowidctlpar\adjustright {Today they can have catastrophic results. Ingrained responses to these stresses are based on an outdated set of behavioral rules that no longer meet the needs of an increasingly dynamic and complex business environ
ment. These rules have functioned well in an era of stability, but are not suited to one dominated by increasing dynamic complexity. The greatest concern for a manager today is not the avoidance of failure costs, but rather the avoidance of opportunity co
sts associated with not being able to identify, evaluate and exploit higher-value opportunities. Opportunities are triggered by a customer need, made real by its content, place and time. To profit from an opportunity, a successful of transforming activiti
es must be coordinated along the supply chain.
\par }\ri0\nowidctlpar\adjustright {
\par }\fi720\ri211\sa1044\nowidctlpar\adjustright {In a dynamically complex business environment, logistics holds the promise of overcoming the spatial and temporal gaps that enable the profitable exploitation of an opportunity. This paper offers a vision
 of the logistical environment of the future. We begin with an historical perspective of the business and logistics systems that have evolved in response to increasing complexity and dynamism. The organization of these
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {1
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {business systems\'97mass production, lean management and, now, agility\'97can be viewed as optimal systems for the environments of their day. We then suggest that the central task of companies in today's en
vironment of rapid change and increasing complexity is to manage opportunity. The concept of a dynamic logistical system\'97a fundamentally new approach to organizing information and material flow in real-time\'97is presented. Four organizing principles f
or such a system are described\'97virtualization, simultaneity, scalability, and autonomy. We conclude with an assessment of current systems, infrastructures and practices vis-a-vis these principles\'97and a prognosis for their future integration into the
 logistical systems of tomorrow.
\par 
\par }{\b\cgrid New Rules of the Game
\par }{
\par }\fi720\ri352\nowidctlpar\adjustright {Nearly a decade ago, the front pages of business journals and magazines proclaimed that the customer was king. The proclamation was slightly premature. At that time, deferring to the customer meant providing enh
anced customer services, establishing a closer relationship with the customer including more "face-to-face" customer interaction, and accommodating customer whims as much as possible within the constraints of existing manufacturing processes and systems. 
Although the importance of establishing a relationship with the customer was a new perspective, the manufacturer still maintained the balance of power in the market place.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri70\sa1476\nowidctlpar\adjustright {Only within the last several years has the balance of power truly shifted to the customer. The spread of new technology, especially information technologies such as the internet and on-line yellow pages th
at made comparison shopping as easy as a push of the button, further diminished customer loyalty. Continuously innovative markets demanded new products, new manufacturing strategies and, at the same time, new success criteria. No longer were quality and p
rice the key market differentiators. Customers wanted responsiveness\'97fast delivery, customized features and an increasing array of services.
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {2
\par }\ql\fi720\ri70\sl360\slmult1\nowidctlpar\adjustright {At the same time, trends toward global integration have only enhanced customer power. Falling trade borders, downward pressures on transportation costs, and low factor costs in emerging markets h
ave spurred the integration of world markets. Growing populations developed a hunger for sophisticated products to signal their new prosperity. Regional, ethnic and personal tastes bean to crack the concept of a single market. Globalization, however, is a
 two-edged sword. Companies are now able to source goods, technology and capital from anywhere is the world. This ability to outsource\'97to go anywhere to get the best, or the cheapest, or the first available\'97allowed companies to concentrate on the de
velopment of core competencies. Companies specialized in the customer-oriented development of specific know-how or management processes. By virtually integrating, companies are able to compete successfully in a world dominated by rising customer expectati
ons for timeliness and responsiveness, with increasing market "fractalization," rapidly evolving technology, sinking relative prices of energy and transport and, ubiquitous information.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri70\nowidctlpar\adjustright {Today, the ability of companies to meet targets of speed and responsiveness in the marketplace depends on their ability to assemble and manage a cast of core competencies\'97to create the virtually integrated ent
erprise. Spurred on my globalization and the desire to avoid failure costs, industry has disseminated competence around the world\'97exported commercial knowledge and technology, developed large international sales and marketing departments, trained peopl
e abroad. Business today feels it must be everywhere all the time to succeed in the global marketplace. As nearly everything becomes available everywhere and at any time, the number of commercial actors and the speed of their transactions increases dramat
ically.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri141\sa1044\nowidctlpar\adjustright {A global business strategy based solely on an assembly of core competencies, however, is not sufficient to maintain a competitive edge in an increasingly complex and dynamic business environment. The sour
ce of complexity is the increasing real-time control of the customer delivery process that is needed to produce customized products from parts and components sourced from suppliers around the world. As Lester Thurow
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {3
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {has said, "Today everything can be made available everywhere and at any time." By the same token, the time necessary to assemble the supply and transport chain necessary to fulfill customer demand is increa
singly more than customers are willing to accept.
\par 
\par }\fi576\nowidctlpar\adjustright {Meeting market expectations in a this complex and dynamic environment will require a rethinking of the business systems by which companies interact and products are made. New rules of the game are altering the distinc
tions between products and services. Nowhere do these changes have more impact than in the arena of logistics\'97the practices and processes by which information, materials and money circumnavigate the globe to create the products and services for the glo
bal marketplace.
