Supply Chain Risk Management: What Will You Do When the Lights Go Out?

Stephen DeAngelis

August 14, 2014

Research from the Kellogg School of Management and London Cass Business School concludes, “Supply chain management is a delicate balancing act in these unpredictable times – on the one hand, there is pressure to keep the supply chain as cost efficient as possible, while on the other, it needs to be flexible and resilient in the face of unforeseen events.” This tension begs the question: “How do leaders proactively manage the risk of disruption?” [“Is Your Supply Chain Prepared for the Unexpected?” IEDP, 18 July 2014] The article notes, “Supply chain management has grown increasingly sophisticated in recent decades; … but as supply chain complexity has increased, so too has the potential for disruption.” The article concludes, “This research suggests that … leaders need to design supply chains in such a way as to contain’ risk, controlling the amount of complexity in the system and trying to avoid the domino effect of interdependencies between products.” In previous posts, I have discussed some of the strategies recommended by the study (such as, regionalizing the supply chain, segmentation, and ‘go global, but think local’). The question raised in the article’s headline is an enigmatic one — “Is your supply chain prepared for the Unexpected?” After all, if you are prepared for something, then it is not unexpected. On the other hand, you can expect something but not know when that something might occur. For example, if you live along the Mississippi, you can expect to see flooding even if you don’t know when that flooding might occur.

 

In a post entitled “How Important is Supply Chain Forecasting?”, I noted that Ann Grackin (@AnnGrackin), from ChainLink Research, insists that just because some events are rare, it doesn’t mean that we can’t or shouldn’t forecast them. Grackin writes, “Creating a resilient enterprise is critical to customer protection and employee welfare, as well as securing the financial viability of the company. Yet many firms think that since rare events are unpredictable, then there is no sense in doing much about them other than ‘risk transfer’ (purchasing a risk product, if one is available, such as product liability, property and casualty and so on). … Modelers and forecasters look through a faulty lens; they discount these events because they are rare.” [“Black Swan? Hardly! Revolutions and Tsunamis Come and Go!” 5 April 2011] Renee Boucher Ferguson asserts that technology has now advanced far enough that assessing the possibility of black swan events should be a part of every company’s risk management process. She writes, “New research suggests that by exploiting many types of data, managers can help prevent (or at least contain) the damage related to black swan events and other risky blind spots. The caveat: organizations should rely less on management experience and intuition and rely more on integrated data to point to potential risks.” [“The Science of Managing Black Swans,” MIT Sloan Management Review, 19 February 2014]

 

That’s really what supply chain risk management is all about — anticipating events that could cause supply chain disruptions even when you don’t know when such events might occur. Although some disasters are caused by accidents, like fires and explosions, some of the most devastating events are so-called “acts of God,” like flooding. Fortunately, science is continuing to explore ways to help us better prepare for such events. For example, Rachelle Flick reports, “Scientists have found a way to anticipate the saturation of water basins by analyzing data taken by NASA’s Grace satellites.” [“Satellite data can predict floods on Earth, researchers say,” The Space Reporter, 7 July 2014] Flick asserts, “Major floods can be accurately predicted 5 months in advance, now that researchers have found a way to measure the amount of water built up in river basins.” This kind of early warning could be of tremendous value for supply chain risk managers. You might recall back in October 2011 that massive flooding in Thailand disrupted supply chains supporting the electronics, automobile, and other commercial manufacturing sectors. If a reliable way to predict such floods five months in advance is now available, it could dramatically affect how companies prepare for such events. The satellites scientists are using to make flooding predictions are NASA’s twin Gravity Recovery and Climate Experiment (GRACE) satellites. Those same satellites can determine if an area is running out of water. Water scarcity is going to be one of the main sustainability concerns for businesses in the years ahead. Tia Ghose (@tiaghose), reports, “The twin satellites take advantage of the fact that gravity’s tug on a spot is proportional to its mass. And water is by far the heaviest thing that changes on Earth, so gravity changes can reveal how much water has been lost [or gained].” [“Thirsty Middle East Is Exhausting Its Water Supply,” livescience, 12 February 2013]

 

It’s not just terrestrial events with which risk managers need to be concerned. Sometimes celestial events can also cause disruptions. Carter Maguire reports that in 2012 the Earth narrowly escaped a celestial event that could have created significant supply chain disruptions. “Two years ago,” he writes, “modern infrastructure came very close to a serious disruption. The culprit? One of the largest solar storms in recorded history. Plasma exploding from the surface of the sun in a coronal mass ejection barreled through space and crossed through Earth’s orbital path on July 23, 2012. If the flare had erupted about one week earlier, Earth would have been squarely in the line of fire.” [“That was a close one! Study: Massive solar storm barely missed us in 2012,” CNN, 25 July 2014] Stephanie Stoughton (@stephstoughton) reports that the chances are good the lights may yet go out as a result of sun storms. [“Who Turned Out the Lights? The Coming Mega Sun Storm,” Bloomberg BusinessWeek, 3 July 2014] She writes:

“Space weather can play havoc with air-to-ground communications. … Most people have no idea that combating the effects of geomagnetic storms is a part of doing business for industries worldwide. With enough warning time, operators of New York’s power grid can alter voltage and reduce transfers across the system to protect against the strong ground currents generated by the storms. Companies that rely on GPS services may delay drilling, mining, or land surveys when satellite communications are disrupted by space weather. But corporations and the federal government may not be prepared for a severe geomagnetic storm — akin to a 100-year flood — that could fry electrical equipment and wipe out power to major cities for weeks or longer. From a small office in Boulder, Colo., William Murtagh and a small team at the National Oceanic and Atmospheric Administration’s Space Weather Prediction Center monitor the sun 24 hours a day, sending alerts to industries and foreign governments when space storms are on the way. Murtagh, the center’s program coordinator, is well-versed in the damage geomagnetic storms can cause. Perhaps the most formidable megastorm on record happened in 1859. Known as the Carrington Event, it lit up night skies from Hawaii to Australia and led to telegraph outages around the world. Of course, no one alive today was around for it. ‘It is in the human nature,’ Murtagh says, ‘to assess the threat based on your own life span.’ … While they await new satellites and sensors, Murtagh and his team in Colorado continue to operate the world’s most esoteric warning system with the tools they’ve got.”

How well could your company operate without electricity or communications systems? An enormous solar flare falls under the Black Swan category; but, assessing the impact of such an event and having a mitigating plan in place would be prudent for most organizations. You cannot anticipate every event (i.e., there truly are some unexpected things that could disrupt supply chains), but preparing for a reasonable number of different kinds of events will make your company better situated to respond should the unexpected occur.