by Gary Lynch

Although it's tempting to categorize the recent earthquake/ tsunami/nuclear catastrophe in Japan as a highly improbable "Black Swan" event, the truth is that organizations operating in today’s global marketplace are exposed to a host of increasingly complex and interrelated risks.

Globalization; pervasive connectivity; an increase in the severity of natural catastrophes; a credit, liquidity, and then solvency crisis; a shortage of natural resources and commodities; and the expansion of the have/have not chasm have created enormous volatility in the geopolitical and social landscape.

In the past 12 months alone, in addition to the earthquake/tsunami/ nuclear incident in Japan, we’ve experienced a devastating earthquake in Christchurch, New Zealand; political and social revolution in the Middle East; massive flooding in Australia; a volcanic eruption in Iceland; pirate hijackings of supertankers off the coast of Africa; and the largest oil spill in the history of the petroleum industry off the Gulf of Mexico.

The 'Disruptive Economy'

Systemic business disruptions are now an assumed operating reality in what is being described by many economists as our new global "disruptive economy." Fuel, agriculture, forest products, and raw materials power critical supply chains in every industry, and a single event can cause a substantial threat to any one of those resources.

The recent political and social revolutions taking place in the Middle East, for example, present a substantial threat to one of our most critical supply chains—energy and the flow of oil. Oil export terminals, refineries, and major transportation lanes such as the Suez Canal are at risk.

The torrential flooding that occurred in Queensland, Australia, late last year forced the shutdown of Dalrymple Bay, a critical terminal within the largest fuel export harbor in the world. The second and third largest global economies, China and Japan, are dependent on the coal exports that pass through that terminal to power their heavy industry and manufacturing supply chains. Their production of automobiles, medical equipment, consumer electronics, heavy machinery, and consumer products are all at risk from this single point of failure in one upstream supply chain.

New Challenges to the Supply Chain

Disruptions are not limited to natural catastrophes or political/social unrest. The high-tech and automotive industries are attempting to mitigate a rapidly accelerating risk caused by a scarcity of critical rare earth minerals, driven by export quotas imposed by China and a desire to shut down illegal and unsafe mining.

And let's not forget the global food and drug supply chains halted due to a single contamination, the failure of thousands of upstream suppliers due to the financial meltdown, consumer goods manufacturing shut down because of the destruction of paperboard mills in Chile, and entire automotive assembly lines stopped due to the unavailability of a single piston ring. All of these are real stories and all are possible because of massive interdependency, the "leaning" out of safety stock, and the tight synchronization of multiple supply chains in a "just in time" production cycle, leaving no room for error.

The questions that must be asked include: Are we learning from past behaviors, successes, and mistakes? Are legacy resiliency management strategies responding adequately to these events? Unfortunately, the answer for the most part is “no.” Most organizations’ business continuity plans remain woefully inadequate today despite operating in an increasingly risky world.

The Resiliency Objective

If the disruptive economy is the new norm and we acknowledge that catastrophic events can occur anywhere in our business networks and supply chains, then a definitive response to the following questions is essential in order to stay focused on the resiliency objective:

• Are we, in conjunction with our partners, continuously evaluating, evolving, and improving the resiliency programs that support our value creation activities as determined by our stakeholders (investors, customers, and others)?
• How do we monitor volatility in our organization in relation to stakeholder behaviors, single point of failures (SPOF), and supply chain interdependencies? What levels of volatility are acceptable? When do we react?
• What are the complete sets of resources (labor, technology, physical assets, relationships, and processes) needed upstream and downstream to deliver each product/service family to the market? Have we mapped the extended supply chain?
• Are we collecting business intelligence about our SPOFs, including the maximum financial, brand, strategic, compliance, liquidity, and asset impact at each point?
• Are the people, infrastructure, and suppliers that we depend on managing their market, financial, operational, and behavioral risk, at a minimum, to our expectations?
• Are we monitoring, in real time, our most critical supply chain dependencies for our value creation activities?
• Have we created decision models to support resiliency options at the time of the event?
• Have we created a collective culture along our supply chains that is risk conscious, intelligent, and motivated?

With discipline, analytics, decision modeling, and the involvement of a broad cross-section internal and external business, technology, and operation leaders organizations can gain control of their supply chains and become more resilient in the face of the next disruption.

A Best Practice Approach to Supply Chain Risk Management

• Gain visibility upstream and downstream.
• Simplify complexity by looking at resources through a value (market served or product families) lens.
• Establish accountability for risk activities by designating ownership not by asset (these are the custodians), but by profit and loss leader, business manager, and product family owner.
• Understand your suppliers’ supply chain and risk management plans; create risk management plans if needed, including incentives and penalties.
• Create a business case for investment by measuring impact against risk mitigation and financing options. Establish business intelligence and leverage analytics and decision modeling to support the business case.
• Provide holistic insurability beyond physical damage coverage. Supply chain interruptions extend to the non-physical world, including labor strikes, pandemics, regulatory change, civil order, and financial failure. The scope of coverage should also cover non-physical damage.
• Maintain relevance by ensuring vulnerabilities are relevant to the supply chains of greatest value. Avoid strategies that focus only on threats and make that only make use of qualitative metrics.