In a survey conducted by ChainLink Research, pollsters “found that the vast majority of respondents (nearly 80%) do not manage risks beyond their immediate first tier suppliers. Instead, they rely on their immediate suppliers to manage those risks.” [“2011 Supply Chain Risk Survey Findings: Part 3,” by Bill McBeath, 7 June 2011] With so many well-respected supply chain analysts talking about the importance of developing end-to-end supply chain visibility, 80% seems like a big number of non-believers. Perhaps it is the phrase “managing risks” that causes that number to be so high. After all, having supply chain visibility is not exactly the same thing as managing risks. Regardless, I suspect that most supply chain analysts would tell respondents falling into the 80% group that they are being short-sighted. Lora Cecere, for example, believes that companies need to develop “value networks that extend from the customer’s customer to the supplier’s supplier that sense, shape and respond by listening, testing and learning with minimal latency.” [“Minding our P’s and Qs: It is more than R’s and P’s,” Supply Chain Shaman, 16 August 2011]
Obtaining end-to-end supply chain visibility is not easy. Cecere asserts that challenges likely to be encountered along the path to increased transparency include: a lack of visionary business leaders; the continued presence of siloed business operations; and a lack of understanding that the supply chain “is the business.” McBeath agrees with Cecere. In his article about the supply chain risk survey, he notes that many companies learned the hard way that, in the aftermath of Japan’s tragedy, being short-sighted comes at a price. He writes:
“The tsunami highlighted the risks in that approach and the importance of being aware of the impacts across multiple tiers of the supply chain. Many companies were impacted not by their immediate suppliers, but by their suppliers’ suppliers or by secondary effects of the tsunami. … It is risky to rely solely on your suppliers to deal with those shortages. Often times, suppliers are reluctant to be forthcoming with bad news, as they scramble and hold out hope that they will find alternative sources. By the time their situation becomes fully clear, it is too late. Having an understanding of the complete supply chain can be advantageous. You are in a position to know where there is capacity and constraint, and which suppliers are in a position to secure that limited output. This gives you a clearer picture of the true risks for your immediate suppliers, as well as an understanding of which alternate sources might have access to the limited supply. Then you can pursue those specific alternate sources more vigorously.”
McBeath wasn’t as interested in the 80% of companies that didn’t manage risks broadly as he was in the 20% of companies that did. He believes those companies have lessons to teach the 80% group. He writes:
“The … 20% of companies [that] are proactive in managing supply chain risk … often have a dedicated supply chain risk group. They have multi-faceted early warning systems in place to raise the red flag before disruptions occur. They are constantly monitoring the situation on the ground and across the globe. They recognize the need to understand and manage risk across multiple tiers of their supply chain. The difference can be largely attributed to the leadership within the firm. We almost always find people at lower levels on the front lines who are acutely aware of the risks faced and are lobbying for resources and policies to mitigate those risks. But top executives are pulled by many forces and with many demands for resources and investments.”
Many executives undoubtedly see risk management as cost center that adds little or nothing to the bottom line. Risk management expenditures are viewed as another cost of doing business, like any other form of insurance. McBeath, however, believes that such views are wrong. He concludes:
“Those who take the attitude ‘these same events are happening to everyone, so why should I spend time and money on this’ really miss the true opportunity. Disrupting events can be critical turning points in the evolution of a sector that determine the future winners and losers in an industry. Those leaders will come out on top who understand risk impacts and provide the leadership and investments needed for their enterprise to proactively deal with inevitable, disrupting events.”
