Globalization has made anticipating disruptions, and managing them when they do occur, more challenging. The potential risks of disruptions are often hidden, and the potential impacts may not be understood, which often results in “black swan” events – unforeseen incidents that can only be fully understood after the fact.
Although companies originally moved production offshore to countries such as India and China to take advantage of lower labor costs, events such as Iceland’s 2010 volcanic eruption and the Japanese tsunami in 2011 have shown the vulnerabilities of extended supply chains are real and serious.
For example, according to the U.S. Federal Reserve, 41 percent of Minnesota manufacturers said Japan’s tsunami affected them negatively. As a result, many manufacturers have re-evaluated their sourcing options, and some are shifting operations back to their home markets. While there are other advantages to reshoring, including improved responsiveness and domestic job creation, reducing their risk exposure has been an important driver for these companies.
The reality is that supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable due to the lack of buffer capacity.
Over the past seven years, researchers at The Ohio State University have been exploring the concept of enterprise resilience, i.e. how companies can prosper in the face of turbulent change by being able to recognize, understand and compensate for vulnerabilities.
The result is the SCRAM (Supply Chain Resilience Assessment and Management) framework, which enables a business to identify and prioritize the supply chain vulnerabilities it faces, as well as the capabilities it should strengthen to offset those weaknesses.
The SCRAM approach represents a systems view of supply chain dynamics, helping companies to understand the inherent vulnerabilities that could lead to disruptions and the capabilities that are within their control. By learning from experience and developing a better understanding of their vulnerabilities and capabilities, companies can reduce the frequency of disruptions and the severity of their impact, resulting in increased customer satisfaction and reduced supply chain operating costs. While reducing inherent vulnerabilities may be difficult, there are many options for improving capabilities. The cost of the improvements must be balanced against the expected supply chain performance benefits.