In the previous post in this two-part series, The 7 Core Capacities of Supply Chain Resilience, we identified the core capacities that are the building blocks of supply chain resilience.
We explained how these building blocks can be used to avoid or manage a limited number of predictable outcomes (failure modes).
In this post, we use the approach to resilience-building to compare and contrast disruptions, especially how the Covid-19 pandemic fits into supply chain management’s risk universe.
Our aim is to improve companies’ understanding of supply chain risk and resilience and help them contextualize the pandemic’s unique risk profile.
Our analysis is captured in the comparison matrix below. The matrix shows the capacity losses and disruption durations experienced by companies in seven major disruptions including the coronavirus pandemic.
The matrix describes the general nature of disruptions, and in most cases depicts mainly local impact areas. However, in global supply chains, a local disruption can quickly escalate into a global impact.
For example, the 2010 Eyjafjallajökull volcano eruption in Iceland caused a primary loss of freight transportation capacity, but that loss also robbed many companies of supply capacity.
In the matrix, this is referred to as a secondary impact. In the case of the Eyjafjallajökull eruption, the initial impact was lost freight transportation capacity, and the secondary loss was supply failures because companies were unable to transport the supplies they needed.
We can see this phenomenon today as a Covid-related shortage of transportation capacity prevents many companies from fulfilling orders and maintaining service quality.
Note that the seven core capacities are assessed as to whether there is a loss of capacity or not. All capacity losses are temporary unless the firm ceases operation; otherwise, the capacity is recreated over some timeframe which could be anywhere from one day to multiple years. In practice, a short loss of capacity — a few days, for example — is not enough to warrant major actions to recreate capacity.
Often, backup inventory and garden-variety expediting measures can ensure that the supply chain maintains continuity. The matrix gives a general sense of how long the core capacity disruptions lasted. However, this measure does not fully capture the long tail of some of the secondary losses.
Also note that for many companies, the Covid impact was a tale of two supply chains — essential and nonessential. These designations refer to how governments classified companies during the disruptions and drove lost capacities. Many companies classified as nonessential were forced to shut down by governments.
On the other hand, companies classified as essential had an opposite experience: high demand with constrained conditions and some capacity loss (human resources). The matrix deals primarily with disruptions due to loss of a capacity, which tends to be the experience of companies initially deemed as “essential” by local governments and permitted to operate.
The comparative matrix enables us to draw some important distinctions between these disruptions and how they compare to the fallout from the Covid-19 crisis.
In common with the other disruptions described, Covid-19 caused the loss of core supply chain capacities. However, Covid-related disruptions lasted longer, and involved more global capacity losses than all the other disruptions in the matrix.
We know this implicitly from our experience, but this visual representation clarifies the core issues and areas of focus. In reality, disruptions generally vary only in the number of lost capacities and the length of the disruption or outage.
Hurricane Katrina in 2005 did not have a high, global impact. Some companies operated factories outside of the impact region that were affected, but most global companies did not suffer meaningful impact outside this area. The high-profile example of GM having to curtail operations at its plants in the European Union and allocate limited parts to high-profile products (trucks) was an exception rather than the rule.
The Tōhoku earthquake disaster of 2011 did have a high, global impact, but the disruption was felt primarily in just one area of capacity: supply. However, this outcome was exacerbated because several of the disrupted supplies were sourced primarily in the impact area, which served as a manufacturing hub for many products. This concentration of supply meant that replacing most of the capacity proved difficult if not impossible. Also, many of the supply issues were not immediately evident to most companies because they involved upstream suppliers in the second tier or below.
A simple (but not necessarily easy) way to assess a firm’s vulnerability to capacity losses is to look at its time-to-recover (TTR) and time-to-survive (TTS). TTR measures the time taken to recreate the enterprise’s lost capacity, and TTS measures how long its supply chain can continue to operate before failure (without additional resource/capacity).
If TTR is shorter than TTS, then the firm’s supply chain is resilient because it can recreate the lost capacity before a failure reaches the customer. However, if the TTS is longer than the TTR, the difference represents the duration of customer outages, and this potential gap in continuity needs to be addressed.
Which capacities have the longest TTR? Or, put another way, which capacities are more difficult to recreate? While TTR varies from company to company, recovery times also vary according to the type of capacity that must be recreated to restore the organization’s operational integrity.
For example, replacing lost ocean transportation capacity can be time-consuming owing to the dynamics of the ocean market. Replacing supply capacity is probably the most challenging task. Here is a summary of the factors that complicate the replacement of lost capacity:
As the above analysis shows, different supply chain disruptions — and company responses to them — have distinctive challenges and characteristics, and these differences can help us better understand the demands of resilience and risk management today and in the future.
This is especially valuable when assessing the impact of the Covid-19 pandemic, which is unprecedented and hence more challenging to analyze in the context of past experience.
Related: The 7 Core Capacities of Supply Chain Resilience
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