Global business is at a tipping point. Volatility has emerged as a systemic condition, disruption occurs at any time, often with unprecedented magnitude, and there no longer are discrete sets of risk events with periods of stability in between.
When disruptions occur, the global supply chain – now an intricately intertwined web – acts as a massive central nervous system, spreading impact instantly among all the connected parties. Effects cascade across the extended supply chain, and frequently gain intensity as they ripple outward from the epicenter.
In this environment, traditional supply chain management models begin to break down, bending under the strain of the unknown and the unexpected. Just in time, lean, and other acknowledged best practices create highly efficient supply chains. As it turns out, however, these supply chains may also be brittle and high risk.
We see this clearly in recent events such as the Fukushima tsunami and nuclear meltdown in Japan. As a result of the combination catastrophe, automakers and high tech companies experienced shortages of critical components. These shortages, combined with rolling power blackouts across Japan, forced production shutdowns not just in Japan,but worldwide. The disaster, including its impact on manufacturing and supply chain output, reduced Japan’s gross domestic product (GDP) by almost 4% for the quarter of January through March 2011.
Supply Chains in Metamorphosis
Supply chains today must be able to ﬂex at a rapid pace – to sense and respond to change or disruption at a new level. But the tried and true approaches to supply chain management are not up to the task. The time has come for a radical rethinking of supply chain management models.
The new supply chain must enable organizations to anticipate and mitigate instabilities of unprecedented amplitude, frequency, and duration. We call this new discipline supply chain resiliency management. It is all about a firm’s ability to bounce back after a disruptive event of any scale – from an everyday occurrence to a catastrophic convergent disaster.
Supply chain resiliency management calls on practitioners to abandon the traditional approach to responding to supply chain risk, which follows this predictable pattern:
• Be prepared when events happen
• React – according to plan if possible
• Wait for the next event to happen
• Start the cycle again.
De-risking Supply Chains
Organizations must take measured and appropriate steps to de-risk their supply chains. The first step in this process is recognizing that supply chain volatility occurs at three distinct levels:
• Macro factors in economy and society – e.g., growth or decline of gross domestic product (GDP), political upheaval
• Industry/firm level factors – e.g., disruptive technology or products, consumer behavior, emerging markets growth
• Supply chain factors – capacity constraints, transportation disruption, product/material shortages.
Volatility can emerge simultaneously in each of the levels and quickly spread in multiple directions across highly porous level boundaries.
In this context, building resiliency in the supply chain requires fundamental changes in the way supply chains are organized and operated. The new approach to supply chain resiliency can be discussed in three contexts, as explained here.