Taking a broader view of supply chain resilience


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Taking a broader view of supply chain resilience

  1. 1. Taking a broader view of supply chain resilience As supply chains become more global and complex, the impact of any disruption intensifies. What’s needed today is an approach to resilient risk management that incorporates four key components: longer term partnerships; government policy that enables flexibility; an IT approach that fosters business continuity; and a strategy of “dynamic operations” that makes supply chains more resilient to potential disruptions. BY JONATHAN WRIGHT s supply chains have become more global, more geographically concentrated, and more efficient, the potential impact of supply chain disruptions has increased dramatically. Accenture’s own research has found, in fact, that significant supply chain disruptions reduce the share price of affected companies by 7 percent on average. The World Economic Forum first began exploring systemic risks and vulnerabilities to global supply chains and transport networks in 2011. As the WEF noted, the changing nature of these risks, along with their greater potential impact, highlights the need for companies to shift their focus from reactive to proactive risk management. While risks from natural disasters and demand shocks remain highly visible, other emerging risks such as cyber threats, rising insurance, and trade finance costs are leading supply chain managers to look at new mitigation options. Accenture’s research indicates that more than 80 percent of companies are now concerned about supply chain resilience. The growing concern reflects the changing risk landscape and particu- A larly the emergence of system-wide risks. Unlike localized or company-specific risks, system-wide risks are those which disrupt supply chains across multiple locations and a wide geographic area. They are created—or magnified—by the way supply chain systems are configured, so they are not easily resolved by individual actors. In a globalized, interconnected world, any major disruption—from an epidemic to a fire—has the potential to cascade through supply chains and permeate other systems. The flooding in Thailand in 2011 exemplified how disruption in one area affects companies all around the world. Thailand is the world’s second largest computer hard drive manufacturer, so the flooding there spread fear among global computer manufacturers. As analysts predicted that worldwide hard drive production would fall by as much as 30 percent in the final quarter of 2011, computer manufacturers reacted by snapping up existing hard drive inventories. The long-term impact is still evident in the increased cost of computer hard drives. These events—and others such as Hurricane Sandy, the Icelandic ash cloud, and the Japanese earthquake and tsunami— have forced political and business leaders to pay attention to supply chain risk. Traditionally, businesses have been concerned with mitigating the impact of highprobability failures, while governments and policy-makers have been concerned with low-probability disruptions—such as extreme weather events—that can cause system-wide failures. Systemic risks and operational failures are, however, linked, and risk management must become a shared responsibility between the public and private sectors, between industries, and between functional decision-makers in companies. Cooperation is imperative and all groups need to have a common understanding of the issues. A shared risk assessment framework can deepen collective knowledge of both low- and high-probability supply chain risks, helping focus organizational agendas upon the top challenges to address. Different regions, different risk landscapes In 2012, the WEF’s Supply Chain Risk Initiative conducted a detailed survey across Europe, North America, and Asia,
  2. 2. Supplier Management: Increased collaboration to accelerate global shipments via the Supply Chain Risk Radar, an analytical and self-diagnostic tool developed by WEF. The aim of the survey was to understand how the risk landscape varied across the three regions and how top risks compared with the top five global risks from 2011. Survey respondents considered global risks and their potential to cause system-wide disruptions in global supply chains. ply chains. These include the effects of pandemics on border crossings and workforces; earthquake disruptions to mainland routes; bombing of major supply chain nodes; trade barriers to raw materials and specialized products; and cyber disruptions to supply chains. Growing concern with cyber risks In regional workshops hosted by the Supply Chain Risk Initiative throughout 2012, cyber risk stood out as the most pressing non-traditional risk facing supply chain experts. Complexity compounds the cyber risk issue, as information technology (IT) has enabled supply chains to evolve into interdependent material, financial, and information flows. While this increases efficiency, it also exposes supply chains to cyber risk which can result in system-wide failure. A fluid, responsive ecosystem of Beyond accidental failure, cyber threats include criminal processes, people, and technologies activity, government attacks, termay provide better capability for a rorism, and corporate espionage, ready response to disruptive events. as well as the danger of “hacktivism” by cyber groups with a Four of the top five risks (natural disas- wide range of motivations. Technology ters, conflict and political unrest, terror- processes and people are the main vulnerism, and sudden demand shocks) remained abilities of a virtual system, while potenunchanged. Extreme weather, however, tial risks range from infrastructure damage emerged as a more prevalent concern in to reputational and intellectual property 2012, with an overall ranking of number impairment. These vulnerabilities and two among the top five global risks. risks become even more alarming as many North American respondents had a nota- traditional supply chains evolve into digital bly higher level of concern about terrorism supply chains. than did European and Asian respondents. While North American policies and regu- Building supply chain resilience lations have been focused on addressing In view of this expanding risk