The Seven Core Capacities of Supply Chain Resilience

Editor’s Note: James B. Rice Jr, Deputy Director, MIT Center for Transportation & Logistics ([email protected])

Human nature leads supply chain practitioners and pundits to focus on the most recent disaster experience, a tendency called recency bias. Today, a major area of focus is how to prepare for the next pandemic in light of the Covid-related product shortages that are disrupting supply chains.

Issues that attracted attention before the coronavirus hit, such as the impact of trade wars and how to shift production out of China, have been pushed off companies’ radar screens by recency bias.

In addition to this tendency, humans often display a fascination for the lurid details of disasters. The media industry’s “if it bleeds, it leads” philosophy seeks to capitalize on this predisposition.

Together, these inclinations compel supply chain practitioners to focus on risk. While companies should understand and mitigate their exposure to supply chain risk, we believe that many become obsessed with risk assessment at the expense of building resilience – the more important objective. We’ve worked with companies that made significant investments in developing sophisticated risk assessment and planning programs, only to realize that their efforts failed to make their supply chains resilient.

Organizations need to prepare for predictable outcomes and reinforce their supply chains so they can withstand serious disruptions. This approach requires them to build resilience – not just to focus mainly on managing risk. In this article, we introduce the seven core capacities that are the building blocks of resilient supply chains.

Why focusing on risk is not enough

Fixating on the pursuit of managing risks in supply chains is like chasing wind in that it is impossible to capture the unlimited sources of risk, with each one representing a different cause for the supply chain failure. Supply chain risks fall into general categories such as natural disasters (the Tohoku earthquake and tsunami), industrial accidents (the port explosion in Beirut), infrastructure failure (Trans-Siberian railroad bridge collapse), terror attacks (the Colonial pipeline shutdown), and labor action (the US West Coast lockout), to name but a few. General Motors counted over 120 different high-level financial, strategic, operational and hazard risks, and these can expand into thousands of risks when applied at an operational level.

Given the extent of the risk universe, it is impractical for organizations to create mitigation plans for every type of threat. Instead, they should seek to manage the most critical risks, and make their supply chains resilient enough to endure disruptions – including those that are outside of their control.

Hence, risk management is about reducing the probability of experiencing the impact of a risk event, while resilience is about creating the ability for the supply chain to continue operating in the face of a risk event or disruption. Moreover, the need for resilience is not negated by managing risk. Reducing the probability and severity of a disruption can reduce the need for resilience – but it doesn’t eliminate it.

Anatomy of Resilience

Making a supply chain resilient implicitly involves creating business continuity plans (BCPs) to ensure continued operations in the face of a supply chain disruption. These are plans to restore lost capacities, independent of HOW the operational capacities were lost.

The good news is that there are only seven ways in which a supply chain can fail. Each failure (also known as failure mode) involves the loss of at least one of the core capacities listed.

1. The capacity to acquire materials (maintain supply).
2. The capacity to ship and/or transport products.
3. The capacity to communicate.
4. The capacity to convert (internal manufacturing operations).
5. The human resources (personnel) capacity.
6. The capacity to maintain financial flows.
7. The capacity to distribute products to customers including consumers.

Regardless of how the capacity was lost (due to natural disaster, industrial accident, infrastructure failure, for example), the outcome is predictable – capacity loss.

Framing possible operational failures in this way gives rise to a powerful approach to building resilience in supply chains. In this approach, companies focus on avoiding or managing a limited number of predictable outcomes.

In other words, while the sources of risk are unlimited, the outcomes of risk events are not.

Let’s look at one example to illustrate this approach. Consider these disruptions:

• A typhoon destroys a supplier’s factory.
• A pandemic prevents a supplier from operating.
• A labor action at a supplier halts production.
• The local government closes a supplier’s plants for environmental reasons.

These scenarios represent multiple sources of risk but only one outcome: the loss of the capacity to acquire materials (supply) for some period of time

Focusing on this outcome helps companies to define the actions needed to steel their operations against such disruptions and make their supply chains more resilient.

Given that these are predictable outcomes, a resilient supply chain is one that can recreate or maintain the capabilities that support each of these seven operational capacities. Succeeding in this mission will help to secure the survival of supply chains in crisis situations.

To be clear, this mission is neither easy nor simple. However, it is easier and simpler to accomplish than attempting to prevent thousands of risks, many of which are external and outside the control of the company.

Questions still unanswered

The approach to preparing for adversity outlined in this article provides a clear path to building resilient supply chains – but there are many challenges that still need to be addressed. For example, how do companies recreate the capabilities described above, and how much should they invest in resilience? 

Also, what can this approach teach us about resilience and risk management when applied to past experiences of managing disruptions?  In the second part of this two-part series, we will offer some insights from such an analysis.

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