The Importance of Supply Chain Resilience

Stephen DeAngelis

May 12, 2020

You’re probably sick (no pun intended) of reading articles about the Covid-19 pandemic and how it has shocked the international economy and stressed global supply chains. Disruptions caused by the pandemic revealed just how brittle some supply chains can be. Matt Leonard (@Matt_Lnrd) reports, “Almost 75% of U.S. businesses have experienced supply chain disruption as a result of the COVID-19 outbreak, according to a survey by the Institute for Supply Management (ISM). … This comes after a survey by Thomas found 60% of North American manufacturers say operations have been affected by the COVID-19 outbreak.”[1] Martijn Rasser (@MartijnRasser), a senior fellow with the Center for a New American Security, asserts, “With all the uncertainty swirling around the Covid-19 outbreak, one thing is crystal clear: the methods needed to prevent or contain an epidemic have exposed the vulnerability and fragility of U.S. supply chains.”[2] Lizzie O’Leary (@lizzieohreally) agrees. She writes, “When President Donald Trump invoked the Defense Production Act, it was telling in two respects. First, it showed that the full force of the federal government will be brought to bear in the manufacturing of vital medical supplies. Second, it underlined what has already become clear: The way our modern supply chain is built is incredibly fragile.”[3] Some might argue we shouldn’t be concerned because the pandemic is a rare event — the most significant health event since the 1918 Spanish Flu pandemic. Supply chain resilience, however, should not be taken lightly.

The danger of brittle supply chains

As a national security analyst, Rasser views supply chain brittleness from a national security perspective. He writes, “Concerns over certain supply chains are not new. In Washington, DC, policy circles, much attention has been paid to areas with a direct impact on defense and national security, such as semiconductors and rare earths. What the ongoing crisis lays bare, however, is the extent of the brittleness in areas that are not considered traditional national security matters but still have a tremendous impact on America’s ability to compete, defend itself and just plain function. The most striking example is that of pharmaceuticals.” You don’t have to be a national security analyst to have concerns about brittle supply chains. Rasser notes, “Even more concerning than being confronted with the fragility of the supply chain is the realization that U.S. companies often don’t fully understand their supply chains. In other words, firms can’t project how bad a situation will be because they don’t always know where key raw materials come from.”

When it comes to the health sector, O’Leary notes pharmaceuticals are not the only thing to be concerned about. She explains, “We’ve built a global supply chain that runs on outsourcing and thin margins, and the coronavirus has exposed just how delicate it is.” As an example, she discusses hospital supply chains. “In general, hospital supply chains work like this: A hospital (or nursing home or health agency) enters a group purchasing organization, or GPO, with several other providers. They pool together to order what they need, in bulk. When the system works, everyone saves money. But GPOs aren’t nimble; when there are problems, they’re felt across the system. And individual hospitals can’t immediately get what they need.” As result, she notes, “When demand spikes, everyone feels it.”

Medical supply chains are not the only ones feeling the pinch. Many economic sectors are seeing supply chain brittleness. Referencing the same studies cited by Leonard, O’Leary concludes, “The strain is obvious.” The CEO of the Institute for Supply Management, Tom Derry, told O’Leary, “You have to realize that there’s almost no industry sector — and when I say that, I mean manufacturing and nonmanufacturing — that isn’t reliant on China in the United States.” You might say the United States has a China problem. O’Leary writes, “Chinese materials and manufacturing are so pervasive that the average customer has no idea how many of their everyday products contain Chinese components, or how reliant on Chinese components most companies have become. ‘If you don’t have a first-tier supplier who’s sourcing from China,’ Derry said, ‘then your supplier’s supplier is.’ … Western companies find it cheaper to manufacture goods in China, and elsewhere in Asia, than to do so closer to home. Car parts, technology, fashion, medical gear, and drug components are particularly vulnerable to disruptions in Asian markets.”

Making supply chains more resilient

MIT professor David Simchi-Levi (@davidsimchilevi) told O’Leary both offshoring and just-in-time delivery have made supply chains more brittle. As a result, he told her, “Companies will come under pressure to diversify where they make their products, which will prove easier for some than for others.” Although some pundits clamor for the end of globalization, companies are beginning to appreciate a more refined and nuanced regional approach for supply chains might be better. Rasser suggests supply chains affecting the national interest should identified in very broad terms. Then, he writes, “Once these essential supply chains are identified, government officials should work with relevant business leaders to audit these networks, map them, and identify knowledge gaps. Ideally, the private industry would cooperate on these issues proactively. Many firms already dedicate considerable resources to supply chain risk management and data analytics.” Risk management experts have repeatedly suggested all companies should map their value chains, identify vulnerable links in the chains, and make them more resilient.

