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.

 

An essay by Joseph Fiksel

Dr. Joseph Fiksel is Executive Director of the Center for Resilience at The Ohio State University, an interdisciplinary research center that is developing a unified approach for modeling risk, resilience and sustainability in complex systems. As a research faculty member in the Integrated Systems Engineering Department, he collaborates with companies, government agencies, non-profits and other organizations to develop new methods and tools for understanding the interdependence between social, environmental and economic interests.

Six vulnerabilities you need to know about

Every business has its vulnerabilities, and most of the time those vulnerabilities are inherent to the business and difficult to avoid, but by recognizing them you’ll be better equipped to deal with disruptions as they happen.

Turbulence

Definition: Environment characterized by frequent changes in external factors beyond the company’s control

Examples: Unpredictability in demand, fluctuations in currencies and prices, geopolitical disruptions, natural disasters, technology failures, pandemics

Deliberate threats

Definition: Intentional attacks aimed at disrupting operations or causing human or financial harm

Examples: Terrorism and sabotage, piracy and theft, labor disputes, special interest groups, industrial espionage, product liability

External pressure

Definition: Influences, not specifically targeting the company, that create business constraints or barriers

Examples: Competitive innovation, government regulations, price pressures, corporate responsibility, social and cultural issues, environmental, health and safety concerns

Resource limits

Definition: Constraints on output based on availability of the factors of production

Examples: Raw material availability, utilities availability, human resources, natural resources

Sensitivity

Definition: Importance of carefully controlled conditions for product and process integrity

Examples: Restricted materials, supply purity, stringency of manufacturing, fragility of handling, complexity of operations, reliability of equipment, safety hazards, visibility of disruption to stakeholders, symbolic profile of brand, customer requirements for quality

Connectivity

Definition: Degree of interdependence and reliance on outside entities

Examples: Scale and extent of supply network, import/export channels, reliance on specialty sources, reliance on information flow, degree of outsourcing

So in the face of all these disruptions, what’s the ­answer? Resilience!

Resilience is the capacity of an enterprise to survive, adapt and grow in the face of turbulent change.

Resilience means improving the adaptability of global supply chains, collaborating with stakeholders and leveraging information technology to assure continuity, even in the face of catastrophic disruptions.

Resilience goes beyond mitigating risk; it enables a business to gain competitive advantage by learning how to deal with disruptions more effectively than its competitors, and possibly even using those disruptions to its advantage.

Resilient systems don’t fail in the face of disturbances – they adapt.

Building resilience is not a substitute for other methods of ERM. Rather, it is an ongoing process that enables companies to embrace change in a turbulent and complex business environment by expanding their capabilities.

Establishing a culture of resilience will help companies thrive in an age of turbulence. 

Article adapted from “From Risk to Resilience: Learning to Deal with Disruption” by Joseph Fiksel, Mikaella Polyviou, Keely L. Croxton and Timothy J. Pettit

Published: February 2017

Illustration: Ralf Nietmann