What is supply chain resilience?
Source: opentext | Blogs by Mark Morley, October 12, 2020, 8 minutes read
Global supply chains are complex beasts. They are multi-tiered, multi-dimensional ecosystems of intimately related parts that allow lean, just-in-time manufacturing, and delivery models. This complexity gives rise to supply chain vulnerabilities as threats, such as natural disasters, accidents, trade wars, and cyberattacks that grow in frequency and severity. Supply chain disruption can now put the very existence of your organization at risk. It has never been so important to include resilience in your supply chain operations.
In 2007, Yossi Sheffi, now Professor of Engineering Systems at MIT, wrote a book entitled ‘The Resilient Enterprise’ that set out to look at how firms could become more resilient to global supply chain shocks. So understanding the concept of supply chain resilience is not new. But within the last decade, the need for organizations to build resilience into supply chains has mushroomed.
By way of illustration, let’s look at some common supply chain disruptions in figures. Let’s start with natural disasters. In 2019, forty weather disasters caused damages exceeding $1 billion each. Economics and trade have also become increasingly vulnerable to disruptive events. According to the World Bank, the share of global trade conducted with countries ranked in the bottom half of the world for political stability and rose from 16% in 2000 to 29% in 2018. Finally, let’s check cybercrime. Verizon’s annual data breach report found that attacks on web applications doubled between 2019 and 2020.
What all this means to the organization that lacks adequate supply chain resilience is shocking. According to McKinsey, companies can now expect supply chain disruptions lasting a month or more every 3.7 years. Over the course of a decade, the analysts say, that can account for as much as 50% of one year’s profits for the organization.
So, most companies knew that their strategies must include strong elements of supply chain risk and resilience management. And then the pandemic hit!
COVID-19 and unparalleled supply chain disruption
In 2020, according to the Supply Chain Resilience Report 2020, the COVID-19 pandemic was the most potent threat to global chains, more than trade sanctions, natural disasters, and cyberattacks combined. In all, around 60% of those surveyed said that the coronavirus had directly disrupted their manufacturing supply chain. As a result, 96% of companies are planning to build resilience into their supply chain.
The sad fact is that supply chain disruptions aren’t chronological. Spare a thought for Japan. In the midst of the COVID-19 pandemic, the country also experienced record-breaking rain and flooding in June of 2020. Tragically, it was reported that these rains were hampering the supply chain networks for much needed COVID-19 supplies and equipment.
Understanding supply chain resilience
The supply chain was traditionally viewed as a cost center. That’s a far cry from the modern supply chain that’s pivotal to the operations, efficiency, and long term success of the business. Viewed in this context any disruption to the supply chain jeopardizes the organization’s ability to perform. Supply chain resilience is the answer.
A group of leading academics defined supply chain resilience, in Supply Chain 24/7, as: “the ability of a supply chain to both resist disruptions and recover operational capability after disruptions occur.“
We’ll quickly look at each complementary component of resilience:
Resistance is the supply chain’s ability to minimize the impact of disruption – such as a natural disaster by either evading it entirely or by minimizing the time between the beginning and the end of the effect of disruption on the supply chain. Resistance gives a good indication of how prepared is a supply chain to predict and lessen the impact of any disruption.
Recovery is the supply chain’s ability to return to full operations once a disruption has occurred. The part of supply chain resilience is characterized by the stabilization phase after which a return to a steady-state of performance can be achieved. Once recovery is complete, firms will often take time to learn from their experience to help in future planning and supply chain risk management strategy.
Any supply chain resilience model will necessarily be a combination of both resistance and recovery components. The combination you select is likely to be driven by your specific supply chain needs and available budget. While prevention will always be better than cure, there is such a large amount of uncertainty surrounding the environments where global supply chains operate that organizations often look to how quickly they can recover.
For this reason, building an effective strategy for supply chain resilience can be challenging, involves a number of cultural and technological aspects. The Global Supply Chain Resiliency Council says: “Supply chain resiliency starts with end-to-end supply chain visibility and includes comprehensive strategies and analytic technology to sense and manage risks proactively and in a highly responsive manner. These risks range from intrinsic supply chain partner risks as well as embedded network design-related risks.”
The role of resilience in supply chain management
In the past, persuading senior management of the need to invest in supply chain resilience has been a struggle for many supply chain managers. The board has viewed resilience as a trade-off between supply chain risk and business efficiency and increased cost. This is because many of the tactics involved can be expensive, such as carrying more safety or buffer stock.
However, the unparalleled nature of the COVID-19 pandemic has exposed structural vulnerabilities within supply chains that can no longer be ignored. The result of this is that there has been a change in thinking where the extra investment required to build resilience is more than met by the increased competitive advantage of being able to recover more quickly than other organizations in your market.
