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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 geographi-

cally concentrated, and more

efficient, the potential impact

of supply chain disruptions

has increased dramatically. Accenture’s

own research has found, in fact, that sig-

nificant 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 vulnerabili-

ties 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 manage-

ment. While risks from natural disasters

and demand shocks remain highly vis-

ible, other emerging risks such as cyber

threats, rising insurance, and trade finance

costs are leading supply chain managers

to look at new mitigation options. Accen-

ture’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-

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 cre-

ated—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 exem-

plified 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 Hur-

ricane Sandy, the Icelandic ash cloud, and

the Japanese earthquake and tsunami—

have forced political and business lead-

ers to pay attention to supply chain risk.

Traditionally, businesses have been con-

cerned with mitigating the impact of high-

probability 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 manage-

ment must become a shared responsibil-

ity between the public and private sec-

tors, 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 knowl-

edge of both low- and high-probability

supply chain risks, helping focus organiza-

tional 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,

Supplier Management: Increased collaboration to accelerate global shipments

via the Supply Chain Risk Radar, an ana-

lytical and self-diagnostic tool developed

by WEF. The aim of the survey was to

understand how the risk landscape var-

ied across the three regions and how top

risks compared with the top five global

risks from 2011. Survey respondents con-

sidered global risks and their potential to

cause system-wide disruptions in global

supply chains.

A fluid, responsive ecosystem of

ply chains. These include the effects of

pandemics on border crossings and work-

forces; earthquake disruptions to main-

land routes; bombing of major supply

chain nodes; trade barriers to raw mate-

rials 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 sup-

ply chain experts. Complex-

ity compounds the cyber risk

issue, as information technology

(IT) has enabled supply chains

to evolve into interdependent

material, financial, and informa-

tion flows. While this increases

efficiency, it also exposes supply

chains to cyber risk which can

result in system-wide failure.

Beyond accidental failure,

the causes of frequent failures, forc-

ing organizations to learn and design

reliability into their processes; globaliza-

tion, which provides opportunities for

diversification of supply; specialized pro-

duction and scale, which accelerate learn-

ing 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 organi-

zations manage the less likely major sys-

temic 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 reli-

ance can cause chaos if critical nodes fail.

In the face of these challenges, organi-

zations should have a blueprint for improv-

ing the resilience of their supply chains.

Such a plan can help align and organize

priorities to address the most problematic

global supply chain risks.

processes, people, and technologies may provide better capability for a ready response to disruptive events.

cyber threats include criminal

activity, government attacks, ter-

rorism, and corporate espionage,

as well as the danger of “hack-

tivism” by cyber groups with a

In workshops and discussions through-

out 2012, participants in the Supply Chain

Risk Initiative discussed and debated a

priority ranking of 11 possible measures

of resilience. The results displayed some

Four of the top five risks (natural disas-

ters, conflict and political unrest, terror-

ism, and sudden demand shocks) remained

unchanged. Extreme weather, however,

emerged as a more prevalent concern in

2012, with an overall ranking of number

two among the top five global risks.

North American respondents had a nota-

bly higher level of concern about terrorism

than did European and Asian respondents.

While North American policies and regu-

lations have been focused on addressing

terrorism—sometimes while hindering

trade—this seems to be changing. In 2012,

respondents said that security measures

and supply chain systems are increasingly

co-designed to facilitate rather than dis-

rupt trade.

This approach is reflected in the

National Strategy for Global Supply

Chain Security announced by the White

House in January 2012, which addresses

a broader range of risks affecting sup-

wide range of motivations. Technology

processes and people are the main vulner-

abilities of a virtual system, while poten-

tial risks range from infrastructure damage

to reputational and intellectual property

impairment. These vulnerabilities and

risks become even more alarming as many

traditional supply chains evolve into digital

supply chains.

Building supply chain resilience In view of this expanding risk profile, sup-

ply chain managers need to think about

risk management as well as on reducing

costs and increasing reward. While it is

hard to see risk management as a com-

petitive advantage, effective risk manage-

ment and increased efficiency need not

be mutually exclusive. Indeed, a num-

ber of business innovations in recent

decades have reduced high-probability,

profit-sapping risks. These include lean

supply chains, which, by design, expose

regional and sectional differences. North

America and Europe, for example, identi-

fied harmonized legislative and regulatory

standards as the top priority, while Asian

respondents said that improved informa-

tion sharing between government and

business was the top priority for building

supply chain resilience.

European and North American respon-

dents emphasized the importance of build-

ing a culture of risk management across

suppliers. This is less valued in Asia,

where the growth opportunities in emerg-

ing markets encourage high-risk strategies

for maximum return. Many Asia-based

supply arrangements are newer and more

fluid, resulting in weaker lines of commu-

nication and more difficulty in establishing

a culture of risk management.

In the aggregate, the top five joint resil-

ience measures were as follows:

1. Improved information sharing

between governments and businesses.

2. Harmonized legislative and regulatory

standards.

3. Building a culture of risk manage-

ment across suppliers.

4. Common risk assessment frameworks.

5. Improved alert/warning systems.

Asian respondents identified improv-

ing alert and warning systems as a higher

priority than their counterparts in North

America and Europe. Inadequate capaci-

ties for providing early alerts for earth-

quakes, 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 classifica-

tion of firms and procedures to allow pref-

erential treatment in times of disruption.

Governments in Asia, however, are tradi-

tionally less motivated by this concern.

