Here is a brief excerpt from an article co-authored by Joseph Fiksel, Mikaella Polyviou, Keely L. Croxton and Timothy J. Pettit for the MIT Sloan Management Review. In it, they explain why, in order to prosper in the face of turbulent change, organizations need to improve how they deal with unexpected disruptions to complex supply chains. Companies can cultivate such resilience by understanding their vulnerabilities — and developing specific capabilities to compensate for those vulnerabilities.

To read the complete article, check out others, and obtain subscription information, please click here.

* * *

In an interconnected, volatile, global economy, supply chains have become increasingly vulnerable. Disruptions — even minor shipment delays — can cause significant financial losses for companies and substantially impact shareholder value. Globalization has made anticipating disruptions and managing them when they do occur more challenging. The potential risks of disruptions are often hidden, and the potential impacts may not be understood. This often results in “black swan” events that can be understood only after the fact. As author Nassim N. Taleb has warned, “Our world is dominated by the extreme, the unknown, and the very improbable … while we spend our time engaged in small talk, focusing on the known and the repeated.”1

Although companies originally moved production offshore to countries such as India and China to take advantage of lower labor costs, events like Iceland’s 2010 volcanic eruption and the Japanese tsunami in 2011 have shown that the vulnerabilities of extended supply chains are real and serious. For example, according to the U.S. Federal Reserve, 41% of Minnesota manufacturers said that Japan’s tsunami had affected them negatively.2 As a result, many manufacturers have reevaluated their sourcing options, and some are shifting operations back to their home markets. While these companies perceive other advantages to reshoring, including improved responsiveness and domestic job creation, reducing their exposure to risk has been an important driver.

The reality is that supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable due to the lack of buffer capacity. For example, many companies that followed the lean inventory model were severely impacted by Japan’s tsunami: Within a week, General Motors Corp. temporarily shut down its Chevrolet Colorado and GMC Canyon plant in Shreveport, Louisiana, because it lacked components supplied from Japan.

Notes

1. N.N. Taleb, The Black Swan: The Impact of the Highly Improbable, 2nd ed. (New York: Random House Trade Paperbacks, 2010).

2. U.S. Federal Reserve Board, “The Beige Book” (April 13, 2011).

* * *

Joseph Fiksel is the executive director of the Center for Resilience at the Ohio State University in Columbus, Ohio. Mikaella Polyviou is a doctoral candidate in logistics and Keely L. Croxton is an associate professor of logistics at Ohio State’s Fisher College of Business. Timothy J. Pettit is an assistant professor of management at the United States Air Force Academy in Colorado.