Why did the COVID-19 pandemic take so many companies by surprise? And, more importantly, how can your organization anticipate – and deal with – disruption more successfully next time around? Because one thing’s for sure: there will be a next time!
Nowadays, many supply chains are made up of intricately connected networks of suppliers, in multiple tiers and on multiple continents. This makes them extremely fragile, as the COVID-19 pandemic demonstrated. But the main reason that coronavirus caused such widespread and persistent disruption on a global scale is that so many businesses were taken by surprise. To understand why they didn’t see the crisis coming, and why they were unable to act swiftly enough, we need to take a closer look at risk management.
The classic approach to risk management is based on identifying the potential risks, assessing their likelihood and impact, setting priorities, deciding on possible mitigating actions and developing a follow-up plan. This sounds great, and it works fine for foreseeable and predictable risks. However, it’s based on looking back and taking a static, view of the world, making decisions based on historical events and what you know. In today’s volatile, uncertain, complex and ambiguous (VUCA) world, this classic approach is no longer fit for purpose. What’s needed now is a dynamic view of the world so that we can prepare for what we don’t know – even the ‘unknown unknowns’ or Black Swans – and are agile enough to respond swiftly to whatever the world throws at us. The good news is that resilience and dynamic risk management go hand in hand.
Spot the warning signs
Ultimately, a dynamic approach to risk management revolves around being able to spot the risks coming, from whatever direction, as early as possible. In 2015, Sheffi introduced ‘detection lead time’ as a third dimension of risk management, besides disruption probability and consequence. And we saw the relevance of this during the pandemic – the companies that have emerged most successfully from the crisis are the ones that were able to look ahead and spot the signs of approaching disruption. They gained valuable time in which to weigh up the potential impact and take the necessary action.
In today’s volatile, uncertain, complex and ambiguous (VUCA) world, this classic approach is no longer fit for purpose.
All of this means that collaboration is more important than ever in your entire ecosystem. You need to constantly exchange information with multiple tiers of suppliers and other partners around the world as a kind of ‘early-warning system’. That way, you can pick up on any subtle changes in demand so that you can make the right decisions, such as to scale up or down, and avoid bullwhip effects.
Modelling can help you to forecast the supply chain effects and shorten your detection lead time. And the IBP process is a perfect framework for anticipating all kinds of uncertainties that lie ahead by helping you to conduct scenario planning, identify any information or supply gaps in your value chain, assess the potential risks and make the right trade-off decisions.
Although no one could have fully anticipated the unprecedented disruption caused by the outbreak of COVID-19, a dynamic approach to risk management enabled leading organizations to emerge from the crisis faster and stronger than their competitors. Taking the next step in risk management and strengthening your supply chain resilience means making a lifestyle change. But if it improves both your ability to anticipate ‘known’ and ‘unknown’ risks and your agility to minimize the impact of them – and perhaps even turn them to your advantage – surely it’s worth it?
If you want to find out more about how to improve your supply chain resilience, whether by implementing IBP or in other ways, contact me or download our whitepaper 'A leader’s guide to value chain resilience'.