High levels of competition in the region

can result in high rates of supplier sub-

stitution, on the assumption that equally

capable suppliers can be rapidly inte-

grated. 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, sec-

for paying too little attention to other

levers by which resilience can be encour-

aged or enhanced. For example, authori-

ties monitoring competition could pay

more attention to the availability of inde-

pendent component sources much deeper

in the supply chain.

Consumers are also seen as being

under-involved in setting resilience priori-

ties. Consumer testing of tolerance levels

and trade-offs is needed to update corpo-

rate and government assumptions. Con-

sumers often care more about knowing

definitely when their order will be filled

than they do about rapid delivery.

Despite regional and sectional differ-

ences, supply chain experts agreed on a

proposed blueprint for resilient supply

chains. The proposed blueprint contains

four core components: partnerships,

policy, strat-

egy, and information tech-

nology (IT).

• Partnerships. Supply

chains show a move away

from “agnostic” outsourc-

ing towards long-term part-

nerships. In such relation-

ships, resilience can be

built via improved security,

information sharing, and

knowledge exchange.

At a broader level, bet-

ter knowledge of a partner can enable more targeted

tion and assemble the resources needed

for response to major disruptions. There

is broad agreement that governments

should aim for maximum flexibility dur-

ing times of disruption, while providing

incentives for building resilience during

times of stability. A government’s abil-

ity to intervene during a crisis should be

calibrated to avoid rewarding poor risk

preparation or too-big-to-fail supply chain

developments. Governments can also act

as information brokers; administrations

that are able to provide strong information

flow play a key role in protecting supply

chains.

• Strategy. Supply chains estab-

lished during more stable times need to

be reshaped for operation in an era of

increased volatility. Although a number of

ond, the development of trade resumption

plans, protocols, and lines of authority to

redress major concerns. These are impor-

tant 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

risk management. This is the

basis of authorized economic

operator programs devel-

oped by customs authorities

worldwide. Both govern-

ment- and business-driven

partnerships must retain

Despite regional and sectional differences, supply chain experts agreed on a proposed blueprint for resilient supply chains that contains four core components: partnerships, policy, strategy, and IT.

disruption occurs—to prevent loss of mar-

ket 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 bor-

der security as a risk, and on private sec-

tor transparency as a means of increasing

resilience. The public sector is criticized

open architectures and harmonized stan-

dards to allow accessibility and competition.

• Policy. Regulations restrict freedom

of action and may, therefore, inadvertently

reduce the flexibility required for building

greater resilience. Governments can, how-

ever, shape actions to benefit the public,

whether through trade, security, invest-

ment, or other policies that directly or

indirectly affect resilience.

Governments can foster the coopera-

strategies can be applied to make this hap-

pen, it is the capacity to adapt, rather than

the actual strategy, that creates resilience.

Our concept of “dynamic operations”

identifies certain organizational capabilities

that can make supply chains more resilient

to potential disruptions. For example, supply

chain operators should be able to synthesize

external and internal data and rapidly take

action to minimize the impact of any disrup-

tion. And supply chain structures should be

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 appli-

cation of IT within supply chains has

increased dramatically. If correctly con-

figured, IT can provide significant gains in

resilience through the channels of analyt-

ics, data and information sharing, scenario

modeling, and pre-programmed responses.

Data and information sharing remains

the key to IT resilience. Business continu-

ity is protected through access to real-time

data, followed by rapid dissemination of

data-driven supply chain fixes. Information-

sharing 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.

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.

Moving to dynamic operations

As the WEF report demonstrates, sup-

ply chains have evolved rapidly. For many

organizations, the supply chain is no lon-

ger 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 opera-

tions possible:

1. Agile Execution: rapidly adjust-

ing supply chain actions by dial-

ing capacity up and down, improving

collaboration, formulating supplier contin-

gency plans, and implementing advanced

technology such as predictive analytics.

The mantra is “flexible resource allocation,”

made possible by an elastic infrastructure.

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 intel-

ligence. In effect, companies use informa-

tion 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 man-

agement, production and warehousing in

response to shifting conditions.

One way to think of dynamic opera-

tions 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 dis-

ruptions occur), dynamic operations can

help companies respond more quickly

and effectively. Think in terms of more-

decentralized operations can allow compa-

nies to deal more effectively with cross-bor-

der challenges, differences in taxation, geo-

graphic obstacles, technological variations,

and labor discrepancies. Similarly, while

just-in-time supply chains add value, com-

panies may need to adjust inventory levels

and SKUs to achieve acceptable levels of

availability.

Systemic risks—with global geo-

graphic 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 con-

cern for supply chain operators. Building

risk management into supply chain gover-

nance is essential, but broader measures

are also necessary. Through greater public

and private sector collaboration—includ-

ing 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.

2. Adaptable Structure: creating prod- dynamic, tailored models such as coun-

ucts, processes, and systems that are easily

modified in response to changing condi-

tions. The best and clearest example may

be flexible manufacturing: the ability to

respond quickly to currency fluctuations,

supply disruptions, and sudden demand

try-based transportation management or

regional (or sub-regional) customer service

approaches. The idea is centralized over-

sight and analytics combined with decen-

tralized execution.

In addition to adding resilience, dynamic,

Jonathan Wright is a managing direc-

tor in the Operations consulting group at

Accenture, a global management consult-

ing, technology services, and outsourcing

company. He can be reached at Jonathan.

Wright@accenture.com.