In today's volatile and interdependent economy, even the best organized companies are increasingly vulnerable to many types of supply chain disruptions that are beyond their control.
This white paper details how mitigating supply chain disruptions can create a competitive advantage. Executives, board members and supply chain leaders will better understand the need for mitigation and how to go about it.
The author, Professor Alan Braithwaite, draws upon established case material and risk management principles in the paper. Topics include:
• How supply chain glitches destroy shareholder value
• General principles of risk mitigation and recovery
• The global economy and the implications of extended supply chains
How Generative AI Is Transforming Your Business | Byond Growth Insights | Apr...
Supply Chain Recovery is a Competitive Capability
1. Emergency Notification • Incident Management
Overcoming Operational Glitches:
Supply-chain Recovery is
a Competitive Capability
The need to design and plan for supply-chain risk mitigation
and recovery, and how to go about it
Professor Alan Braithwaite, Cranfield University and LCP Consulting
3. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
Business success may depend on a process to deal with events that can-
not be designed out and for which the full impacts cannot be anticipated
or predicted. Response and recovery in a global business involves par-
ties working remotely to a common process with fast communications,
ensuring consistent information and actions on short lead-times.
Boards now recognize that their supply chain is their business and exter-
nal dependencies and risks are built in at every step. Since it is impos-
sible and very costly to plan and design for every contingency, recovery
is a strategic capability. Key to successful recovery is the ability to com-
municate seamlessly throughout the supply chain.
“If a man presumes certainty, he shall end with doubts, but if
he will be content with doubts, he will end with certainties”.
Francis Bacon 1561-1626
The Global Economy and the Implications of
Extended Supply Chains
The global economy for world merchandise trade has been expanding at
a rate that is between 2 and 4 times the rate of GDP. The figures from the
WTO are illustrated in Figure 1. (i)
Figure 1: Growth in the World
Merchandise Trade
It has been one of the most pronounced and remarkable economic trends
of the last 40 years. It has both fueled and enabled the growth in GDP of
most developed countries.
The risks and rewards of this change have been the subject of increasing
academic and journalistic analysis and commentary from a variety of
perspectives.
Page 3
4. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
Rosabeth Moss Kanter (ii) identified that communities develop a criti-
cal mass of capability to take leadership in specific industries where the
symbiotic connections of education, culture, research and commercial
skills build a powerful platform. These communities then feed on their
success.
She introduced the idea of the three C’s: concepts, capabilities and con-
nections. Competitive advantage is about being able to initiate leading
concepts: have the capabilities to deliver them: supported by the con-
nections from an extended network. These connections enhance the core
capability with skills that do not exist inside the firm or organization
itself. Implicit in this simple idea is that the skills required to be suc-
cessful are so diverse that no one organization can sustain them at the
required level.
In simple terms, a business is its supply chain – the dependency on oth-
ers is total: covering relationships with government, regulators, educa-
tion, research and suppliers of products, services and logistics.
This extended chain has been identified by many authors as being a ma-
jor source of risk to sustainable business performance. Braithwaite and
Hall in 1999 (iii) pointed to the increasing awareness of vulnerability
arising from anticipating the millennium bug.
Recent work at Cranfield on supply chain risk and vulnerability (iv)
created Figure 2, which highlights the risk profile of the extended sup-
ply chain. Every link is liable to fail and, even through the individual
statistical probability is very low, the impact of such a failure cascaded
through the supply chain may accumulate into a major disruption fur-
ther down (or up) the line.
Figure 2: Risk is present at every
point in the supply chain
The economic dependence of a business on its suppliers is massive;
the rule of thumb is that external purchases for materials, components,
services and indirect supplies are 55% to 60% of revenues. In some cases
this will be very much higher and can exceed 90%.
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5. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
The drive for globalization has been driven by the development of low
cost sources of supply, giving significant economic advantage to buyers;
they have been able to increase profits directly or reduce prices in order
to drive market share, volume and hence profits.
The consequence of this dash for lower cost has been to increase the en-
demic risk profile in the supply chain. Supply chain theory has its roots
in industrial dynamics and control science which shows that extended
response times create an intrinsically less stable system.
Cutting lead times is good, extending them is bad. The implication of
the growth shown in Figure 1 is that less and less business is purely “lo-
cal for local” and risk will increase.
