As the traditional supply chain risk approaches fail, the key question is how to incorporate risk resilience in your supply chain. BCI has developed a Resilience Framework to assess risks and to make explicit trade-offs in terms of risk management, resilience and investments.
Supply chain risk management has been around for some time whereas the majority of companies are using the 2 x 2 assessment framework as shown below to identify risks the probability and impact when such event will occur and to mitigate such risk. This approach works decently for risks that are predictable like thefts, downtime of utilities, strikes etc.
The quality & availability of data regarding disruptions is often (very) poor, especially on low probability and high-impact events like the current pandemic or in the past with the tsunami, floodings and major natural disasters. Furthermore, risk assessments are often applied on an ad-hoc basis whereas it takes considerable investments to identify and mitigate against all possible risks – yet financial means are limited.
As the typical risk management outlined above is not geared for large disruptions with a low likelihood to happen such as the pandemic, companies need to incorporate resilience.
Resilience is defined as a supply chain ability to return to its original state after a disruption. Resilience focuses on building competencies in an organization (supply chain) capable and empowered to deal with disruptions, regardless of their nature and origin. A recent McKinsey survey indicated 93% of global supply chain leaders are planning to increase resilience and almost half is willing to invest in resilience even at the expense of short term savings.
BCI has developed a Resilience Framework to assess risks and to make explicit tradeoffs in terms of risk management, resilience and investments. The visual below shows the outer ring with key risks or vulnerabilities and the 3 key capability areas in which companies can increase their resilience being the organization, footprint and technology/infrastructure. The BCI framework includes 150 vulnerabilities and competencies to assess, identify and build resilience capability.
Source: BCI Global, 2020
Tactics on the footprint level can include for instance nearshoring, re-shoring, decentralization/ regionalization of production and distribution, to name a few. Rather over hyped in the media is the re-shoring as this will tactic will be beneficial for a limited part of the global sourcing and manufacturing flows. BCI talks about decentralization of production and distribution or right shoring. The exodus from China as the prime sourcing area was already taken place before Covid leading towards China+ N strategies. Duplication of production and distribution can be beneficial but comes with a price tag. Companies with low batch sizes, low volumes have a single sourced or focused plant for capability and efficiency reasons. Duplicating such a type of operation can increase the resilience level at rather high costs whereas the question is whether to duplicate such capability or incorporate resilience on other levels. Another key consideration is the vendor base or supplier ecosystem. Several industries are highly concentrated in certain geographies due to their ecosystem (i.e. semiconductor industry).
What is clear is that companies need to review their global complex supply chain in order to reduce complexity and vulnerability. In-region sourcing, manufacturing and distribution will increase in the near future. What the right footprint is for your company depends on many different factors and will require you to do your own homework to assess various footprint alternatives and define the rationale and tipping point for you as a company. A recent survey conducted by BCI showed that 80% of the participants indicate they will review their footprint in the next 18 months.
Resilience in the organizational dimension includes classical elements like distributed decision making, but addresses also cooperation capabilities with suppliers and customers, as well as cultural elements like encouraging creative problem solving attitude. BCI sees hat the more ‘technical’ elements in the organization are easily picked-up, but the behavioral and cultural changes to improve resilience take much longer to land in the heads and hearts of management and employees. Especially companies with strong central decision making, in a risk averse environment, with a stable market struggle to enhance their resilience.
The cultural dimension must be well assessed and carefully considered before starting changing the organization. Leadership is key to spark and speed the change towards readiness to become a resilient organization. There is a strong element of progressing ‘ownership’ in the organization spanning from the top to the floor. The speed of developing the organization will vary dependent on the combination of factors like the environment in which your company operates, current style of leadership, applying the right metrics and the age & size of the organization.
Covid-19 has shown that complex value chains with tier- n suppliers moving products to tier 1 suppliers to manufacturing sites to customers across the globe needs to be managed and controlled. However, many companies are in the dark when it comes to visibility on an end to end basis or even upstream or downstream. Upstream tier N visibility requires digging into the bill of your material and your supplier(s) suppliers. An open eco-system approach with collaboration and information sharing will be key.
Control towers can support complex supply chains from a visibility perspective. On top of the increasing resilience by means of control towers, risk intelligence and predictive analytics can support decision making and proper scenario analysis in case a disruption is about to happen. These technologies are required when embracing current complexity in the lengthy supply chains that we have in place today, similar to the need to have a driver’s license to drive a car or else use less sophisticated less complex means of transport (hence less complex supply chains) to run your business.