The ongoing COVID-19 pandemic is a reminder of the importance of Supply Chain Resilience. The challenges associated with the current disruption is showing us new consumer behavior with unprecedented variation in order volumes. To handle the demand variation, you need to adopt an operating model that accommodates the extreme level of uncertainty facing your business.
Reactive capability
The concept of Supply Chain Resilience traces its roots back to the work of C.S. Holling, an ecologist who first noted the characteristics of a resilient ecological system in 1973. Since then, the notion of resilience has been applied to fields as diverse as psychology, systems thinking, disaster management, and more recently, supply chain management. For some, resilience is a reactive capability that occurs after a disruption or shock has taken place. Others see resilience as more proactive efforts toward helping the firm prepare for a disruption. In light of these divergent observations, it is not surprising that there is confusion surrounding this key concept.
Supply Chain Resilience is: “the ability of a supply chain to both resist disruptions and recover operational capability after disruptions occur”. As mentioned above, viewed from this perspective, resilience consists of two critical but complementary system components: the capacity for resistance and the capacity for recovery. Let’s look more closely at those elements.
Resistance and recovery capacity
Resistance capacity is the ability of a system to minimize the impact of a disruption by evading it entirely (avoidance) or by minimizing the time between disruption onset and the start of recovery from that disruption (containment).
Recovery capacity is the ability of a system to return to functionality once a disruption has occurred. The process of system recovery is characterized by a (hopefully brief) stabilization phase after which a return to a steady state of performance can be pursued. The final achieved steady-state performance may or may not reacquire original performance levels, and is dependent on many disruption and competitor factors.
Risk and uncertainty are different in meaning
The distinctions between supply chain resilience, risk, and uncertainty are often blurred and unclear. Unfortunately, this issue is exacerbated by the fact that some use risk and uncertainty interchangeably, implying that these two concepts are the same. Yet, this is not the case. While linked, they are separate and distinct concepts.
Risk exists so firms have to deal with the possibilities of encountering situations that can adversely affect them. However, not all future events are equally unknown. Past experience offers some insight regarding what events could occur, the probability of occurrence, and the impact. Firms can predict the likelihood of these events over a set time period to help them determine how to potentially react when they occur. Events with a greater likelihood and significant potential impact require greater preparation.
In contrast, uncertainty considers unpredictable events. Typically, these are events that have not been previously encountered. Alternatively, they are events where the type of event falls outside of past experience. In a COVID-19 world, supply chain leaders need to adjust best practices away from being reactive or bureaucratic.
Use digital twins to create a resilient Supply Chain
Given that Supply Chains need to be redesigned to treat disruptions as the norm and Supply Chain Resilience, we believe that the use of digital twins will increase. Organizations can use them to create business process simulations that can be updated in real time as circumstances change. For example, this could include finding the best way to shift production to alternate locations, move inventory to different warehouses, increase or decrease safety stocks and be better prepared overall.
