For decades, globalization, decentralization, outsourcing, and just-in-time have led organizations to optimize their supply chains for cost-efficiency. As a result, supply chains have become more vulnerable, as more factories or warehouses and more lanes increase the risk of disruptions spreading through highly interconnected networks. In such networks, even a local outage can negatively impact businesses on a global scale.
In times of crisis, today's highly globalized and interconnected businesses are pushed to their limits, especially in their supply chains.
Creating resilient supply chains
This phenomenon goes along with a shift in corporate thinking, where resilience has become popular as a counterpart to efficiency and lean principles in supply chain management. Today’s supply chain managers need to consider how to assess and increase supply chain resilience.
Current methods still focus on handling risks with high probability and little impact, and they often rely on IT tools to provide alerts for operational risks. Although operational business continuity is an important component of resilient supply chains, it is not always possible for organizations to respond to every alert – due to limited capacity and other priorities.
In addition, operational measures alone are not sufficient to handle the effects of previously unknown large-scale events with unprecedented consequences. Yet from the Covid-19 pandemic to global conflict, these kinds of large-scale events are growing more common in today’s world.
The role of risk management in supply chain resilience
Boosting supply chain resilience across an organization requires a shift of focus. Rather than seeing risk management as “firefighting” focused on individual disruptions to ensure operational business continuity, businesses need to take a more proactive and holistic approach. The existing strategic design of the supply chain should be the starting point for identifying potential risks – instead of starting with possible disruptions and projecting their effects on the supply chain.
What does an organization need to consider when establishing resilience-oriented supply chain risk management?
Practical shortcomings of common approaches:
- No differentiation in terms of size of risks’ impact
- Reactive supply chain risk management, rather than preventive
- Overwhelming number of alerts for an unlimited number of operational risks
- Lack of follow-up processes to manage risks
- Existing software for strategic decision support is costly without providing sufficient benefits
- No clear guidelines to measure strategic resilience
Requirements for a resilience-oriented approach from supply chain risk management theory:
- High practical applicability
- Appropriate cost-benefit ratio
- Consideration of the characteristics specific to the supply chain in question
- Analysis based on the best available data
- Scalability of the analysis
- Holistic view of and transparency within supply chain
As a starting point, supply chain managers should gain in-depth knowledge of the vulnerable elements in their network, such as production sites, suppliers or lanes, rather than gathering a list of detailed risks that could affect any part of the supply chain at any time. Creating a list of risks is not efficient, as it relies on random identification of relevant risk events – those that could critically affect the network. In contrast, if supply chain teams elaborate from network effects to potential causes based on an understanding of their network itself, risk definition becomes much more focused.
Putting resilience-oriented risk management into practice
Together with my co-authors, we have defined three principles to guide this redefined approach to supply chain risk management for strategic resilience analysis:
Key resilience areas (KRA) for principle two include aspects like geographic conditions, sending and storage strategies, delivery lead times, internal material flows, and more.
With these principles, organizations can shift to proactive supply chain risk management and focus on resilience. Zooming in on the current supply chain to identify risk potential, rather than anticipating risks and projecting them onto the supply chain, allows a customized and much more effective approach.
Have questions or comments?
This article is based on “Impact-oriented risk management: guiding practitioners towards a resilient supply chain design”, a paper published January 2, 2024, in the journal Sustainable and Resilient Infrastructure by Ole Hansen, manager at 4flow research, Prof. Dr. Frank Schätter, Professor of Supply Chain Processes Management, and Prof. Dr. Florian Haas, Professor of Purchasing and Procurement Management. Professors Frank Schätter and Florian Haas are affiliated with the study program Purchasing, Logistics and Supply Chain Management at the business school at Pforzheim University of Applied Sciences.
Author
Ole Hansen
Manager
4flow research
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