McBeath is correct when he writes that disrupting events are inevitable. They used to be considered “black swans” when companies were regionalized and had a small geographic footprint. Today, multi-national corporations are subject to the disruptions that occur all around the globe. They are finding that black swans are common. That is why a military acronym, VUCA, has started to creep into supply chain discussions. VUCA stands for Volatility, Uncertainty, Complexity, and Ambiguity. In a post on this subject, supply chain analyst Trevor Miles writes, “I almost feel that we should be shouting ‘Vuka’ which in Xhosa (one of the South Africa languages) means ‘wake up.’ Wake up to the new reality that VUCA is a new norm.” [“VUCA, a useful acronym for today’s supply chain,” The 21st Century Supply Chain, 9 June 2011] He continues:
“Let us parse the term, because in my opinion volatility is the active ingredient and uncertainty, complexity, and ambiguity are largely effects, though complexity can add to the volatility, uncertainty, and ambiguity. Globalization is the driving force of demand volatility… which is in turn driving product complexity … which, coupled with outsourcing, is driving supply chain complexity. By product complexity, I mean the concepts embodied in the terms ‘mass customization’ and ‘the long tail’ in which companies need to develop product variants specific to markets which, assuming a near zero-sum situation, means that there is less demand for each variant. This all leads to a great deal of demand uncertainty. On the supply side, multi-sourcing and outsourcing has led to longer and more variable lead times, and associated costs. Ambiguity arises from not having the appropriate processes and systems in place to respond profitably to actual demand.”
There is simply no way that a company can deal rationally with VUCA without having excellent supply chain visibility and risk management strategies. That is why Miles writes, “I say embrace VUCA. Accept that it is the new norm. Resistance is futile.” He concludes:
“Far too many analysts and advisors are telling you that you need to reduce VUCA. While not having anything against this approach in principle, and definitely not advocating that you increase VUCA through poor processes and management, I believe that you have to learn to operate in a VUCA environment and that this requires different skills and tools than those required in a more stable environment. There is a recent Harvard Business Review article titled ‘Leading Effectively in a VUCA Environment: A is for Ambiguity‘ in which the author, Col. Eric G. Kail, states that:
Whereas the frustration we experience from volatility, uncertainty, and complexity might leave us feeling overwhelmed and exhausted, ambiguity leads primarily to inefficiency and missed opportunities. Toleration of either will leave us surviving at best, and we want to lead our organizations to thrive.
This is an approach common amongst experts that run counter to what I believe. … Embrace VUCA not by thinking you can reduce it, but by building the skills and deploying tools to help you manage it.”
In general, I agree with Miles. There are simply too many things in the supply chain that you can’t control that could negatively affect your company. Like a good boxer, you need to learn to roll with the punches. For things you do control, you should try to reduce volatility, uncertainty, complexity, and ambiguity; however, knowing that you can’t control everything you do need the skills and tools to help you manage what you can’t control. In an effort to assert more control, some companies have tried to implement closed supply chains. Peter Marsh describes a closed supply chain this way:
“A closed supply chain is a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the system. A large proportion of the components made by key suppliers are unique to the final product.” [“Closed encounters with suppliers,” Financial Times, 6 July 2011]
Under normal circumstances closed supply chains may work fairly efficiently and create a reduced-VUCA environment. However, Daniel Corsten, a professor at IE Business School in Madrid, told Marsh that such systems are vulnerable and not as easy to manage as business executives might think.
“Such systems can be extremely difficult to manage. The individual processes involved with different elements of these chains are often associated with complex technologies that involve interlinked subsets of components. In these instances, companies often need a ‘top-down’ approach to drive the different processes – with the maker of the final product rather than the suppliers being in charge. Closed supply chains can also leave companies more exposed to the risk of greater disruption caused by external events than an open system based on modular principles. If parts of the supply chain are disrupted in a closed system it can be much harder to find replacement suppliers. This risk is compounded by the fact that many closed systems commonly operate with clusters of suppliers spaced close to a central ‘mother’ factory which orchestrates the sequences of technologies being used in the system, and drives product changes.”
Obviously, there are no silver bullet solutions to the VUCA challenge. Having said that, Miles asserts, “There is nothing better than agility to address VUCA.” I couldn’t agree more. Agility, however, relies on having as much supply visibility as possible. The more information an executive has at his fingertips in a timely manner, the better he or she is able to make necessary decisions and take appropriate actions to avoid, reduce, or mitigate negative consequences.