\par }\fi0\nowidctlpar\adjustright {
\par }{\b\cgrid Dynamic Complexity: An Historical Perspective
\par }{
\par }\fi720\nowidctlpar\adjustright {The emerging new rules of today's business environment can be can be viewed as a natural extension of the interplay between the pressures of increasing environmental dynamics or temporal change, and new business strat
egies such as "customization" that create logistics complexity. It is worthwhile to look at how the interplay of these two dimensions\'97one characterizing the competitive environment and the other industrial response\'97have given rise to the business sy
stems of the past one hundred years.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\sa1044\nowidctlpar\adjustright {In most tales of industrial history, Henry Ford's Tin-Lizzy is the symbol of the mass production era. Mass production appeared in the early part of this century as a response to the demand for affordable produc
ts for a growing middle class. Ford's apochryphal statement that customers could have a Model T in any color so long as it was black reflected the power of the manufacturers to ignore the true or latent demand of the marketplace. New technologies of produ
ction and mechanization allowed large volumes of standard products that returned tremendous economies of scale, as well as profits, to the early corporations. The focus on ever increasing economies of scale, combined with a trend toward vertical integrati
on, also led to the formation of ever larger and hierarchically structured companies that ultimately would fall under the weight of their
\par }\qc\fi0\sa0\sl240\slmult1\nowidctlpar\adjustright {4
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {inefficiency.
\par 
\par }\fi720\nowidctlpar\adjustright {Mass production remained the predominant business strategy for nearly fifty years. "Taylorism" was a successful strategy for an era of static environments and, since the power to determine what goods were sold resided
 with the manufacturer, avoided the problem of complexity generated by structural variety. Under Taylorism business systems were dominated by the pressures to reduce unit costs and increase economies of scale. As Figure 1 illustrates, the dynamic between 
temporal change and complexity can explain the experience of recent years. A simultaneous increase in structural variety\'97more variants of products to appeal to a "fractalizing" market\'97and of temporal change characterized by an acceleration in the ra
te of introduction of these variants, drive sudden and fundamental changes in system behavior. The confounding of these increases in structural variety and temporal change result in an increase in what we call dynamic complexity.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri71\nowidctlpar\adjustright {The cascading eras of dynamic complexity are illustrated in Figure 1. The increases in structural and temporal variety triggered by the ascendance of customer power marks the first discontinuity. Economies of sca
le become insufficient to assure market success. Business systems organized around economies of scope\'97lean systems\'97emerged as the dominant form of competition. As shown in Figure 1, lean management is dominated by failure costs\'97costs that are inc
urred when fleeting and evanescent market targets are not met. However, as products became increasingly complex, the constellation of core competencies necessary to design, manufacture and deliver a product became more expensive to maintain. At the same t
ime, the increasing pace of technological change made it impossible to develop this core know-how in-house as opportunities arose.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\sa1044\nowidctlpar\adjustright {This increase in dynamic complexity is the root of the term "turbulent" that is increasingly being used to describe the business environment today. The analogy, drawn from science of physical systems, has impli
cations from the natural world. Complex and
\par }\qc\fi0\sa0\sl240\slmult1\nowidctlpar\adjustright {5
\par }\qj\sl360\slmult1\nowidctlpar\adjustright {nonlinear physical systems can quickly turn into turbulent or "chaotic" systems. In these systems, predictability of the future is poor or non-existent because even small changes at the edges of the system 
can have dramatic effects on system's performance and outcome. In turbulent business environments, it becomes difficult to even identify market targets\'97much less exploit them.
\par }\ql\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {In business systems today, market turbulence is still driven by a global interaction of competitive strategies to penetrate markets with superior goods and services in the face of increasing pretentiousness of custome
rs and fast technological development. What's different today is that new information and communication technologies have rendered obsolete the business processes and responses that worked only a few years ago. Vanishing market demarcations and transactio
n costs, the progressing predominance of immaterial assets, the substitution of the law of falling marginal costs per unit by the law of the increasing productivity of knowledge and, last but not least, the interfering volatility of global financial marke
ts, have all exacerbated what was already a chaotic environment.
