The 9.0 earthquake and 45-foot wall of water that struck Japan last year devastated local production and power generation, causing massive supply chain disruptions for companies all around the world. While the impact for many companies lingered well into 2012, some companies were able to bounce back much more quickly than expected.

What was the secret to their speedy recovery? And how can companies better prepare their own supply chains to withstand future crises and minimize the impact of potential disruptions?


The Rising Tide of Risk

Despite the tsunamis widespread impact on global supply chains, most companies are not fundamentally changing how they manage supply chain risk. Meanwhile, supply chain risks appear to be rising, driven by a variety of internal and external forces especially globalization, which is increasing supply chain complexity and amplifying the impact of disruptions.

High impact, low probability black swan events now seem to be almost a regular occurrence. This is not necessarily because problems are happening more often, but because in a globally interconnected business environment, problems that used to remain isolated now have far-reaching impacts.

Supply chain risk is exacerbated by the never-ending push to improve operating efficiency and reduce costs. Although trends such as lean manufacturing, just-in-time inventory, outsourcing and supplier consolidation have yielded compelling business benefits, they have also introduced new kinds of supply chain risk and reduced the margin for error without providing appropriate counter-balancing to help mitigate risk.

Whats more, customer expectations and product lifecycles continue to shift. Todays buyers expect businesses to deliver a constant stream of customized products that are better, faster and cheaper while at the same time acting responsibly toward society and the environment. And thanks to social media and the Internet, if a company has a weak link or one of its supply chain partners stumbles theres a good chance the public will learn about it even before the CEO does. This can trigger an almost immediate impact on a companys brand image and market value.


A More Holistic View of Supply Chain Risk

Efforts to identify and mitigate supply chain risk have traditionally focused on financial and operational risks and familiar disruptions that caused trouble in the past. But these days, that narrow view of risk is much too limited, especially when it comes to preparing for major disasters and other black swan events. In todays hyper-connected supply chain environment, risks are evolving at a dizzying pace and can strike from almost any direction, including those that are new and unexpected.

A holistic approach to managing supply chain risk should consider four distinct risk categories:

Macro environment risks are broad external forces that affect the entire business and supply chain. For example, globalization can give businesses access to less expensive labor and materials, and opens up vast new markets. But it also increases supply chain complexity, increases the probability and magnifies the impact of disruptions that in the past might have remained locally isolated such as natural disasters, political turmoil, piracy and regional economic crises.

Extended value chain risks center around a companys upstream and downstream supply chain partners. Increased use of outsourcing, for example, may have improved efficiency and has allowed businesses to focus more attention on their core competencies. But it has also made their operations more complex and exposed them to increased third-party risk. Similarly, supplier consolidation can be a double-edged sword. Although it creates economies of scale, it also increases the risk of major supply disruptions by putting all of a companys eggs in fewer baskets.
Operational risks are tied to a companys internal manufacturing and distribution operations. Lean manufacturing, just-in-time inventory and capacity rationalization may have boosted supply chain efficiency and may have made businesses more agile and responsive. But by reducing slack in the network, they have also reduced the margin for error and amplified the disruptive potential of any problems that happen to arise.

Functional risks relate to the business functions that support supply chain activities, such as finance, HR, legal and IT. Many of todays supply chains are enabled and accelerated by a broad suite of applications and systems. A disruption or breach in these critical systems can have an immediate impact on the customer experience. Also, the rising complexity of regulatory requirements and increased repercussions of non-compliance are making supply chains more dependent than ever on legal and regulatory functions.


Four Pillars of a Resilient Supply Chain

Given the scale and scope of todays global supply chains, there is no way for a company to predict and prepare for every possible risk. However, what a company can do is build resilience proactively addressing the critical vulnerabilities that expose the business to risks that may exceed its risk tolerance.

A business with a resilient supply chain can sidestep a wide range of risks and, perhaps even more important, is able to bounce back quickly from risks that cannot be avoided.

The notion of resilience is not new; in fact, it is a characteristic many enterprises and supply chains have long aspired to. However, simply recognizing the value of supply chain resilience as a concept is not enough. To make it happen, organizations should understand the essential components and necessary trade-offs that are required to build resilience. In our experience, four capabilities are key:

Visibility being able to track and monitor supply chain events and patterns as they happen (or even before they happen). This can enable an organization to address supply chain issues before they develop into problems.

Flexibility being able to promptly adapt to problems without significantly increasing operational costs. This can enable an organization to avoid potential problems, and to minimize the impact of a critical disruption or sudden shift in expectations.

Collaboration being able to work effectively with supply chain partners (through symbiotic, trust-based relationships) in order to avoid disruptions and achieve common goals.

Control having clearly defined policies, monitoring and control mechanisms to help ensure that proper procedures and processes are actually followed.

In addition to these four essential capabilities, companies with resilient supply chains tend to feature a strong and clearly defined governance structure. Few businesses have an executive-level position with full, end-to-end ownership of supply chain operations, let alone supply chain risks. Clear accountability and ownership supported by a strong foundation of key enablers (people, processes and technology/analytics) are critical to building and sustaining a resilient supply chain.

Given the large impact that supply chain risk can have on financial performance and shareholder value, supply chain resilience should be near the top of the CFOs agenda.


Resilience in Action

After the tsunami, companies with flexible manufacturing and supply chain capabilities generally recovered more quickly than their less resilient counterparts. For example, a leading printer manufacturer was reportedly able to restore production to pre-disaster levels in less than four months thanks to an established business strategy of diversifying parts production to mainland China and various areas throughout Japan.

Collaboration was another key to rapid recovery. In the wake of the crisis, Japanese automakers worked closely with their key suppliers to help them get back on their feet. This unprecedented cooperation was made possible in part by the deep relationships and trust that have long been an integral part of supply chains in Japan.

Forward-thinking companies that built business continuity and risk management controls into their supply chains also had a significant advantage in bouncing back from disaster. One semiconductor manufacturer recovered more quickly than its peers thanks to a strategy it had developed in the aftermath of an earthquake three years earlier. As part of the strategy, the company created flexible manufacturing capabilities that could handle silicon wafers of varying dimensions. It also established continuity plans for shifting production to unaffected manufacturing facilities in other parts of Japan and Asia. Within three months of the disaster, five of the companys chip plants were already back at pre-tsunami production levels.



Looking Ahead

Managing risk has traditionally been an important part of supply chain management; however, the increasing complexity and connectedness of todays global business environment is taking supply chain risk and ramifications to a whole new level. In a world where local problems in one region can bring an entire global supply chain to its knees, a business-as-usual approach to supply chain risk is just asking for trouble.

Companies that were fortunate enough to not be deeply affected by last years disaster cannot afford to sit idle. Instead, they should use the experiences of others as a catalyst for building resilience into their own supply chains. Those that dont could end up learning things the hard way when the next disaster strikes.

Kelly Marchese is a principal, Siva Paramasivam is a senior manager and Michael Held is a specialist leaderall in the Supply Chain and Manufacturing Operations practice inDeloitte Consulting LLP.