Small, targeted investments in supply chain resilience can make a huge impact in business continuity and, ultimately, performance.
Yes, brittle. Manufacturers and retailers have trimmed their supply chains to save money and engineered them within an inch of their lives to deliver just-in-time performance. This has made supply chains wonderfully efficient, yet woefully vulnerable—like an Indy Car without spare tires in the pit.
A fire, a storm, bankruptcy, or coup at a supplier’s location can suddenly crack a brittle supply chain and leave an otherwise high-performing company in pieces. The wounded firm becomes prey to competitors who’ve taken pains to make themselves resilient.
The Thailand floods of 2011 present a vivid example. Surging waters interrupted manufacturing for hard-drive makers. Yet, because the hard drives of one maker, Seagate, kept getting to its customers, the company ended the year with a 36% revenue increase and new market leadership. Blaming the floods, at least in part, rival Toshiba slashed its full-year profit outlook.
Poor labor conditions, untrained employees and cutting corners on risk management are other factors making supply chains brittle and often putting lives at risk in the process. For example, in Bangladesh, the collapse of a garment factory building has rightfully intensified focus on safety and building codes. Look for more business interruptions around such concerns and, hopefully, fewer disasters.
Supply chain vulnerabilities like these devastate otherwise healthy companies every day. When supply chains break down, customers don’t get products, companies lose revenue, brands are sullied, and the company goes into a hole.
No one wants a brittle supply chain. But what exactly does it mean for a supply chain to be resilient? In a resilient supply chain, any business interruption will be brief and make only a minimal impact on operations. Resilience will put a company in the same position Seagate occupied during the Thailand floods: ready to grab market leadership from rivals.
Resilience is a journey, and the best place to start is by considering four factors of resilience: flexibility, transparency, ethics and robustness.
MIT’s Yossi Sheffi writes eloquently about the power of flexibility in his book The Resilient Enterprise. He says standardization is an important strategy for flexibility. Adhering to standards in processes and product development dramatically simplifies switching suppliers, if necessary, or moving employees to new locations or roles. Cross-training also fosters flexibility, enabling employees to fill in where they’re unexpectedly needed.
When the supply chain is interrupted, everybody needs to know what happened and why. The more available the intelligence, the better the organization can respond as it switches supply routes, reschedules deliveries and otherwise minimizes disruption. Transparency also means having full day-to-day visibility into the entire supply chain. This visibility needs to go beyond the main supplier level to suppliers’ suppliers and their vulnerabilities.
As in so many elements of managing a successful enterprise, a business is only as resilient as the least resilient part of its supply chain. That’s why it’s critical to understand the strength of subcontracted suppliers in a given region or vertical industry.
Though hard to quantify, an ethical culture is essential to a resilient supply chain, in part because it infuses the other three factors of resilience. Without a strong ethical culture, it’s hard to operate with transparency, flexibility and robustness. Unethical compromises in the interest of short-term cost reduction, for example, can lead to under-investment in protecting facilities from natural disasters or corruption. Successful organizations have strengthened their ethical foundations with cultural narratives and actions that ensure that business goals don’t incent unethical behavior, and that any misconduct is exposed quickly.
A robust supply chain is a resilient supply chain. Robustness comes from a multitude of factors, including well-maintained transportation infrastructures, economies resistant to shocks, and protections against storms, fire and earthquakes. As business leaders make decisions about where to site offices, plants and distribution hubs, they need to look at all of these factors, as well as others that affect the quality of supply chains in individual countries.
You might wonder: How much will resilience cost? Companies have worked so hard to make their supply chains lean; do they now need to put on a layer of fat? No, they don’t.
Small, targeted investments in supply chain resilience can make a huge impact in business continuity and, ultimately, performance. So it’s not a choice of efficiency versus resilience. It is indeed possible—with a lot of thought, work and intelligence—to be lean without being brittle. It’s like stocking spare tires for the race. Vulnerability is a choice, and resilience is its own ROI.
Jonathan W. Hall is chief operating officer at FM Global, a commercial and industrial property insurer. Appointed to his current position in 2014, he is an expert in high hazard risk industries, including power generation and forest products. Previously, he was executive vice president and, before that, senior vice president, underwriting and reinsurance; and senior vice president, manager, Eastern division. He is a member of the Global Insurance Chief Operations Officer Roundtable (GICOOR) and the Next Generation Leadership Forum.
The FM Global Resilience Index is a data-driven tool and repository that ranks the business resilience of 130 countries. It is designed to help executives evaluate and manage supply chain risk. Nine key drivers of supply chain risk are grouped into three categories: economic, risk quality and supply chain factors.