\par }\fi0\nowidctlpar\adjustright {
\par }{\b\cgrid The New Agility: Managing Opportunity
\par }{
\par }\fi720\ri141\nowidctlpar\adjustright {If mass production is dominated by unit costs, and lean management by failure costs, then turbulent environments are dominated by opportunity costs\'97or the inability to identify and exploit market opportunitie
s in turbulent environments. The challenge in an environment of dynamic complexity is not only to capture market opportunities in real-time, but also to overcome the diseconomies of scale'and scope due to market fractalization that constrain profitability.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri70\sa1044\nowidctlpar\adjustright {The concept of opportunity costs is not new, but rather dates to the turn of the last century. According to Green }{\f16\fs20\i\cgrid et al., }{"if a decision for one of at least two opportunities to make 
use of scarce assets is inferior in terms of costs or utility relatively to the other(s) this relative loss is called an opportunity cost." Until now attempts to integrate
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {6
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {opportunity costs into accounting systems has proved difficult for the simple reason that it is difficult to measure the difference between a known inferior and an unknown better or even "best" decision. Fi
rms have focused on cost per unit, or failure costs (e.g. excess inventory, obsolescent products), or even on order-to-delivery cycle times. In a turbulent environment driven by dynamic complexity, the risk is that companies are unable to respond to marke
t opportunities because they lack information to identify the target. The resulting inferior decisions can result in opportunity costs. Alternatively, companies fail because the lead times required to assemble the right set of competencies, or re-deploy e
xisting resources, exceeds the speed of temporal change.
\par 
\par }\fi720\ri71\nowidctlpar\adjustright {The challenge of hitting the target is especially difficult in today's fast-paced market where windows of opportunity are shrinking continually, as shown in Figure 2. The business system's task is to assemble the
 necessary assets and supply chain connections that enable the firm to hit the target. First, the necessary assets for assembling a product must be identified and appropriate links for moving parts, components and finished products must be opened. Delays 
only give opportunities for competitors to steal the opportunity. In some cases, the wrong target may be hit! When this happens, companies must waive a part of their profits due to the costs of re-locating and re-assembling assets, or the costs of increas
ed inventories of unsold goods, or reduced revenues from fire sales.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri71\sa1476\nowidctlpar\adjustright {Companies increasingly face these crucial opportunity risks. They urgently need business systems that enable them to scan for opportunities, to account for opportunity costs in daily operations, and get to
 the customer before the competition. At the same time, quality and cost must be controlled. Without these systems, companies run the risk of obsolete deployment of physical materials that cannot be reused because they are not fungible. Many production ca
pacities and distribution capacities\'97for example space in the belly of an air freighter\'97cannot be stored. To miss the opportunity is to lose it forever.
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {7
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {\b\cgrid Maximizing Opportunity
\par }{
\par }\fi720\ri142\nowidctlpar\adjustright {The volatility of today's markets has forced company's to ask themselves important questions about their ability to respond to customers fast and effectively. For example, can supply chains be rearranged efficie
ntly in response to changes in customer demand? Or can asset positions be adjusted quickly in response to exchange rate fluctuations? Ideally, a company's assets should be positioned at their place of maximum value at all times. Of course, this is theoret
ically impossible given the unpredictable nature of customer demand. In the absence of complete knowledge of customer demand, companies must develop the operational flexibility that will allow assets to be marshaled with the same ease for a variety of mar
ket opportunities\'97regardless of where they surface around the world.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {Operational flexibility is expensive and, consequently, Henry Ford's Tin Lizzy tried to get rid of it. Today, the combination of increasing demand for variety and efficiency sharpens the flexibility versus cost debate
\'97and destroys economies of scale at the same time. Recent strategies to increase operational flexibility include delaying product assembly until customer orders are actually received. These postponement strategies, built around common platforms or modu
les, reconcile variety and efficiency using common standards and interfaces. At the same time, they regain economies of scale by increasing the number of common parts, and achieve variety through the mix of modules. While the personal computer industry is
 most quickly brought to mind as an example, complex industries like the auto industry are increasingly trying to resolve the efficiency/variety debate through similar strategies.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri213\sa1044\nowidctlpar\adjustright {Dynamic complexity can be tamed by new strategies that maximize opportunity within the organization. Maximizing opportunity means solving the twin problem of information and deployment. The first task is 
to identify and evaluate effective opportunities. The second task is to deploy materials and capacities close to the opportunity. From the time a product is conceived in response to a perceived market
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {8
\par }\ql\ri282\sl360\slmult1\nowidctlpar\adjustright {need, actions that the company takes to bring that product to the marketplace reduce opportunity and, at the same time, incur risk. Opportunity is lost because dedicated resources are not available to
 other market opportunities that may have a higher value. Conversely, risk, or potential opportunity costs, are incurred if that product misses it market target.
\par }\ri0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {This concept of maximizing opportunity and, conversely, minimizing risk, is illustrated in Figure 3. In this graph, opportunity diminishes over time as assets are allocated as part of the total business process of mee
ting customer demand. The rigidity and risk associated with Henry Ford's Tin Lizzy system of mass production is represented by the lowest curve in the figure. Dedicated machinery, fixed assembly lines, and lots of inventory decrease opportunity rapidly. B
ut, of course, since there was only one model, and the idea of shifting resources to a higher use was not relevant. And, as the dominant manufacturer with total market power, lack of opportunity did not hurt Ford. By contrast, the personal computer manufa
cturers today are in a very different situation. Through postponement, common parts and components sit on a shelf awaiting receipt of an order. Delaying product assembly (Label 1) or platform strategies (Label 2) increase opportunity. Ideally, decisions t
o deploy assets should be postponed to coincide with the identification of the opportunity. Business systems need new and different strategies to achieve even greater opportunity.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri70\sa1044\nowidctlpar\adjustright {A significant outcome of strategies such as postponement has been the elevation of logistics as a coordination mechanism for the global enterprise. Fast turnaround for modularized products requires that al
l parts, components, or modules arrive simultaneously at the point of assembly. Personal computer manufacturers like Dell and Compaq have solved this problem by requiring all suppliers to maintain inventories or parts and components within minutes of the 
assembly point. Personal computers assembled to specification are air expressed to the customer overnight. Manufacturers dependent upon parts and components located far away from the point of assembly leverage the technology of integrated carriers like Fe
dEx to assure the synchronized
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {9
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {arrival of components directly to the point of assembly.