The supply chain risks of global sourcing have now been widely dis-
cussed; Wilding and Braithwaite at Cranfield (vi) and Sheffi (vii) at MIT
provide useful references for further reading. In essence, the conclusion
is that the dollar value of international sourcing is compelling but the
risks can be substantial and may not always have been addressed. Fig-
ure 3 illustrates the greed-to-risk relationship; the financial motivation
has generally been the winning driver in strategic terms.
Figure 3: The greed-to-risk
relationship
It is wrong, however, to think that risk is exclusively associated with
global sourcing and trade; rather it is global sourcing and supply that
has brought the issue into sharp focus. The underlying theme is bur-
geoning complexity in our supply chains. For example:
• Channels of customer demand with internet trading and e-fulfill-
ment expanding rapidly alongside heritage routes to market
• Product and service variety increasing exponentially and creating,
in turn, additional complexity and risk arising from conflicting de-
mands on capacity
• Outsourcing of logistics and supply, with companies engaging a
wider variety of services
• Consolidation and specialization of sourcing and supply taking
place to secure economics increasing, irrespective of whether it is
off-shored or global
Page 5
6. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
Introducing a Supply Chain Risk Management
Framework—Design for Resilience and Mitigation
The economic pressure described in the previous section is inexorable;
it is forcing companies to increase customer choice and service while at
the same time reducing cost. The question is how does a company as-
sess, internalize and mitigate the associated risks?
Work at Cranfield on behalf of a British Government Department (v)
developed a classification of the types of risk to which a business is
exposed.
Risk was classified into those external to the firm, through demand,
supply and environmental factors, and those which are internal, and
potentially self-inflicted, through processes, controls and lack of risk
management.
This concept is illustrated in figure 4, which contains a brief description
of the types of risk in each segment. Mitigation is the most crucial seg-
ment in this model since it introduces the idea that risks can be identified
and managed, down if not out, through design of the chain and the way
in which it is set up and operated. A workbook was created to support
the process of identifying risks and is a helpful resource in this process.
Figure 4: The dimensions of
supply-chain risk
The workbook invites management teams to consider their supply
chains in a structured way in order to identify their risks and vulnerabil-
ities in terms of the scale, cost, duration and recovery actions that would
be needed should risk turn to reality. This provides a cost and time
estimate for each potential failure irrespective of its probability which,
by definition, is low.
Alongside this estimate the process invites the team to consider the miti-
gating actions through which they can design out the risks together with
the costs of such measures.
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7. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
There are a number of important insights from such work that are some-
what counter-intuitive.
• Mitigating measures tend to converge for a number of risks – doing
some things differently will catch a lot of the potential problems
• The cost of these measures is often very small and certainly insignif-
icant in relation to their consequences, were they to occur. So this
is about organization, governance and careful planning in order to
have the benefits while reducing the risk
• The consideration of probability is a natural tendency but totally
unhelpful. The probabilities are, by definition, very small; otherwise
they would have been designed and managed out as ‘known issues’
• In the terms of Donald Rumsfeld, we are interested in the ‘known-
unknowns’ and the ‘unknown-unknowns’. A good process of dis-
covery can help to turn many of these into ‘knowns’ where mitiga-
tion and responses can be planned; they may be remote but they are
more predictable than was originally thought
• This means that the self honesty of the process is critical to its suc-
cess and, in the context of any organization’s power vortex, is dif-
ficult to achieve
• Even when many unknowns are converted to knowns, there will still
be events that cannot be anticipated; it’s wise to have a robust recov-
ery process to deal with them as they arise, which is also mitigation
Given the evolution of tools and structures, it’s clear that failing to plan
is like planning to fail, and in the future, we must anticipate the unex-
pected.
The questions that arise from the analysis so far are:
• What do glitches really cost? Is it worth the effort to plan for them?
• What can we learn from the experience of others?
• What general principles can be drawn from those experiences?
• How should a company organize to be able to recover from
problems?
• How can the MissionMode platform with LCP’s expertise support
accelerated recovery?
Supply Chain ‘Glitches’ Destroy Shareholder Value
Glitches cost a lot more than might be imagined. The impact can be huge
as experienced in terms of share price and shareholder value. These
events also hit executives’ bonuses and share incentive schemes. At the
extreme they are career limiting.
The basis for this statement is provided by some formative research by
Singhal and Hendricks (viii) who analyzed a sample of 861 profit warn-
ing announcements from publicly quoted companies linked to supply
chain difficulties.