profile, supterrorism—sometimes while hindering ply chain managers need to think about trade—this seems to be changing. In 2012, risk management as well as on reducing respondents said that security measures costs and increasing reward. While it is and supply chain systems are increasingly hard to see risk management as a comco-designed to facilitate rather than dis- petitive advantage, effective risk managerupt trade. ment and increased efficiency need not This approach is reflected in the be mutually exclusive. Indeed, a numNational Strategy for Global Supply ber of business innovations in recent Chain Security announced by the White decades have reduced high-probability, House in January 2012, which addresses profit-sapping risks. These include lean a broader range of risks affecting sup- supply chains, which, by design, expose the causes of frequent failures, forcing organizations to learn and design reliability into their processes; globalization, which provides opportunities for diversification of supply; specialized production and scale, which accelerate learning and the smoothing out of potential risks; and IT-enabled visibility, which gives advance warning of problems and offers decentralized solutions. While these advances can help organizations manage the less likely major systemic disruptions, they can also amplify risks. Lean supply chains can shut down in hours, and learning from past events is of little use during once-in-a-generation failures. Global supply chains affect many more people, and supply chain and IT reliance can cause chaos if critical nodes fail. In the face of these challenges, organizations should have a blueprint for improving the resilience of their supply chains. Such a plan can help align and organize priorities to address the most problematic global supply chain risks. In workshops and discussions throughout 2012, participants in the Supply Chain Risk Initiative discussed and debated a priority ranking of 11 possible measures of resilience. The results displayed some regional and sectional differences. North America and Europe, for example, identified harmonized legislative and regulatory standards as the top priority, while Asian respondents said that improved information sharing between government and business was the top priority for building supply chain resilience. European and North American respondents emphasized the importance of building a culture of risk management across suppliers. This is less valued in Asia, where the growth opportunities in emerging markets encourage high-risk strategies for maximum return. Many Asia-based supply arrangements are newer and more fluid, resulting in weaker lines of communication and more difficulty in establishing a culture of risk management. In the aggregate, the top five joint resilience measures were as follows: 1. Improved information sharing between governments and businesses.
  3. 3. 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. Asian respondents identified improving alert and warning systems as a higher priority than their counterparts in North America and Europe. Inadequate capacities for providing early alerts for earthquakes, tsunami, and flooding affecting Asia in 2011 may have contributed to this prioritization. Public and private sector specific priorities The public sectors in North America and Europe are interested in tiered classification of firms and procedures to allow preferential treatment in times of disruption. Governments in Asia, however, are traditionally less motivated by this concern. High levels of competition in the region can result in high rates of supplier substitution, on the assumption that equally capable suppliers can be rapidly integrated. North American and European public sectors have placed more emphasis on retaining partnerships, so companies are placed under more scrutiny to assess their long-term reliability. Two key private sector priorities emerged: First, the use of exercises to stress-test assumptions and plans, and, second, the development of trade resumption plans, protocols, and lines of authority to redress major concerns. These are important because of the diversity of supply chain configurations available to businesses, the criticality to their bottom line of selecting the correct one, and the need—when a disruption occurs—to prevent loss of market share to more resilient or unaffected competitors. Some private sector firms also fear the complexities and unintended side effects of government action. The workshops revealed a widely held view that public sector supply chain experts are predominantly focused on border security as a risk, and on private sector transparency as a means of increasing resilience. The public sector is criticized for paying too little attention to other tion and assemble the resources needed levers by which resilience can be encour- for response to major disruptions. There aged or enhanced. For example, authori- is broad agreement that governments ties monitoring competition could pay should aim for maximum flexibility durmore attention to the availability of inde- ing times of disruption, while providing pendent component sources much deeper incentives for building resilience during in the supply chain. times of stability. A government’s abilConsumers are also seen as being ity to intervene during a crisis should be under-involved in setting resilience priori- calibrated to avoid rewarding poor risk ties. Consumer testing of tolerance levels preparation or too-big-to-fail supply chain and trade-offs is needed to update corpo- developments. Governments can also act rate and government assumptions. Con- as information brokers; administrations sumers often care more about knowing that are able to provide strong information definitely when their order will be filled flow play a key role in protecting supply than they do about rapid delivery. chains. Despite regional and sectional differ• Strategy. Supply chains estabences, supply chain experts agreed on a lished during more stable times need to proposed blueprint for resilient supply be reshaped for operation in an era of chains. The proposed blueprint contains increased volatility. Although a number of four core components: partnerships, policy, strategy, and information technology (IT). • Partnerships. Supply chains show a move away