Years ago, María Jesús Sáenz, a professor at the MIT-Zaragoza International Logistics Program, and Elena Revilla, a professor of operations at IE Business School, wrote, “At many companies, the resiliency of the supply chain has not kept pace with the continually rising level of logistical complexity.” They suggested five things companies could do to make them more resilient. They are:

1. Identify strategic priorities. Sáenz and Revilla assert companies need to determine whether cost or response time matters more for a particular product line. They note every complex system requires trade-offs and those trade-offs will determine how supply chains should be configured.

2. Map the vulnerabilities of your supply chain design. According to Sáenz and Revilla, “Today’s supply chains are vulnerable on many fronts, including political upheavals, regulatory compliance mandates, increasing economic uncertainty, rapid changes in technology, higher customer expectations, capacity constraints, globalized market forces and natural disasters. Understanding where a company’s vulnerabilities lie is therefore important.”

3. Integrate risk awareness into the product and the value chain. Risk management is not just a problem for professional risk managers. Sáenz and Revilla suggest companies integrate risk awareness into the design of their supply chain and be pro-active. Pro-active mitigation includes designing resilient products (e.g., designing products that can use alternate components); and building in supply chain resiliency (i.e., designing supply chains in “terms of equipment, processes, manufacturing sites and external services, with a primary purpose of reducing the length of time and the extent of post-disaster recovery necessary”).

4. Monitor resiliency. Sáenz and Revilla explain, “To achieve effective transparency and resiliency, objective and comparable metrics [are] required.”

5. Watch for events. As with the Covid-19 pandemic, Sáenz and Revilla note, “Not every event can be anticipated.” Nevertheless, they suggest companies take proactive steps to help integrate risk management warning signs. They believe companies need “to evaluate the nature, magnitude and impact of a disruptive episode and to calibrate their responses accordingly.” George S. Day, the Geoffrey T. Boisi Professor Emeritus at the University of Pennsylvania’s Wharton School, and Paul J.H. Schoemaker, founder Q2 Tech, insist, “The costs of being slow to sense threats and opportunities on the competitive horizon can be devastating. … Businesses can avoid such perils by spotting directional shifts ahead of their rivals.”[5] They suggest companies consider risks in very broad terms. They write, “An effective strategy for detecting change early is assembling a diverse team of independent thinkers from both inside and outside the company who can, as one of our clients phrased it, ‘tap into the organization’s paranoia’ and invite everyone to voice hunches, concerns, doubts, or intuitions that would otherwise remain dormant.”

Concluding thoughts

About the same time Sáenz and Revilla were writing about supply chain resilience, another group of academics wrote, “To prosper in the face of turbulent change, organizations need to improve how they deal with unexpected disruptions to complex supply chains. Companies can cultivate such resilience by understanding their vulnerabilities — and developing specific capabilities to compensate for those vulnerabilities.”[6] Making supply chains less brittle, they insist, may require different supply chain strategies. They explain, “The reality is that supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable due to the lack of buffer capacity.” They add, “Adopters of resilience thinking have already demonstrated how they can augment traditional risk management practices with new capabilities that help them to anticipate, prepare for, adapt to and recover from disruptions. In some cases, they are able to treat disasters as opportunities for gaining competitive advantage.” The Covid-19 pandemic is a good time to learn what matters in order to make supply chains more resilient.

Footnotes
[1] Matt Leonard, “44% of supply chain pros have no plan for China supply disruption,” Supply Chain Dive, 11 March 2020.
[2] Martijn Rasser, “Pandemic Problem: America’s Supply Chains are Dangerously Brittle,” The National Interest, 17 March 2020.
[3] Lizzie O’Leary, “The Modern Supply Chain Is Snapping,” The Atlantic, 19 March 2020.
[4] María Jesús Sáenz and Elena Revilla, “Creating More Resilient Supply Chains,” MIT Sloan Management Review, 17 June 2014.
[5] George S. Day and Paul J.H. Schoemaker, “How Vigilant Companies Gain an Edge in Turbulent Times,” MIT Sloan Management Review, 18 November 2019.
[6] Joseph Fiksel, Mikaella Polyviou, Keely L. Croxton and Timothy J. Pettit, “From Risk to Resilience: Learning to Deal With Disruption,” MIT Sloan Management Review, 17 June 2014.