Supply Chain Risk Management: The Five "Rs" of Resilience and Response

Stephen DeAngelis

February 11, 2013

Recently, the blogsite Riskviews: Commentary on Risk and ERM posted an article entitled Five components of resilience — robustness, redundancy, resourcefulness, response and recovery. [24 January 2013] The post was “adapted from the WEF Global Risks 2013 Report” and was only minimally edited to show how the components discussed could be applied to an organization as well as a country. The article started by discussing three components that specifically relate to resilience (robustness, redundancy, and resourcefulness). The author notes, “These components should be designed into a system and, as such, will enable assessments of an organization’s inherent resilience capabilities.” The first component discussed was robustness.

“Robustness incorporates the concept of reliability and refers to the ability to absorb and withstand disturbances and crises. The assumptions underlying this component of resilience are that: 1) if fail-safes and firewalls are designed into an organization’s critical networks, and 2) if that organization’s decision-making chains of command become more modular in response to changing circumstances, then potential damage to one part of an organization is less likely to spread far and wide.”

The fail-safes and firewalls are intended to halt negative effects of serious disruptions rather than to create barriers to information flows or hinder horizontal organizational processes. However, doing one without the other is a delicate and difficult challenge. The article provides the following examples of attributes associated with robustness:

“– Monitoring system health: Regularly monitoring and assessing the quality of the subsystem ensures its reliability.

“– Modularity: Mechanisms designed to prevent unexpected shocks in one part of a system from spreading to other parts of a system can localize their impact, as happened with the contagion from investment banking to retail banking during the 2007-2008 financial crisis.

“– Adaptive decision-making models: Networked managerial structures can allow an organization to become more or less centralized depending on circumstances, such as when branch offices of the Japanese retailer Lawson’s continued operating through the serious disruptions of the Great East Japan Earthquake in 2011. These measures can include having in place the right investment and incentive structures to overcome competing interests.”

In other words, robustness involves having a continuity of operations plan in place that takes into account the nature of the business, how far-spread the organization’s operations are, and what is going to happen if part of the organization is cut off from other parts of the organization. The next component discussed is redundancy.

“Redundancy involves having excess capacity and back-up systems, which enable the maintenance of core functionality in the event of disturbances. This component assumes that an organization will be less likely to experience a collapse in the wake of stresses or failures of some of its infrastructure, if the design of that organization’s critical infrastructure and institutions incorporates a diversity of overlapping methods, policies, strategies or services to accomplish objects and fulfill purposes.”

As every supply chain professional knows, redundancy comes with a price tag; but, in times of crisis, the return on investment can be significant. In fact, redundancy can save the company. With the number and severity of crises that have occurred around the globe over the past few years, more and more companies are building redundancy into their supply chains. The article provides the following examples of attributes associated with redundancy:

“– Redundancy of critical infrastructure: Designing replication of modules which are not strictly necessary to maintaining core function day to day, but are necessary to maintaining core function in the event of crises.

“– Diversity of solutions and strategy: Promoting diversity of mechanisms for a given function. Balancing diversity with efficiency and redundancy will enable organizations to cope and adapt better than those that have none.”

It has often been pointed out that having more than one supplier of the same part in the same geographical location does not constitute redundancy. That’s a lesson that computer makers learned when floods in Thailand affected the availability of parts being manufactured there. The final attribute directly associated with resilience is resourcefulness.

“Resourcefulness means the ability to adapt to crises, respond flexibly and – when possible – transform a negative impact into a positive. For a system to be adaptive means that it has inherent flexibility, which is crucial to enabling the ability to influence of resilience. The assumption underlying this component of resilience is that if organizations can build trust within their networks of suppliers, employees and customers and are able to self-organize, then they are more likely to spontaneously react and discover solutions to resolve unanticipated challenges when larger industry and community institutions and governance systems are challenged or fail.”

