A. Volatility as a Historical Constant: The Three Tiers of Change Drivers "Volatility, like the speed of light, is a universal constant independent of the observer's motion." Einstein's theory of relativity reformulated Volatility is a constant in the supply chain. The model of ever-present supply chain volatility defined in Figure 2.1 is composed of three nested, interconnected rings. The outermost ring represents the macro factors in economy and society, such as growth or decline of gross domestic product (GDP), that generate oscillations, or waves of change. The next ring inward represents the industry/firm level that both absorbs waves of change and generates its own waves by inventing discontinuous technical innovations or by changing the profile of production or employment. Finally, the innermost ring represents the supply chain itself. It too absorbs waves of change from the economy, industry, and the firm and is molded by these forces, and it too generates waves of change by creating new interdependencies between nations and enterprises. Volatility can emerge simultaneously in each of the rings and quickly spread in multiple direc- tions across highly porous ring boundaries. It is a simple model in which entities (e.g. sub-systems) within a system interact and impact one another. These interrelationships prove highly consequen- tial in determining attributes and impacts of both the overall system and individual factors or forces. For example, a decline in GDP can trigger a drop in employment, which can lead to lower sales, which can in turn cause hibernation behaviors in corporate inventory ordering. Another example would be a fire at a critical supplier's factory creating instability or imbalances that emanate out- ward from the innermost supply chain ring, disrupting production and sales and hurting corporate profitability. In the sections below, we will briefly explore how each of these levels of volatility has historically manifested. Interest Rate Swings Firm/Industry Volatility GDP Swings The X-SCM Management Framework 11 Demographic Change Supply Chain Volatility: Supply Chain Volatility shows up as extreme demand uncertainty and wide variability in inventory ordering. During an extreme downturn, supply chains go into suspended animation to reduce cash outlays for network assets and inventory stocks. Firm/Industry Volatility: Industry/firm volatility is perceived as pervasive by executives who then pull back expansion plans and capital investment outlays. Given limited pricing power, executives seek much greater cost-savings and risk management gains from supply chain management to preserve revenue margins. Macro-Factor Volatility: Extreme swings beyond historic tolerances disrupt some or all macro-factors: economic, social, demographic, political, regulatory, and environmental factors. Intense Macro-Factor Volatility drives industry, firm, and supply chain instability. Trade Patterns Buying Patterns Supply Chain Volatility Political/ Regulatory Change Environmental Change