One of the most famous supply chain resilience examples happened in Japan following the 2011 earthquake and tsunami. In the wake of these twin disasters, it quickly became clear that suppliers for both Nissan and Toyota were struggling to cope with the shock. Nissan quickly built an alternative supplier network and was able to resume operations and regain lost market share much faster than Toyota. For its part, Toyota learned the lesson of resilience and was able to recover much more effectively when disaster hit again in 2016.
Key capabilities when building resilience in the supply chain
Taking from his book, Professor Sheffi, explained seven key capabilities when creating a supply chain resilience model to Harvard Business Review in 2007 that are as relevant today as they were then, including:
Adopt standardized processes
Many companies are now looking to manage risk by using interchangeable and generic parts in many products and standardizing the production process across plants and sites. Standard processes deploying interchangeable parts allows a company to respond quickly to a disruption by reallocating resources where they have the capacity, or the need is greatest.
Use concurrent instead of sequential processes
Employing simultaneous rather than sequential processes in such key areas as product development and production/distribution speeds recovery phase after a disruption as well as improving responsiveness. As global organizations increasingly use suppliers to complete entire sub-systems, this approach makes it easier to swap suppliers should a region be affected as happened with China at the beginning of the COVID-19 pandemic, where the supply of everything from raw materials to finished goods was disrupted.
Plan to postpone
As organizations know that disruption is coming, risk mitigation suggests that planning for resilience is essential. One area is the plan to postpone. Essentially, this covers how you can postpone production while still supplying the customer. For example, keeping products in semi-finished form enables flexibility to move products from surplus to deficit areas. It also increases fill rates and improves customer service without increasing inventory-carrying costs.
Align procurement strategy with supplier relationships
The COVID-19 shock shone a light on over-reliance on single supplier relationships or working with suppliers from predominantly one region. It has led companies to look toward multi-source strategies as part of supply chain resilience. However, relying on a small group of suppliers may not be the wrong approach. By knowing each trading partner intimately, a company can better monitor the group to detect potential problems—and rely on them for help to deal in unforeseen circumstances. The final decision will be driven by your market and business strategies.
In both the resistance and recovery phases of supply chain resilience, the ability for the company to respond quickly will help determine success or failure. Teams and individuals have to be empowered to make decisions and take necessary actions swiftly and effectively as ‘close to the action’ as possible.
From ‘just in time’ to ‘just in case’
The shift to just-in-time and lean production systems that helped companies improve efficiency and reduce the need for excess inventory and working capital had been happening for many years prior to the pandemic, Even before the COVID-19 crisis started, however, the business model of the highly coordinated and efficient international supply networks had come under pressure. This approach was, in many ways, a contributing factor to the speed and depth with which the global shock hit supply chains.
Companies have had concerns about the structure, robustness, and resilience of global supply chains. Now, they are looking to manage risk by striking a different balance between just-in-time and just-in-case – building supply chains that are flexible and responsive with sufficient padding to absorb the worst effects of a shock. This requires robust digital platforms that let trading partners communicate and collaborate effectively as well as the analytics muscle to run scenarios based on different responses to potential disruption.
6 supply chain resilience strategies to follow
To achieve a ‘just-in-case’ strategy, there are a number of supply chain resilience strategies you can follow:
Buffer capacity is the most straightforward way to enhance resilience, whether in the form of underutilized production facilities or inventory in excess of safety stock requirements. However, this approach is expensive. A company must pay for the redundant stock, capacity and workers. In addition, it goes against lean principles that supply chains have been following for years that could lead to a drop in efficiency and quality.
Multi-sourcing is a good way to mitigate this risk by building a supplier network that enables the organization to select an alternative supplier to deal with disruption and ensure business continuity. For a multi-source strategy to be successful, the company must have in-depth knowledge of their supplier. There needs to be end-to-end transparency and visibility across your global supply chain. This extends beyond tier-one suppliers to cover their suppliers and their suppliers’ supplier.
COVID-19 has seen national governments begin to worry about the safety of the supply of essential products. Sectors, such as healthcare and pharmaceuticals, are witnessing new regulations to protect and stimulate domestic production. As a result, many companies are now exploring the ability to reduce geographic dependence in their global networks and shorten cycle times for finished products by bringing production back to domestic markets. Regional or local supply chains can be more expensive, but they allow for more control over inventory and move the product closer to the customer.
The COVID-19 crisis has shown the need to have a diversified approach to sourcing. At the same time, collaboration with partners such as strategic raw material suppliers and external service partners is vital to ensure better preparedness and resilience. This is encouraging new relationships with non-traditional suppliers, contract manufacturers, and distribution partners to create multi-tiered ecosystems that can help diversify production and operations.
The threat of disruption – whether natural disaster or cyberattack – is greater than ever. It’s important that every business take steps to have resilience in supply chain management. No strategy is foolproof. But those that can effectively manage risk will not only build supply chain health, they will increase the competitive advantage of their organizations.