Page 7
8. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
They coined the term ‘glitches’, which in many cases is a euphemism for
a full-scale disaster. They found that announcement of these problems
was associated with an 8.62% market adjusted reduction in shareholder
value; if a period of 60 days before and after the announcement is includ-
ed the effect is about minus 20%. This finding is illustrated in Figure 5.
Supply chain problems for the purpose of their research were classified as
including: parts shortages; changes by customers; ramp and roll out prob-
lems; production problems; development problems; quality problems.
These so-called ‘glitches’ are occurring frequently and for a wide range
of causes; it is clear that such issues are not isolated problems. They
erode shareholder value to an extent that must be stomach churning for
the CEOs involved.
Figure 5: The effect of ‘glitches’
on shareholder value
They affect the company, customers and suppliers alike, often with seri-
ous consequences. What is more, supply chain value is perishable; any
‘problem’ will have a recovery period during which the performance of
the organization is sub-optimized in terms of either or both revenue and
cost. Capacity and performance is lost forever.
Boards, therefore, are having to start to make more structured choices
about the exposure to risk that they will mitigate through design and
that which they elect to deal with ‘if it happens’. It was not always this
way; the profit motive and investor short-termism has been such that
“profit today” was better than “sustainability in the future”.
But governance and sustainability are now the watchwords; compli-
ance and transparency are dictating the need for new approaches to risk
management.
As the following examples show, the risk agenda is a matter of corporate
and executive survival. The unexpected is lying in wait at every junc-
tion. “A business is its supply chain—risk and dependency is built in.”
Page 8
9. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
Case Studies of Supply Chain Risks: What We
Can Learn from Experience
There has been major publicity for many cases of supply chain failure.
Two examples from a few years ago are:
• British Airways for its disastrous implementation of Terminal 5 at
London’s Heathrow
• Bear Stearns, and others, who lost their independence as a result of
investing in sub-prime derivatives.
These incidents may not immediately appear to be supply chain related,
but closer inspection should change that view
British Airways commissioned a new factory (terminals process passen-
gers, not unlike chickens) and failed to test adequately and get a secure
handover on schedule. As a result they have admitted that it will cost
them tens of millions of £ Pounds and add to their existing profit warn-
ing which has distracted from a record profit announcement at the same
time. In Singhal and Hendricks terms this is a ramp and roll out problem
Bear Stearns effectively bought bad inventory in the form of mortgage
securities on which there was no redress against the suppliers. In Sing-
hal and Hendricks terms this was a supplier quality problem. Attempt-
ing to conceal the problem simply made it worse; if you keep bad food
in the fridge, it eventually taints everything.
In the more prosaic industrial world, the case material is building on
how supply chains go wrong and their financial impact. Sheffi and
Wilding documented many well-known examples from several years
earlier, such as:
• Ericsson losing its handset business as a result of a fire in a micro-
chip factory because Nokia read the situation better and responded
faster
• The impact of the earthquake in Kobe, Japan on a range of industrial
producers and the response of Toyota
• The effect of a foot-and-mouth outbreak in the UK that had disas-
trous consequences for a wide range of industrial producers.
They might equally have described the:
• The catastrophic effect on Sainsbury’s supermarkets as a result of
supply chain change
• The impact of bio-fuel growth on food production
• Land Rover losing its supply of vehicle bodies due to supplier finan-
cial collapse
• Coca-Cola losing its bottled water business in the UK as a result of
contamination.
• $Billion write-down of inventory at CISCO in the wake of the Y2K
and technology downturn
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10. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
This list could be yet more extensive as Singhal and Hendricks’ research
indicates through their profit warning analysis. But these are just the
events that hit the headlines and where the consequences get measured
and reported. Organizations around the world are experiencing inci-
dents and crises (glitches) each and every day; which impact on the abil-
ity of the organization to operate effectively.
The challenge is to plan and anticipate better and then deal effectively
with events as they occur. On this basis, Nokia and Toyota are clearly in
the best in class league. In both cases they showed an ability to recover
from events where disruption might have been generically anticipated
but the specifics could not.
Nokia recognized the event faster, understood its implications and mo-
bilized to capture remaining global capacity of chips well before Erics-
son. As a result Ericsson experienced long term interruption to its ability
to supply and lost its market position
Toyota rapidly engaged its network to move tools and re-start produc-
tion of crucial components – losing only 2 to 3 weeks of assembly which
was a gap it was able to make up.
