RISK MANAGEMENT
Resilience is more than risk management. It is a capability to get to the future by limiting the impact of disruptions. Risk management is necessary to manage particular supply chains as well as the supply chain system. Anticipating risks from disruption is an important skill. Assessing risk and assigning probabilities to manage risk are parts of any risk management system. Beyond the immediate supply chain risks there are risks that threaten the total supply system. It is necessary to take a systems view of risk if you want to build resilience across the total system. An example would be energy supply chains which are made up of entity supply chains (e.g.extractors, refiners, generating companies) linked to buying organizations (re-sellers, business and consumer suppliers) which are linked to business supply chains and consumers at some point in the chain. The total supply system would consider risk at each node from source to consumption. This means not simply managing risk in the organization supply chain it means managing the risk in the system which has many supply chains. Resilience requires steps to manage beyond the immediate supply chain, beyond intra and interorganizational supply chains linked in the total system. Resilience capabilities have to be developed to manage systemic risk.
We cannot solve a problem with the same thinking that created it.
Albert Einstein
As John Maynard Keynes noted markets do not always work as expected when this happens it may be necessary for government to intervene to correct the problem. Governments have a responsibility to secure strategic assets that may include: energy, food, water, public utilities, banks, defense and other resources. These are the resources that are needed to maintain life and provide security for the population. Yergin and Stanislaw (1998) refer to these resources as the ‘Commanding Heights of the Economy‘ after Lenin and Marx.
RESILIENCE
- Resilience is not a quick fix
- Resilience is a long-term commitment
- Resilience requires investment
- Resilience requires trained and highly skilled personel
- Resilience requires immediate intelligent response
- Resilience is continuous not episodic or ad hoc
Resilience is the ability to bounce back from disruptions. In supply chains one thing is certain at some point there will be disruption. Something that knocks your plans off track. Those that plan often make plans resilient by adopting ‘what if?’ strategies. This means having plans to get back on track quickly when the unexpected happens.
Resilience is tested when goods being shipped in containers are held up or when there is a labor strike at a port or supplier production unit. It can be beyond supply disruption which is a symptom not a cause of something much bigger. For example, when a pandemic grips the world. This is systemic disruption. What makes for resilience in these circumstances is having the capacity to bounce back quickly. Capacity which has been built through planning and investment to ensure it is present when needed.
Securing strategic assets must be part of resilience. If we think about the needs of a nation state we could produce a list that would include: defense, energy, food, healthcare, materials and technology amongst other things. These are what Lennin and Marx referred to as the ‘commanding heights’ of the economy. We expect governments to secure strategic assets. One of the problems for some nation states is ‘short-termism’. In democratic states governments are elected for 4 or 5 year terms and commitments follow suit. The long-view has been something that eastern countries such as China and Japan have been admired for. Without such long-term views it is difficult to develop continuity for resilience.
In my discussion of the West’s dependency on China I drew attention to the long term planning to acquire rare earth minerals and strategic metals for battery technology. China has built resilience and continues to do so. Western economies have been wedded to the market to solve their problems. I mean that they see the price mechanism as a way to fix disruptions rather than build capacity through investment to achieve it. In essence you assess and balance risk through markets. This will become clearer as I discuss risk.
People and Technology
Creating the right culture is part of building resilience. Expectations have to be set and carefully managed. Developing people and teams to respond effectively when disruption strikes is critical and it requires a mix of people and technology to achieve results. Having data in the right form to signpost what is happening in the supply chain often gives advance warning. It may not always provide signals as soon as you would like but ensuring that teams are trained to interepret data and respond effectively is the key to minimising the impact.
Let me demonstrate using an analogy from Formula 1 racing. A driver may be the first to recognise a problem in the car and quickly signal to the pit team what is happening. Each person in the pit team has a role and knows exactly what to do in the particular circumstances reported. Quick response is necessary to effect a repair or adjustment that will get the car back on track immediaitely after the incident without delay. Supply chains have to become resilient in similar fashion with every team member knowing their role and having a skill set so that each member knows exactly what to do in the specific circumstances.
In ‘Competing for the Future’ Gary Hamel talked about everyone being a prisoner of their experience but this need not be the case if you can learn skills that stretch beyond that experience. You can learn from the best and from the mistakes of others as well as from your own experience.
RISK
Risk is managed through probabilities. This is a first step to map risks that may disrupt supply chains. Time is an important element of this assessment. What is the likelihood of something happening and how long will it last? This is more than probability, it is impact too measured through time. An example such as the Ever Given Container Vessel demonstrates both. If we were assessing the risk prior to occurrence the probability statistic might have been close to zero (.0001), since in the Suez Canal’s history over 100 years of past data there had been no such event. The impact was more than the 7 days the ship was stuck. It took months for ships and container traffic to bounce back to something near normal throughput. So how do you plan resilient strategies for unlikely but possible events? If you do not want to over invest in capacity you have to be agile. Agility depends on thoughts and action. Firstly, you must anticipate such an event. Secondly, you have to think through scenarios and cost the options. Thirdly, make the decision. Necessary but not easy because resilience costs but it will cost less if you anticipate and plan agile strategies.
In supply chains there are many risks which I summarized in my 7V Framework based on more than twenty years researching supply chain risk across different industrial sectors. The factors that create value are also those factors that carry risk. Volatility, Volume, Velocity, Visibility, Variability, Virtuality and Variety are the seven risk factors. The profile of risk is not the same for every organization but the factors are. The question for organizations to address is to identify how each of the factors contributes to that particular organization’s mix profile. Of course even inside organizations there will be different supply chains that are affected differently by the mix elements. A simple example might make this clear. Supposing we operate a supply chain that has regular demand patterns that lead to constant reorder patterns from a consistent supply base. This type of supply chain should not be affected by volume risk or variability. Whereas a supply chain where volumes are less predictable and sources of supply are more volatile will have a very different profile of risk.
Resilient strategies require investment in resources to build it. Examples include people, training, technology, systems, sourcing, procurement, operations, warehousing and distribution. Each element forms part of the mix. Resilience extends beyond a single supply chain which means investment in the network is necessary. Supply chains have to be thought of as service systems satisfying customers if we want to build resilience.
Analyzing systemic risk requires constant scanning for threats. In the process of doing so we may also find opportunities to enhance the system capabilities which increase resilience. A similar process can be implemented at organizational level or for a specific product supply chain with the aim of building resilience.
RESPONSIVE SYSTEMS
Supply chains are service systems. We should never lose sight of this fact. Service to customers however defined is central to the supply system. Building resilient supply chains means that customers can be served efficiently and effectively. Service means being responsive to customers at the time service is required. This responsiveness is common to public services and to private enterprise. Time is of the essence.
CONCLUSIONS
Resilience is important in any system. In supply chain systems it is paramount. Supply systems exist beyond immediate firm and intra-firm supply chains. Risk has to be anticipated, assessed and probable outcomes assigned to manage the risk for the system. Within the system organizations are responsible for managing their own intra and inter-organization supply networks. Agile strategies can be employed by firms inside their own supply networks. Responsiveness is an important capability to build. Resilience goes beyond agility and responsiveness by allocating resources to the total supply chain system proportionate to risks identified in that system.
ProfessorTony Hines PhD, writes and talks about supply chain strategies. He is author of Supply Chain Strategies published by Routledge. He presents the Chain Reaction Podcast all about supply chain advantage.
Listen also to the episode Reflections On Resilient Supply Chains which discussed the part geopolitics has played in moving supply chains towards resilient strategies.
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