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
• Recover
• 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.

Supply chains today must be able to flex at a rapid pace – to sense and respond to change or disruption at a new level.

1. The need for a wholly new model of supply chain risk management that goes beyond a narrow, sequential identification and management of operational risks. This new model needs to account for systemic risk because of the increasing fragility of interlocked systems and networks. It must also fully recognize that the supply chain itself is a source of extreme volatility and acts as a destabilizing agent in ways never or seldom previously acknowledged.

2. The need for a wholly new model of volatility management that spans the “multidimensional” supply chain. The model must encompass not only the traditional product supply chain, but also the end-to-end service, financial, and cyber processes to which the supply chain management concept is increasingly being applied. Why is this important? Traditional product supply chains depend to a significant degree on support from service, financial, and information organizations and processes. Without that support, a supply chain’s ability to support corporate strategies will be jeopardized. These seemingly disparate types of supply chains are really facets of a single, multidimensional supply chain. The multidimensional nature of today’s supply chains requires a new type of managerial oversight, one that is enabled by a real or near-real-time “control tower” view of the extended supply chain. Such visibility is a key enabler of resilience. Without it, true resilience is impossible.

3. The need for a wholly new model of supply chain network efficiency that replaces traditional economies of scale and scope with those that are based on “contingent scale.” Contingent scale is the ability of the enterprise to rapidly size its assets, services, and capabilities up or down as required by market and business volatility. These resizing capabilities are executed through flexible contracts with external providers. They are the hallmark of the resilient enterprise. Shifting to a contingent scale model is a big change for most existing supply chains. In the present environment, however, companies can no longer afford to operate inflexible, fixed supply chain networks and capabilities. Instead, they must assemble and orchestrate highly adaptive, robust networks that can scale capacity and throughput up or down with speed that matches volatility in market conditions – both supply and demand. These new contingent scale networks have a tremendous competitive benefit to companies: they enable them to hedge financial risks, conserve cash, and – most importantly – have the resiliency to adapt to whatever challenges the world presents.

This essay is based on excerpts from chapters 1 and 2 of the 2010 book X-SCM: The New Science of X-treme Supply Chain Management. The chapters are written by Lisa Harrington and Sandor Boyson. The book's complete author list also includes Thomas Corsi, and a number of contributing authors.

Published: February 2014

 

Lisa Harrington


Strategic consultant, academic, and co-author of three books, Lisa Harrington offers a global supply chain perspective. She is Associate Director of the Supply Chain Management Center at the University of Maryland and the President of the lharrington group LLC, a firm providing strategic consulting services across global supply chain strategy, operations, and best practice.

Illustration: Bernd Schifferdecker
Photo: Paul Souders/Corbis