Supply Chain Resiliency: A Vague Concept?

Stephen DeAngelis

March 13, 2013

“Supply-chain resiliency is something companies in the high-tech sector and other industries have been talking about for years,” writes Jennifer Baljko. “Even with all the talk, it still remains a relatively vague concept mentioned in the same dreamy way people discuss supply-chain flexibility and agility.” [“Rethinking Supply Chain Resiliency,” EBN, 21 February 2013] For many companies, actual supply chain resiliency may remain elusive; but, I’m not so sure that the concept remains vague. The remainder of Baljko’s article leads me to believe that she has a pretty good concept of what supply chain resiliency is as well. She even defines it:

“As elusive and ever-changing as resilience may be (mostly because changing world circumstances require companies to stay flexible in how they construct and reconstruct resilient supply-chain practices), it certainly remains top of mind for many executives globally, according to a recent report from the World Economic Forum. In the most basic sense of the word, according to dictionary definitions, resilience is the ability to spring back into shape; it’s elasticity, and a capacity to recover quickly from difficulties. The aptitude and skill needed to rapidly bounce back is more frequently being tested as companies confront many more complex risks and supply-chain disruptions.”

I do agree with her that defining a problem and solving it are two very different things. With all of the supply chain disruptions that have occurred over the past several years, supply chain risk management (SCRM) has certainly crept up the priority list for a lot of organizations. They recognize the problem, know they need to do something about it, but, either through ignorance or procrastination, haven’t acted. When I talk about companies being ignorant, I don’t mean that their leadership is stupid. I mean that they don’t have enough information about their supply chains to make decisions intelligently. Last year Bill McBeath wrote, “Firms’ knowledge of their suppliers and the environments they operate in is often limited and out-of-date, crippling their ability to successfully manage the dynamics of their supply base.” [“Supplier Risk and Compliance Management in Practice: Part One,” ChainLink Research, 1 May 2012] One of the reasons that companies don’t know as much as they should about their supply chains and the risks they face is that there is so much to know. McBeath included the following graphic in his article to give readers and idea about how complex this subject can be.

NumerousSupplyRisks675McBeath argues that “managing supplier risk and compliance is very important, but unfortunately that importance is often under-recognized.” He explained:

“When a marketing executive or engineer does a great job, everyone sees the increase in sales or a great new hit product launched with a big bang … and with those successes, the bonuses and praise flow. When a supplier risk and compliance manager does a great job, then what happens is … nothing goes wrong. Everything goes smoothly. And most of the time, nobody notices. Of course if they mess up, all hell breaks loose.”

One of the reasons that “all hell breaks loose” when something does go wrong is that company valuations are dramatically affected following a disruptive event. McBeath indicated research conducted by his company “found that the stock price fell on average about 25% as the result of each single disruption” and that “the effect persisted and the stock price barely moved for a full year after the event.” Baljko reports that more recent research indicates that stock price drops aren’t quite that steep (currently about 7% on average), but that is still a big enough drop for stockholders to be upset (see my post entitled Risk Management Concerns Continue to Draw Attention). Of course, not just company valuation is affected. “The average cost [of a supply disruption] is £200,000 [approximately $300,000], according to a new study by Zurich Insurance which surveyed 500 businesses with annual revenues of between £5 million and £300 million across manufacturing, technology, food and beverage, sport leisure and entertainment and wholesale businesses.” [“What is supply chain disruption costing your company?” by Malory Davies, Supply Chain Standard, 3 July 2012] That may sound like a relatively small number, but that is for all kinds of disruptions not just those associated with major natural disasters. That same report “found that nine out of ten organisations had experienced significant disruptions to their supply chains” and that “the top three common causes of disruption were product quality incidents (57 per cent), adverse weather (45 per cent) and unplanned outage of IT (39 per cent). The average length of disruption was five weeks.” Baljko concludes, “Given these issues and the fact that supply-chain volatility isn’t likely to lessen anytime soon, maybe it’s time to rethink resiliency and put a more common framework around it.”

She suggests that a good starting point for building a framework can be found in a report issued earlier this year by the World Economic Forum (WEF) entitled “Building Resilience in Supply Chains.” She writes:

“Under its Supply Chain Risk Initiative, the WEF aims to bring together leading cross-industry experts ‘to explore the most critical threats facing supply chain networks, and to apply new risk response tools that can promote efficient risk management, security and resiliency in the complex global trading environment.’ Ultimately, it wants to do noble things like ‘strengthen the framework for global risk assessment’ and ‘improve collaboration and transparency across supply chain actors.'”

Baljko hopes that the WEF initiative isn’t all talk and no action. She believes it offers some “good starting points to get more companies involved in the conversation and [it] could provide a framework for companies trying to make clearer sense of all this.” She continues:

“While the report outlines common challenges, it emphasizes three ‘must-have’ requirements to develop a resilience framework:

  • The need for a common risk vocabulary;
  • Improved data and information flow across supply-chain actors; and
  • Building greater agility and flexibility into the supply chain.

“More specifically, the top five measures the WEF named as the roll-up-your-sleeves-and-dive-in focus areas for creating a more comprehensive resiliency blueprint are:

  1. Improved information sharing between governments and businesses
  2. Harmonized legislative and regulatory standards
  3. Building a culture of risk management across suppliers
  4. Common risk assessment frameworks
  5. Improved alert/warning systems

“These topics … are big issues, and it’s about time that companies step out of their individual silos … to address the broad impact resiliency, flexibility, and agility has on the entire industry. The supply chain is, in fact, only as strong as its weakest link, and while moving the global conversation from chatter to action may be a monumental task causing its own kind of disruption, it has to happen sooner or later.”

Robert J. Bowman, managing editor of SupplyChainBrain, agrees that the sooner companies start addressing this challenge the better. He notes, “Economies might rise and fall, but there’s never a slowdown of disasters that impact global business. All that matters in the end is a company’s ability to respond quickly. As [Sheryl] Toby puts it: ‘Those that move the fastest to gain visibility are going to win in the competition game.'” [“Are You Ready for the Next Supply-Chain Disaster?” 11 June 2012] Brian W. Hagen, managing director of the Decision Empowerment Institute, told the SupplyChainBrain staff that SCRM specialists still are receiving enough respect from the top echelons of corporate leadership. “Anyone who is a practitioner of risk management feels like they’re a second-class function in a company,” he says. He agrees with McBeath that one reason is that “risk management can’t deliver measurable results, in terms of value versus investment.” That’s a challenge that SCRM professionals will always face.

Given all of the factors that can adversely affect a supply chain, it should come as no surprise that mastering supply chain risk management has proven elusive. Nevertheless, I’m satisfied that the concept of supply chain resiliency is pretty clear in most professionals’ minds.