Managing for Catastrophes: Building a Resilient Supply Chain
March 26, 2014
Editor’s Note: This is the first of a three-part feature authored by Dr. Alan Kosansky and Michael Taus, Profit Point
Once a futuristic ideal, the post-industrial, globally-interconnected economy has arrived. With it have come countless benefits, including unprecedentedly high international trade, lean supply chains that deliver low cost consumer goods and an improved standard of living in many developing countries. Along with these advances, this interdependent global economy has amplified collective exposure to catastrophic events. At the epicenter of the global economy is a series of interconnected supply chains whose core function is to continue to supply the world’s population with essential goods, whether or not a catastrophe strikes.
In the last several years, a number of man-made and natural events have lead to significant disruption within supply chains. Hurricane Sandy closed shipping lanes in the northeastern U.S., triggering the worst fuel shortages since the 1970s and incurring associated costs exceeding $70 billion. The 2011 earthquake and tsunami that struck the coast of Japan, home to the world’s 3rd largest economy representing almost nine percent of global GDP caused nearly $300 billion in damages. The catastrophic impact included significant impairment of country-wide infrastructure and had a ripple effect on global supply chains that were dependent on Japanese manufacturing and transportation lanes. Due to interconnected supply chains across a global economy, persistent disruption has become the new norm.
To further complicate matters, over the last 20 years supply chain professionals have been given the mandate to deliver just-in-time, low-stocked inventories of globally-sourced and globally-manufactured goods, relying heavily on a tiered assortment of different types of transportation lanes. In essence, the billions of products the world population consumes and relies upon each day have never traveled further or been delivered via a more complex and interdependent supply chain. As global inventory drops, the ability to insulate that inventory from adverse impact is diminished and exposure to disruption is amplified.
So how does a forward-looking supply chain manager address the vast number of unknown potential catastrophes? What processes and tools can be used to help test sensitivities and prepare for uncertainties? What types of operational challenges should one prepare for while attempting to affect change within an organization?
The initial, and perhaps most important, element in preparation is maintaining composure. Successfully managing a catastrophic disruption to the supply chain depends on the ability to be calm in the moment. The best way to accomplish that goal is to be equipped with a tested, rapidly available, agile and responsive supply chain.
Billions of future scenarios
In 2013, the World Economic Forum surveyed 1,000 experts from industry, government, academia, and civil society. Participants were asked to review a landscape of 50 global risks. Those risks ranged from environmental concerns such as a water supply crisis to systemic concerns such as chronic fiscal imbalances. The risks were rated on the basis of their likelihood to occur in the next 10 years, as well as the anticipated impact of such an occurrence. Additionally, defined ‘risk cases’ were developed; these included connected risks, which could trigger one another and develop co-occurring risk scenarios.
Given the sheer number of risks and risk combinations available, compounded by the unknown geographic impact of these scenarios, it would seem impossible to develop a supply chain plan that could adequately account for so many possibilities. Of course, there are still ‘worst case scenarios’ for which no one could fully prepare. Yet the job of an astute supply chain manager is not to be thoroughly prepared for one particular worst-case scenario. Rather, the job is to be prepared for the most likely scenarios and to develop a system that is sufficiently flexible and ready to respond quickly for the multitude of unknown factors.
Tomorrow: Five elements of a resilient supply chain
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