\par 
\par }\fi720\nowidctlpar\adjustright {Increasingly, complex industries like the automotive industry are transforming themselves into logistics companies rather than traditional manufacturing companies. One example is Volkswagen's new truck and bus facilit
y in Resende, Brazil. This facility might better be called a "logistics center" than a manufacturing plant. Each vehicle has been broken down into seven modules such as cockpit or chassis. First-tier suppliers assume responsibility for manufacture of each
 module, assembly into the vehicle at the Resende plant, and manage the module supply chain. Volkswagen provides the assembly facility, and assumes responsibility for the assembly logistics and quality control.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri70\nowidctlpar\adjustright {In increasingly turbulent times, however, even these strategies will ultimately fail since they do not address the critical issues of dynamic complexity and market fractalization. In a stable environment, variety
 can be produced effectively and efficiently. However, as companies increasingly outsource parts, components and modules beyond their core competencies, both the complexities and the potential for failure are exacerbated. Small fluctuations in supply chai
n reliability can stop the assembly line driving customers to a competitor. Normally, "built-in" lead times or inventory buffers protect against fluctuations. However, these measures run counter to the need to couple the links of the supply chain more and
 more tightly to avoid time and cost weakness.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }{\b\cgrid Dynamic Logistical Systems
\par }{
\par }\fi720\ri211\sa1044\nowidctlpar\adjustright {The proliferation of actors, the number of transactions, and the speed with which they must be accomplished is increasingly raising the performance standard for global systems that manage information, com
munications, transportation, and even finance. A fundamentally new attitude is needed to realize operational flexibility beyond conventional postponement or modularization\'97and that overcomes the problems of micro-coordination that are endemic in turbul
ent environments. Such as system, which
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {10
\par }\ql\sl444\slmult0\nowidctlpar\adjustright {we term dynamic logistics, must possess the following capabilities:
\par }\sl360\slmult1\nowidctlpar\adjustright {
\par }{\pntext\pard\plain \f6\fs24\i\cgrid \loch\af6\dbch\af0\hich\f6 \'b7\tab}\pard \fi-432\li1129\ri635\sl360\slmult1\nowidctlpar\jclisttab\tx1129{\*\pn\pnlvlblt\ilvl0\ls1\pnrnot0\pnf6\pnfs24\pncf1\pnstart1\pnindent432\pnhang\pnsp432\pntxtb \'b7\tab}
\ls1\adjustright {\i\cgrid Virtualization \'96 }{the ability to acquire the information from the turbulent environment necessary to identify and evaluate opportunity;
\par }{\pntext\pard\plain \f6\fs24\i\cgrid \loch\af6\dbch\af0\hich\f6 \'b7\tab}\pard \fi-432\li1129\sl360\slmult1\nowidctlpar\jclisttab\tx1129{\*\pn\pnlvlblt\ilvl0\ls2\pnrnot0\pnf6\pnfs24\pncf1\pnstart1\pnindent432\pnhang\pnsp432\pntxtb \'b7\tab}\ls2
\adjustright {\i\cgrid Simultaneity \'96 }{the ability to know the real-time status of all relevant assets and to control them physically by simultaneous access;
\par }{\pntext\pard\plain \f6\fs24\i\cgrid \loch\af6\dbch\af0\hich\f6 \'b7\tab}\pard \fi-432\li1129\ri70\sl408\slmult0\nowidctlpar\jclisttab\tx1129{\*\pn\pnlvlblt\ilvl0\ls3\pnrnot0\pnf6\pnfs24\pncf1\pnstart1\pnindent432\pnhang\pnsp432\pntxtb \'b7\tab}\ls3
\adjustright {\i\cgrid Scalability \'96 }{the ability to arrange capacities and assets to match demand cost effectively; and
\par }{\pntext\pard\plain \f6\fs24\i\cgrid \loch\af6\dbch\af0\hich\f6 \'b7\tab}\pard \fi-432\li1129\ri564\sl360\slmult1\nowidctlpar\jclisttab\tx1129{\*\pn\pnlvlblt\ilvl0\ls4\pnrnot0\pnf6\pnfs24\pncf1\pnstart1\pnindent432\pnhang\pnsp432\pntxtb \'b7\tab}
\ls4\adjustright {\i\cgrid Autonomy \'96 }{the ability to overcome problems of micro-coordination that create a robust, of fail-safe, system
\par }\pard \sl360\slmult1\nowidctlpar\adjustright {
\par }\ri564\nowidctlpar\adjustright {Each of these enablers of dynamic logistics is a response to some characteristic of a turbulent environment that destroys the competence of existing business systems. Virtualization is a response to the rapid destruct
ion of information in a turbulent environment. Scalability is a response to the destruction of economies of scale and scope. Simultaneity is a response to the destruction of accessibility. And finally, autonomy is a response to the destruction of central 
controllability.