from “agnostic” outsourcing towards long-term partnerships. In such relationships, resilience can be built via improved security, information sharing, and knowledge exchange. At a broader level, better knowledge of a partner can enable more targeted risk management. This is the Despite regional and sectional differences, basis of authorized economic supply chain experts agreed on a proposed operator programs devel- blueprint for resilient supply chains that oped by customs authorities contains four core components: partnerships, worldwide. Both government- and business-driven policy, strategy, and IT. partnerships must retain open architectures and harmonized stanstrategies can be applied to make this hapdards to allow accessibility and competition. pen, it is the capacity to adapt, rather than • Policy. Regulations restrict freedom the actual strategy, that creates resilience. of action and may, therefore, inadvertently Our concept of “dynamic operations” reduce the flexibility required for building identifies certain organizational capabilities greater resilience. Governments can, how- that can make supply chains more resilient ever, shape actions to benefit the public, to potential disruptions. For example, supply whether through trade, security, invest- chain operators should be able to synthesize ment, or other policies that directly or external and internal data and rapidly take indirectly affect resilience. action to minimize the impact of any disrupGovernments can foster the cooperation. And supply chain structures should be
  4. 4. Supplier Management: Increased collaboration to accelerate global shipments adaptable and agile, so that they can quickly adjust and respond to market and economic conditions. • Information Technology. The application of IT within supply chains has increased dramatically. If correctly configured, IT can provide significant gains in resilience through the channels of analytics, data and information sharing, scenario modeling, and pre-programmed responses. Data and information sharing remains the key to IT resilience. Business continuity is protected through access to real-time data, followed by rapid dissemination of data-driven supply chain fixes. Informationsharing infrastructures, however, depend on a resilient core network, appropriate communication tools, and at least some redundancy. This requires IT systems that are scalable, secure and re-routable. Moving to dynamic operations As the WEF report demonstrates, supply chains have evolved rapidly. For many organizations, the supply chain is no longer a singular operating model—a more or less straight line fostering the efficient movement of goods. Rather, companies operating in vast, diverse regions may need structures that are more like “demand and supply webs.” This may mean re-thinking accepted concepts such as supply chain integration. A fluid, responsive ecosystem of processes, people, and technologies may provide better capability for a ready response to disruptive events. Four capabilities make dynamic operations possible: 1. Agile Execution: rapidly adjusting supply chain actions by dialing capacity up and down, improving collaboration, formulating supplier contingency plans, and implementing advanced technology such as predictive analytics. The mantra is “flexible resource allocation,” made possible by an elastic infrastructure. 2. Adaptable Structure: creating products, processes, and systems that are easily modified in response to changing conditions. The best and clearest example may be flexible manufacturing: the ability to respond quickly to currency fluctuations, supply disruptions, and sudden demand If correctly configured, IT can provide significant gains in resilience through the channels of analytics, data and information sharing, scenario modeling, and pre-programmed responses. shifts by altering manufacturing volumes, mixes, and venues. 3. Insight to Action: sensing, capturing, and analyzing external and internal data and turning it into usable business intelligence. In effect, companies use information to improve their ability to buffer risk while swiftly leveraging new opportunities. 4. Flexible Innovation: making design and development processes less rigid by reducing changeover times, increasing interchangeability, designing products that embrace multi-channel networks and technology, and structuring ways to smoothly and rapidly rebalance order management, production and warehousing in response to shifting conditions. One way to think of dynamic operations is as a less tightly integrated, more flexible, non-linear coalition of supply chains. This flexibility can help a company navigate unpredictable markets. When market opportunities arise (or when disruptions occur), dynamic operations can help companies respond more quickly and effectively. Think in terms of moredynamic, tailored models such as country-based transportation management or regional (or sub-regional) customer service approaches. The idea is centralized oversight and analytics combined with decentralized execution. In addition to adding resilience, dynamic, decentralized operations can allow companies to deal more effectively with cross-border challenges, differences in taxation, geographic obstacles, technological variations, and labor discrepancies. Similarly, while just-in-time supply chains add value, companies may need to adjust inventory levels and SKUs to achieve acceptable levels of availability. Systemic risks—with global geographic scope, cross-industry relevance, uncertainty as to how and when they will occur, and high levels of economic and/or social impact—have become a major concern for supply chain operators. Building risk management into supply chain governance is essential, but broader measures are also necessary. Through greater public and private sector collaboration—including activities such as the WEF’s Supply Chain Risk Initiative—we are deriving a more comprehensive view of supply chain risk and the measures needed to build greater resilience while increasing both the efficiency and the effectiveness of global supply chains. Jonathan Wright is a managing director in the Operations consulting group at Accenture, a global management consulting, technology services, and outsourcing company. He can be reached at Jonathan. Wright@accenture.com.