One of the best ways to foster resourcefulness is to test crisis response plans routinely. Individuals who are routinely exposed to realistic simulations of crises are much more likely to understand how to react when the unexpected occurs. Even if the exact circumstances of a crisis have not been part of an exercise, people are more likely to be respond resourcefully if they have been exposed to an exercise. The article provides the following examples of attributes associated with resourcefulness.

“– Capacity for self-organization: This includes factors such as the extent of social and human capital, the relationship between social networks and organizational structures, and the existence of institutions that enable face-to-face networking. These factors are critical in circumstances such as failures of government institutions when organizations need to self-organize and continue to obtain essential services.

“– Creativity and innovation: The ability to innovate is linked to the availability of spare resources and the rigidity of boundaries between disciplines, departments and social groups within the organization.”

As noted above, open communications and horizontal processes are good for a business because they break down traditional organizational silos. As the article points out, they also have value added when it comes to facing a crisis.

The article concludes by discussing the two components associated with “resilience performance”; namely, response and recovery. The article states, “These two components of resilience describe how a system performs in the event of crises. They provide evidence of resilience when actual crises occur. Response and recovery are dependent on risk, event and time. These components will provide the ability to compare systems and feed the measurements and results to calibrate the resilience characteristics.” The article first discusses response:

“Response means the ability to mobilize quickly in the face of crises. This component of resilience assesses whether an organization has good methods for
gathering relevant information from all parts of society and communicating the relevant data and information to others, as well as the ability for decision makers to recognize emerging issues quickly.”

Business speed appears to accelerate every year. Keeping up can be difficult. When it comes to responding to a crisis, however, it can be even more challenging. Often normal lines of communications are no longer available because power grids are gone, cell towers are destroyed, or communication systems are overwhelmed. That means a lot of thought needs to go into what constitutes “good methods for gathering relevant information.” It has been pointed out that nowadays social media is likely to report the occurrence of a devastating event before such news is released by official channels. The article provides the following examples of attributes associated with response.

“– Communication: Effective communication and trust in the information conveyed increase the likelihood that, in the event of a crisis, stakeholders are able to disseminate and share information quickly, and to ensure cooperation and quick response from the audience.

“– Inclusive participation: Inclusive participation among all stakeholders can build a shared understanding of the issues underpinning crises and acute risks to the organization, reduce the possibility of important interdependencies being overlooked, and strengthen trust among participants.”

A number of analysts have encouraged businesses to adopt the use of social media as a routine means of communicating between stakeholders. If stakeholders are used to communicating through these more informal channels, they are more likely to find ways to communicate and coordinate during a crisis. The final component discussed in the article is recovery.

“Recovery means the ability to regain a degree of normality after a crisis or event, including the ability of a system to be flexible and adaptable and to evolve to deal with the new or changed circumstances after the manifestation of a risk. This component of resilience assesses the organization’s capacities and strategies for feeding information throughout the organization, and the ability for decision-makers to take action to adapt to changing circumstances and incorporating new situations into business strategies.”

Recovery is obviously a huge part of being resilient. A business that can’t recover is no longer a business. A business that can only recover slowly may not be a business for long. A business that can recover more quickly than its competitors may actually find that a crisis was turned into an opportunity. The article provides the following examples of attributes associated with recovery.

“– Active ‘horizon scanning’: Critical to this attribute are multi-stakeholder processes tasked with uncovering gaps in existing knowledge and commissioning research to fill those gaps.

“– Responsive feedback mechanisms: Systems to translate new information from horizon-scanning activities into action – for example, defining ‘automatic policy adjustments triggers’ – can clarify circumstances in which policies must be reassessed.”

Active scanning, as discussed above, is a good job for artificial intelligence systems using intelligent agents that can alert decision makers to potential crises in real time. The key, of course, is teaching the intelligent agents what to look for and when they should trigger an alert to decision makers. The article concludes, “There are many individual stakeholders who would benefit from greater shared resilience but currently lack either the incentive or feel too pressed for time and resources to take the necessary actions.” Unfortunately, when a crisis occurs, lack of interest turns quickly into regret. The points made in the article are excellent for organizations to keep in mind as they craft their crisis response and continuity of operations plans.