\par }\ri0\nowidctlpar\adjustright {
\par }\fi720\sa2124\nowidctlpar\adjustright {As we have discussed in a previous section, increasing turbulence and the speed of change exceed the lead times needed to respond successfully to market opportunities. In such an environment, any deployment of 
material assets incurs risk\'97the risk of having assets deployed at the wrong location at the wrong time. To increase the speed of reaction is a first response. However, the fundamental changes in the environment that result from turbulence do not respon
d to speed. Rather, the goal of dynamic logistics should be to define products and allocate resources on the basis of the their reduction of opportunity risk\'97risk that is incurred when assets are no at their location of maximum value.
\par }\qc\fi0\sa0\sl240\slmult1\nowidctlpar\adjustright {11
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {\b\cgrid Wresting Information From Turbulence: The Principle of Virtuality
\par }{
\par }\fi720\nowidctlpar\adjustright {Virtualization is an organizational strategy to identify and evaluate market opportunities, and to keep these opportunities open as long as possible. Today the half-life of knowledge is about three years. After six ye
ars, 75% of knowledge has been devalued, and the devaluation of knowledge is accelerating. In such an environment, it is increasingly difficult to keep in touch with the market, as evidenced by the tremendous surge in companies that provide business intel
ligence services. For executives today, a crucial question is: "How do you evaluate opportunities which don't exist yet? And, then, how do you allocate resources for opportunities which may exist in the future, but don't exist yet?"
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri70\nowidctlpar\adjustright {In a dynamic world, companies have to react very exactly and very quickly to changing conditions. Formally, this environment can be described by probabilities of demand at every location and the probabilities of 
being able to provide exactly the assets needed to respond. To make decisions about asset location, companies must align the probability that a resource will be needed, with the probability that the asset can be provided. A virtual system is one in which 
it is possible to provide maximum "closeness" of resources to opportunity. What is needed is an operational link between supply and demand that can provide this "closeness" to opportunity. Closeness is typically defined by distance, but does not need to b
e. `Real options" are one solution.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {Options provide an essential ingredient\'97information about the future status of an asset. Options are "information-rich" products because they provide critical information about the }{\i\cgrid future }{availability 
in terms of quantity, quality, price and time. For example, car insurance provides information about future assets in the case of damage or accident. Options provide more\'97in addition to accounting for down-side risk, they provide an opportunity to achi
eve up-side gain as in the financial markets.
\par }\fi0\nowidctlpar\adjustright {
\par }\qc\sb72\sa1116\sl240\slmult1\nowidctlpar\adjustright {Figure 4 illustrates a basic pricing system that allocates transport capacities
\par }\sb0\sa0\nowidctlpar\adjustright {12
\par }\ql\ri70\sl360\slmult1\nowidctlpar\adjustright {according to the principles of options\'97virtual capacity allocation. Traditionally, decisions about the allocation of assets are made in advance of the opportunity\'97for both the shipper and the car
rier. A customer of air freight, for example, has a portfolio of assets that are deployed around the world in anticipation of market opportunities (left-hand side). At the same time, the provider of the air freight service has pre-assigned capacities in r
outes that are based on expected opportunities. For all the reasons mentioned earlier, market demand and opportunities are not aligned due to turbulence in the environment that destroys information.
\par }\ri0\nowidctlpar\adjustright {
\par }\fi720\ri141\nowidctlpar\adjustright {Consider Figure 4. An `options' market assigns capacities on a virtual basis\'97whenever or wherever they are needed. The bell-shaped curve on the left represents perspective of the shipper, providing the probab
ility of demand on, for example, a specific route at a specific time. If the curve were shifted the right, then the shipper should purchase an option to assure that capacity is available when needed. Conversely, when the curve is shifted to the left, then
 the shipper should sell the option because the expected price reflecting anticipated demand, is too low. To possess a right on such a "virtual capacity" can be very valuable\'97analogous to insurance against other expected disasters such as floods, hurri
canes and other natural disasters.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri70\nowidctlpar\adjustright {The right-hand side of the figure provides the perspective of the providers. The premium associated with a tradable option is an evaluation of the "opportunity" associated with the underlying capacity. A high pre
mium indicates the need to increase capacity because many customers perceive a high value for that available capacity. When the premium exceeds a certain amount, the provider should increase capacity; conversely, when it falls below a certain amount, the 
allocated capacity should be reduced. There is a region between these two prices where no action is possible. In the case of transport management, this situation might result from the technical infeasibility associated with adding "one shipment' to a full
 plane, or the problem of lead times.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\li707\sb72\sa1116\sl240\slmult1\nowidctlpar\adjustright {All capacities need not be traded on the basis of options. However, in extremely
\par }\qc\li0\sb0\sa0\nowidctlpar\adjustright {13
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {dynamic environments, a significant portion of those capacities can be allocated through an options-based system. In cases where there are too few market participants, alternative "opportunity-oriented" pri
cing systems may be applied. The crucial point is not that real options are the answer. Rather, the outcome of virtualization is a virtual capacity allocation system, such as an opportunity-oriented pricing strategy, that allocates resources so that the p
robability of experiencing an opportunity equals the probability of being able to respond to that opportunity.
