Supply Chain Resilience: What It Takes
Supply chain resilience is about building the right level of redundancy in operations and being able to exploit it via decision agility - the right level of process and digital maturity.
With the disruption caused by the Covid 19 pandemic, there is plenty of talk about building up resilience. But what does supply chain resilience mean? Let's deconstruct the buzzword into the desired effect and what it takes to achieve it.
Desired effect: not being negatively affected by uncertain events.
What it takes: a combination of redundancy and decision agility.
Redundancy definitely does not sound as nice as resilience. Redundancy implies extra cost to achieve the same result. And while decision agility has positive connotations, the fact is that it also requires more effort (cost). Resilience is expensive. It is an insurance against large one-time losses. How much is it worth investing to achieve the desired effect?
The Two Levers of Resilience
The two levers of resilience are redundancy and decision agility. In principle, a company can achieve (optimal) resilience by combining these levers smartly. Let's define each lever and evaluate the consequences.
Redundancy means having a plan B and paying for it even if you are not using it. It means increasing inventory levels, and thus also increasing obsolescence risk. It means having underutilized production lines or having vendors at the ready for snap make-or-buy decisions - booking their capacity is expensive. It means having flexible (more expensive) contracts with logistics providers. And it means having several alternative vendors for critical raw materials, ideally also geographically diversified. Again, an additional cost.
Decision agility means being able to act on short term signals. It means investing in information capture (forecasting, interfaces to partners) to sense demand changes and external supply constraints. And it means investing on the ability to process that information and act on it. That implies having alternate vendors, materials and routes as available options (if with an added cost) in the supply chain planning system, and having the business rules coded to put them into action without delay.
A pure redundancy strategy will cost too much upfront to be competitive. A pure decision agility strategy is useless if the minimum required material redundancy is not in place (and that itself is the uncertainty at the core of the problem!).
How to Make Resilience Happen
The key to resilience is to balance the two levers. Build redundancy in the critical supply chain risks and ensure you have these systematized so that, when the time comes, there is decision agility.
Choosing where to build redundancy is a strategic exercise that should be carried out regularly with rigorous methods (say, annually). Qualitative methodologies, such as scenario planning or causality analysis help going about it in a structured manner. Quantitative exercises, such as sensitivity analysis can help discover weak points. Knowing what the rest of the industry is doing and the main upstream and downstream industries are doing is also important.
Ensuring decision agility requires having the right planning technology, the right processes and a high level of discipline in place. Make sure the time phased safety stock calculation works. Make sure that alternate vendors are in the system. Make sure the interface to the logistics provider is working for edge cases as well. And make sure your planners know what to do and are empowered to make decisions in face of uncertainty.
How Much Resilience Is Right for My Company
In the end, it is not about jumping on the resilience bandwagon only to overreact and later jump back on the lean bandwagon. It is about finding the optimum level of resilience (where to build redundancy and how much plus having systems and processes for agile decisions) for your company and situation and gradually adjusting. This can be done by projecting the cost of resilience and comparing it to the financial impact under a variety of scenarios.
Black swan events will continue to happen. Sometimes the insurance you picked will be well placed, sometimes it won't. It is a risk management exercise and while luck plays a big role, being informed and prepared - playing at your optimum - certainly helps.