Recovery is clearly a strategic competence for which corporations
should put in place well rehearsed routines and support mechanisms.
General Principles of Risk Mitigation and Recovery
A series of generalizations emerge from this analysis of risk events that
can be summarized in the bullets following.
• Many events are capable of a greater level of anticipation for which
planning and design would reduce the risk of occurrence and/or the
consequences. For example:
oo Keeping a plant on an earthquake fault line, in a cyclone area or
adjacent to a high hazard facility requires contingency planning
oo Ramp and roll out of products, facilities and anything technologi-
cal requires appropriate project governance and control
• Vulnerability is accentuated when a combination of events occurs,
one of which on its own would not have caused the catastrophe but
when combined were fatal
oo Some of these events will be the result of poor controls and op-
erational compliance
oo They are easy to fix and are only a surprise because all the signals
were ignored
• A few events are so difficult to anticipate in their specific form that
they cannot be specifically planned and mitigated:
oo They are usually outside the immediate control of the firm
oo Their consequences are generally the same as the two previous
points and so the recovery plan can draw on how to correct for
other consequences.
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11. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
• The keys to risk management are a controlled and governed pro-
cess of planning, mitigation design, rapid detection and accelerated
response and recovery
oo These are critical capabilities covering detection, response devel-
opment and managed recovery
oo High performance requires real time visibility and communica-
tions together with the skills to manage the situation
All of these generalizations require the right questions to be asked dur-
ing planning and then during the event if one occurs. The importance of
developing and maintaining an integrated capability through the phases
of recovery is emphasized in Figure 6. This diagram overlays response
modes and horizons on the graph of the impact on share price of a ‘so
called’ glitch. The timing of this overlay is not exactly right as a business
would hope that detection and recovery would have been achieved and
initiated at the minus 60 day point to achieve the best recovery.
How should a company organize to be able to recover from problems?
For the purpose of the balance of this paper, the assumption will be that
the company has designed and planned for operational resilience. The
main vulnerabilities have been identified to the best of the company’s
ability and, where the business case justified, resilience measures have
been put in place. This can be done using the framework illustrated in
Figure 4 and the workbook referred to earlier.
But that is not enough to ensure operational resilience; events will still
happen from short term disruptions lasting just a few days to major
events where the impact will be felt for weeks or months. It is almost
impossible to point specifically to the likely impact of any event on the
business before it happens.
Figure 6: The effect of detection,
response and recovery
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12. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
For example:
• An earthquake or tsunami, while a long term catastrophe for the
residents, can permanently disrupt a supply chain or have an effect
of only a few days
• Industrial disruption can be short lived and wildcat or it can stop a
particular operation for months
• Quality issues can be either short term, or damage yields for long
periods
• Terrorist actions may take out a critical capability for good or lead
to quite a short disruption.
And, it is important to recognize that one operation’s disaster may be
just a minor irritation for another.
While normal operations and even anticipated disruptions can be proce-
duralized, when un-anticipated events strike there is an important shift
towards free-form teamwork and collaboration. This transition can be
a subtle one as the business moves from standard process to accelerated
and extended collaboration (incident management or crisis manage-
ment), characterized by increased communication between participants
and agility in response.
It is well known that when a crisis hits, communication becomes of para-
mount importance because only through communication can the correct
actions be determined and delivered (ix). Working in a supply chain
where there may be many organizations active (see Figure 2) makes
communication even more important.
So, organizations need to have in place a phased process and communi-
cations structure through which they can mobilize their response for the
supply chain crisis management. The acronym DEDReC-M is a conve-
nient way to remember the sequence.
• Detect – identify and alert the business to an event that may have a
serious impact on business performance
• Evaluate – evaluate the implications for the business in terms of
scale and duration in order to guide decision making and response
• Decide – determine the appropriate actions to guide the business
through the event and speed recovery
• Recover – mobilize the recovery actions that have been decided
• Coordinate – coordinate the actions of players in the chain both
inside and external to the business – directing the recovery
• Monitor – monitor the recovery program to ensure that the situation
moves from a status of ‘intensive care’ through ‘release to normal’
The controlled transition through this phased process requires central-
ized visibility and direction, instant communications and rapid feed-
back. Since most companies are now widely dispersed across many
operating locations, the process requires a “virtual” command center
approach with secure and universal communications to all the players
Page 12
13. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
who may be involved. It is virtual in the sense that there is no physical
location where all players come together to work on the problem.
