Scholarly research in the last twenty years has defined some key constructs of supply chain resilience. These are basically core elements that determine the level of resilience within a network of suppliers.
Some of the most important ones can be listed and described as follows:
- Agility: “The ability to respond rapidly to unpredictable changes in demand or supply”;
- Velocity: “The total time it takes to move product and materials from one end of the supply chain to the other”;
- Visibility: “A clear view of upstream and downstream inventories, demand and supply conditions, and production and purchasing schedules”;
- Flexibility: This is emphasized by Sheffi as one of the three main ways to build SCR;
- Collaboration: “A high level of collaborative working across supply chains can significantly help mitigate risk”.
Practitioners can adopt these concepts as metrics to evaluate how resilient their supply chains are, using them as the starting point for their supply chain policies. This article aims to do this, focusing mainly on the importance of flexibility within the supply chain, especially in the context of the pandemic that has deeply hit many countries.
Flexibility
Professor Yossi Sheffi, a leading supply chain scholar from the Massachusetts Institute of Technology, talks about the trade-off between having several redundancies and back-ups and avoiding investments in large amount of stocks that might remain unused. In doing this, he points out that instead of having unnecessary redundancies along the chain it might be better to build interchangeable resources. In practice, this could mean cross-training employees, utilizing similar components for different products and building sound, reliable relationships with suppliers. Reducing the diversity of components used across different vendors also means avoiding concentrations of risk, since there would be more interchangeable suppliers.
Another key factor in ensuring flexibility is collaboration among suppliers. Making sure that the different links of the chain are engaged in the process and reactive in the case of an incident is key to providing a fast response. One such case was that of Boeing during the 2011 earthquake which took place in Japan, where the company had several production facilities. Whilst the incident had an obvious impact, Boeing was able to mitigate it by working closely with its suppliers and forging new partnerships with vendors that could operate. It is worth noting that in this case the good relationship with first tier vendors ensured a higher visibility on the other tiers of the chain.
This idea of collaboration and adaptation during a crisis in the supply chain is proving effective in Italy during the Covid-19 emergency, as organizations from various sectors have converted some of their core activities to producing medical equipment. This, for instance, would be the case of clothing manufacturers that are now making face masks to protect from the virus. Some local authorities in the country have even published a call for cooperation between the public and the private sector to receive the necessary supplies.
Such collaborative approach culminated with one of the most surprising and creative types of support the government has received thus far. This consisted in a group of engineers coming up with a model to produce valves for respirators through 3D printing as a response to the request from a hospital in Lombardy that was running out of equipment.
It’s not only about disruptions
An article from Professor Paolo Trucco, from the Polytechnic of Milan, makes an interesting comparison between the supply chain impairments linked to Covid-19 and those caused by the Japan earthquake (and the related tsunami and nuclear incident) and the Thai floods in 2011. The article highlights how companies that had focused on preparedness during “peace times” were ready to react quickly and swiftly, mitigating the potential devastating effects of the incidents. Preparedness measures included sound business continuity management systems that allowed organizations such as Nissan to push through with no annual losses. It is important to point out that fewer or no losses means that the many jobs that depend on a supply chain, especially if very large, will have a better chance to be preserved, and so will be the financial stability of the employees.
At the moment, some of the sectors that seem to suffer the toughest financial impact are the high-tech and the automotive ones, as they tend to be very reliant on Chinese production centres. However, they are not the only ones that will have to endure lasting changes as a consequence of the Covid-19 crisis. Some of these changes will be a result of the response to the outbreak, rather than the outbreak itself. Personal habits might change and organizations might too; for instance, work from home practices might intensify or certain online businesses could experience growth as opposed to physical shops. All these shifts propagate through different and at the same time interconnected supply chains, which therefore need to be resilient.
Having a flexible supply chain with strong connections and foundations helps not only to stay on top of the twists and turns during an incident but also to handle the change in the market that follows in the aftermath. In fact, flexibility might help an organization manage any shift in the demand and supply, making the supply chain more efficient regardless of potential disruptions.
The bullwhip effect
This process is evident in the case of the so-called “bullwhip effect”. This consists in a company cutting down orders from its suppliers as it experiences a sales drop. If the drop is at 10%, the company might guess that the market might slow down even further and therefore cut its orders from tier1 suppliers at 20%. Tier 1 suppliers might apply the same thinking and cut their orders by twice that amount, at 40%, with suppliers in farther tiers doing the same at an exponential rate. Once market conditions restore, the effect reverses, causing further upheaval in the supply chain. The upstream, smaller companies are usually those to suffer the most, as the larger ones might decide to move to different markets due to such uncertainty . The image below from Fisher et al. (1997) shows the impact of a supplier discount on the supply chain, which misleads the perception of the demand creating unnecessary redundancies. In comparison, the impact of a much less predictable phenomenon such as a pandemic could unsettle supply chains by far greater deal.
Implementing a sound business continuity management system, in harmony with risk management programmes, would help mitigate unpredictable swings such as the bullwhip effect, by providing a clear idea of which the critical vendors are and how to face change without causing unnecessary turmoil. In addition, when a BCMS is well implemented in the supply chain and there is the right awareness around the subject, this helps cascade a culture of resilience through the entire supply chain ecosystem, even the smaller vendors.
Key takeaways
In light of the analysis above, we can conclude that:
- The metrics highlighted in this article can be used to measure the performance of a supply chain;
- Flexibility can be built through the dissemination of interchangeable skills and resources across the chain, avoiding concentrations of risk;
- Preparing for unexpected disruptions also helps deal with everyday changes in demand and supply, making the supply chain more efficient;
- Having a collaborative attitude and a BCM culture in the supply chain can help overcome unwanted phenomena such as the bullwhip effect;
- Collaboration and communication with suppliers is key to ensuring swift responses. There have been previous cases, as shown in this analysis, where collaboration made the difference and provided a competitive advantage;
- Organizations downstream should make sure a BCM culture is propagated through the supply chain, by working closely with their immediate suppliers and making they do the same with theirs.