\par 
\par }\fi720\ri70\nowidctlpar\adjustright {In short, "real options" are nothing more than a tool to implement virtuality. In short, we are re-defining the virtual enterprise. Instead of defining the virtual enterprise as a portfolio of real assets, we def
ine it as a portfolio of options pre-configured for expected opportunities. Supply chains are constructed by picking those options from the portfolio which corresponds to the opportunity. The options can be used, if an opportunity arises. If the options a
re not needed, they can be sold or left to lapse. The price of the real option reflects the value of the opportunity and the underlying assets, as perceived by the market. If the price of the option on transport capacity drops, few players can use the ass
et. But conversely, a rising price signals a hot asset. Providers of transport services can steer their networks away from "poor" markets to "hot" ones, maximizing opportunity\'97and profit.
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }{\b\cgrid Linking Assets and Opportunities: The Principle of Simultaneity
\par }{
\par }\fi720\ri212\sa1044\nowidctlpar\adjustright {The identification of opportunities through virtuality is a necessary\'97but not sufficient\'97condition for managing in a turbulent environment. Assets must also be continuously visible and physically ac
cessible. A dynamic logistical system must bring together }{\f16\fs20\i\cgrid simultaneously }{all of the assets necessary to exploit an opportunity\'97assets and capabilities necessary to produce goods and services have to be always and everywhere connec
ted to the firm's operational control and dispatch. While strategies such as postponement and mass customization maximize opportunity by leveraging asset flexibility associated with product design and manufacture, they do not address the
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {14
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {spatial and temporal distribution of assets\'97or the inflexible scales of logistical capacities. Assets maybe kept too far away from the place and time of need, and there may be insufficient time to reconf
igure the system on demand. The success of Dell in the personal computer market can be attributed to their ability to assemble machines to customer specification within minutes from components stored on-site and air express them to the customer overnight.
 Maintaining inventories of components on-site is not possible always possible. Very complex supply chains require the coordinated transport of hundreds of parts and components from distant corners of the globe\'97all arriving simultaneously at the point 
of assembly.
\par 
\par }\fi720\nowidctlpar\adjustright {As shown in Figure 5, the ability to postpone resource allocation in the transport chain requires not only asset visibility, but also real-time control. Through the integration of temporal and spatial distribution pat
terns of moveable assets and transport capacities, the likelihood of demand can be aligned with the likelihood of the transport opportunity. New automatic identification technologies, bar coding techniques and information technologies are solving the prob
lem of asset visibility in the pipeline. When information about routing and carrier schedules linked to information about asset location, real-time control of the pipelines becomes possible. As new opportunities emerge, assets can be reassigned immediatel
y from a point of lower value to a position of higher value. In short, logistical systems that coordinate the deployment of assets in response to market opportunities are becoming central platforms for management of operational risks.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri70\sa1044\nowidctlpar\adjustright {Simultaneity is enabled by information technology that allows all constituencies along the supply chain from customer to raw material supplier to transportation provider. By simultaneous information exchan
ge, order receipts, and exceptions or changes to an order, can be relayed to all the necessary parties immediately. This transaction model represents a significant departure from traditional supply chain processes in which information is passed sequential
ly along a chain from customer to retailer to supplier to manufacturer, and so forth. The web of transactions that are enabled when all parties are
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {15
\par }\ql\ri213\sl360\slmult1\nowidctlpar\adjustright {linked in simultaneous information exchange give rise to economies of conjunction. Economies of conjunction occur when opportunities and assets are aligned through information. In the same way that ma
ss production systems were organized around economies of scale, dynamic logistical systems will be organized around economies of conjunction. These economies result not from how production is organized, but rather from how information is managed and excha
nged.