From a status of ‘business as usual’ to full scale crisis management can
be a matter of minutes or hours. As described earlier in this paper, the
speed of response may make all the difference to the outcome.
There will not be time to bring people together in a single place and
established communications methods may not be fully functioning. In-
deed, people should often be located closest to the areas where they can
direct the local response rather than in a remote crisis center far away
from where things need to happen.
It is simply unrealistic to expect that representatives from the whole
supply chain can gather in one physical location. The command center
needs to be able to receive situation reports from many locations under
different communications modes that can be logged to provide a single
picture of the situation.
From this the leadership team, who may also be acting remotely, need to
be able to assess the implications, determine and then direct and moni-
tor the response across all the stakeholders.
Figure 7: The command center,
using different modes
This command center approach is illustrated in Figure 8, with a com-
bination of alerting to mobilize and collaboration to drive the response
forward to a successful conclusion.
The communications through the command center are crucial to the
detect, evaluate, decide, recover, coordinate and monitor (DEDReC-M)
crisis management process. However, the planning, testing and exercis-
ing are the first step and equally important.
To manage recovery, the business must have well-rehearsed and docu-
mented crisis management plans that, accepting the uncertainty of the
event itself, prepare the business for the type of disruption.
Page 13
14. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
The preparation, case scripts and exercising are a major investment by
the firm to anticipate the issues and build a state of readiness with a
team that can be mobilized at any time.
If the crisis team is well rehearsed and can work together effectively us-
ing a command center, they will be well placed to deal with any event,
prepared for or not.
The ability to run the command center in a decentralized way requires
that there is total information visibility of the situation that is in line
with the crisis management plans for the situation.
The combination of different times and locations is key to the command
center approach. It is the only way to run a continuing situation across
many locations and time zones. This is shown in figure 9 with a diagram
from MissionMode.
Figure 9: MissionMode combines
different times and locations
using different modes
The control center can be accessed through a range of screens as shown
on page 16. From the moment the situation is detected and an alert is-
sued, the log can follow the information and analysis as the situation is
managed through. Requests and instructions can be issued to key people
and the feedback logged.
Because the ‘A’ team will have exercised on the scripts and lines of com-
munication, and leadership is clear, the process is designed to work well
from the first moment. The team can come together for conference calls as
required and they’ll all be working from the same information base.
If specialist advice and information or particular skills are required, then
these can be bought in and the people patched into the system. Of par-
ticular importance is the ability to keep private information private, yet
share that information which should be shared.
Following the exercise or real crisis, the command center log can be used
to analyze the effectiveness of the response and recovery and improve
the business processes between all parties in the supply chain.
Page 14
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Page 15
16. Recovering From Glitches: Supply-chain Recovery is a Competitive Capability
References
i. World Trade Organisation – www.wto.org
ii. Moss Kanter, R (1997) World Class: Thriving Locally in the Global
Economy, Simon & Schuster Ltd
iii. Braithwaite, A. & Hall, D. (1999) “Risky Business? Critical Deci-
sions in Supply Chain Management”, Supply Chain Practice, Vol. 1,
No. 3, pp. 44-56.
iv. Hall, D. & Braithwaite, A. (2001) “The Development of Thinking in
Strategic Supply Chain & Logistics Management” in Handbook of
Logistics and Supply Chain Management, (ed) Brewer, A., Button,
K. & Hensler, D., Oxford: Pergamon, pp. 81-98.
v. Cranfield 2003 for the Department for Transport, Supply Chain
Vulnerability ~ A Self-Assessment Workbook
vi. Braithwaite, A. & Wilding, R. (2006) “The supply chain risks of
global sourcing” in Managing Business Risk, (ed) Reuvid J, Sim-
mons & Simmons
vii. Sheffi, Y, (2005) The Resilient Enterprise: Overcoming Vulnerability
for Competitive Advantage, Massachusetts Institute of Technology
viii. Singhal, V.R. and Hendricks, K. Supply Chain Management Re-
view, January/February 2002.
ix. Sapateiro, C, & Antunes, P (2008) Crisis Management: A collabo-
ration model for unstructured activities Institute for Complexity
Science: 1st ICC Workshop on Complexity in Social Systems, ISCTE
Lisbon, January 2008
101512
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