\par }\ri0\nowidctlpar\adjustright {
\par }{\b\cgrid Overcoming Scale: The Principle of Scalability
\par }{
\par }\fi720\nowidctlpar\adjustright {There is an inherent contradiction between the principles of virtualization and simultaneity and the inflexible scales of existing business and logistical systems. Turbulence destroys both economies of scale and scope
. For example, fractalizing markets result in smaller and smaller lot sizes and increased product variance. Diseconomies of scale result when production levels that do not match their operational optimum, as illustrated in Figure 6. Diseconomies of scale 
occur when production lot sizes, and corresponding employment levels, decline below their optimum level\'97or rise above that level. In a totally scalable system, the costs of producing another unit, or transporting another container, are fully independen
t of lot size. Not too many years ago, typical production runs were several hundred thousand or more. At this scale, variances of two or three thousand did not matter too much. In fractal markets, however, lot sizes as small as several hundred are often d
ominated by variance.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri142\sa1044\nowidctlpar\adjustright {Mass customization, modularization, and various "platform" strategies are all attempts to regain economies of scale in a fractal environment. None of these strategies, however, result in a truly scaleable
 business system. A dimension (i.e. length) is scalable if it can be arbitrarily divided (e.g. into centimeters or millimeters). Physical systems are scalable (and even have fractal dimension). On the other hand, economic scales cannot be arbitrarily divi
ded. Costs or exchange rates are scalable, but the production goods that accompany these costs or rates are not. Lack of scalability in production leads to excessive costs, as well as operational problems. The cost of
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {16
\par }\ql\ri70\sl360\slmult1\nowidctlpar\adjustright {expediting a single order, especially one that requires a slightly different process, can be extremely high. To make production systems arbitrarily dividable would be too expensive, or even physically 
impossible. But it does make sense to improve scalability.
\par }\ri0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {Companies are moving towards scalability through a variety of organizational and technological means. Virtual companies can leverage excess capacities of aligned companies, and reduce overhead as well. Consider, for e
xample, a virtual enterprise of 25 mechanical engineering companies in Austria, Germany and Switzerland. Each company is operating at 90% capacity/employment. By sharing excess capacity, the firms can offer, in theory, the operational capacities of the eq
uivalent of an additional 2.5 companies. At the same time, technological developments such as automation de-couple human efforts from the production process, thereby eliminating learning curve effects. Automation also eliminates fixed costs that lead to o
verlinear cost effects. Inside the factory, new flexible processes and computer-controlled machines enable the production of similar products at no additional cost.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\sa1476\nowidctlpar\adjustright {Of course, there is a fundamental difference between the transport industry, on the one hand, and traditional manufacturing industries. Manufacturing, affected by the on-going destruction of economies of scale 
and scope, have already moved toward agile production systems, embracing technologies and organizational forms that are highly "scaleable." Transport industries, however, are still organized around scale economies. Not that airlines and shipping companies
 don't focus on individual customer needs\'97they do that through sophisticated handling and information systems. However, the transportation industry has not focused on the single shipment in the way that the manufacturing industry has. The high costs of
 purchasing and operating airplanes and ocean freighters, as well as maintaining the transportation network, have forced transport providers to concentrate as much freight as possible on primary trunk routes. At the same time, most pricing structures are 
mass oriented, offering quantity discounts to larger shipments.
\par }\qc\fi0\sa0\sl240\slmult1\nowidctlpar\adjustright {17
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {\b\cgrid Outsmarting Murphy's Law: The Principle of Autonomy
\par }{
\par }\fi720\nowidctlpar\adjustright {A fundamental principle of turbulence is that it destroys the central controllability of business systems that rely on top-down or hierarchical structures for managing complexity. Central planning and control systems 
are dominated by two main effects. The first effect is the disproportionality of cause and effect, or the "butterfly" effect. Traditional forecast-based systems, for example materials planning (MRP) systems for managing the ordering of parts and component
s, are based on the assumption that small disturbances like butterflies don't cause large system failures. But in highly dynamic systems, there are numerous positive feedback cycles amplified by multiple self-similar systems that interact in complex and n
ontransparent ways. In these dynamic systems, small inputs to the system can result in major catastrophes.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {The bullwhip effect is one example of how information distortion can propagate out of control, leading to tremendous inefficiencies, excessive inventory investment, poor customer service, and lost revenues. The bullwh
ip, or whiplash, effect has been observed is products as diverse as diapers and personal computers. At Proctor & Gamble, for example, logistics managers noted the broad discrepancy between the variability of diaper sales in retail stores and the variabili
ty of raw material orders to suppliers. The amplification of order variabilities as information moved up the supply chain was attributed to rational behavior on the part of managers who wanted to control their supply chains. The same phenomenon was observ
ed by Hewlett Packard executives when comparing sales of their printers with orders from the resellers down the chain. The variability was even more pronounced when they examined orders propagating further upstream to the company's printed circuit divisio
n.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\ri70\sa1044\nowidctlpar\adjustright {The second effect of turbulent environments is the stress of time and the differentiation that results when small, local events cause the system to spin out of control. When this happens, no central system
 will have both the information and the time necessary to make reasonable decisions. If decisions are made, they may not be the
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {18
\par }\ql\ri424\sl360\slmult1\nowidctlpar\adjustright {"right' decisions because the decision-makers are so far removed from the local environment. Further, the time it takes to relay the information to the central control location, and back to the local 
location, may exceed the lead-time of the decision.
\par }\ri0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {Current logistical systems are centralized and optimized to manage the movement of goods in a stable environment. For all the reasons provided above, centralized systems are inappropriate models for tomorrow's logisti
cal systems. In contrast to hierarchical command-and-control systems, dynamic logistical systems must be intelligent, self-organizing and agile. It is essential that authority be distributed locally. Decisions optimized for local information on the basis 
of global rules can protect against butterfly effects and critical time lags.
\par }\fi0\nowidctlpar\adjustright {
\par }\fi720\nowidctlpar\adjustright {Figure 7 illustrates the problem of micro-coordination that can be thrown into a tailspin by a local event such as the failure of a segment of the transport chain, or a change in customer requirement. Figure 6 traces 
the path a shipment on its way from a supplier's warehouse in Asia to a customer Europe. In mid-route, a message is received from the shipment owner that the priority of a shipment has been reassigned and a new destination in New York has been determined.
 A query of the interactive tracking system determines that the affected shipment is located in position x-y on pallet 1234. The locally intelligent system reassigns the shipment to a new route, after checking that there are no secondary effects associate
d with the re-routing. The shipment is de-palletized, the intelligent tag is updated with new routing information, and the shipment is sent on its way to the new destination. The remaining shipments continue unaffected to their original destination. Throu
ghout the entire set of transactions, local intelligence has managed the entire adjustment process, guided by a set of system-wide rules for determining the best route given local information.
\par }\fi0\nowidctlpar\adjustright {
\par }\sl672\slmult0\nowidctlpar\adjustright {\b\cgrid Uneven Progress
\par }\li707\sb288\sa1044\sl240\slmult1\nowidctlpar\adjustright {Progress on the path to dynamic logistics has been uneven so far. As can be seen
\par }\qc\li0\sb0\sa0\nowidctlpar\adjustright {19
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {in Figure 8, none of these four organizing principles have been developed beyond the prototype stage. Virtuality as a concept has been understood, but the application of these concepts to real-world situati
ons has not progressed significantly beyond basic research. The concept of "real options" appears increasingly often in the current business journals, and has been applied to applications ranging from the selection of a research and development portfolio 
to evaluate investments in new production facilities for products whose life cycle is uncertain. The primary obstacle to further development and application of the concept is the lack of methods for computing and evaluating opportunity costs.
\par 
\par }\fi720\ri70\nowidctlpar\adjustright {Scalability as a concept has been validated in the factory, but not yet in the design of transport networks. The transportation industry has introduced several innovations over time that improve scalability. The 
ocean container, for example, created a standard modular unit that could be scaled up to the capacity of the ocean freighter. Future steps toward scalability at the macro-level will be realized in new airport and seaport designs that are modular and porta
ble. At the micro-level, the ability to achieve scalability depends on new information and communications technology that allow shipments from disparate geographic locations and manufacturers to "self-organize" into larger units destined for similar locat
ions. Proven technology exists, but it has not been integrated into a system organized specifically to achieve superior cost economies for "shipments\-of-one."
\par }\fi0\ri0\nowidctlpar\adjustright {
\par }\fi720\ri70\sa1044\nowidctlpar\adjustright {Over the last several years, the principle of simultaneity has advanced the fastest and the farthest. The best example of an integrating infrastructure designed to provide simultaneity is the Global TransP
ark (GTP) concept. Prototypes of the Global TransPark concept are being built in North Carolina, Thailand, and the Philippines. What does this infrastructure look like? If you could merge an airport with overnight connections to major overseas markets, a 
multi-modal transportation hub providing regional access, distribution centers capable of consolidating and bundling shipments from all over the globe, and agile manufacturing facilities\'97all linked together in a universal information
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {20
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {environment\'97you would come close to creating the Global TransPark. These GTPs are being linked into a global network that will bridge the spatial and temporal divide, and serve as an enabling technology 
for dynamic logistics.
\par 
\par }\fi720\ri71\sa8496\nowidctlpar\adjustright {Finally, there is no question that rapid developments in digital technology will soon be leveraged into low cost silicon chips with embedded digital intelligence for controlling shipments moving through an
 "intelligent" logistics network. In this network, software agents will update shippers and carriers as to the progress of the shipment, negotiating new routes as necessary, and, for all intents and purposes, operating as an advocate for that shipment. Th
e real challenge, of course, is not the isolated development of any of these four dimensions of dynamic logistical systems, but rather their fusion into the logistical systems of the future.
\par }\qc\fi0\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {21
\par }\ql\sl360\slmult1\nowidctlpar\adjustright {Jack, I have given Guerda a paper copy of the figures. We }{\b\cgrid don't }{have electronic versions available in a separate file since they are embedded in a bigger }{\b\cgrid Powerpoint }{presentation fr
om a GLORI meeting.
\par }\qj\ri6992\sa4536\sl1092\slmult0\nowidctlpar\adjustright {\f10\fs34\cgrid FIGURE 1 FIGURE 2 FIGURE 3 FIGURE 4 FIGURE 5 FIGURE 6 FIGURE 7
\par }\qc\ri0\sa0\sl240\slmult1\nowidctlpar\adjustright {22
\par }}