Where does supply chain risk rank in the hierarchy of priorities in the grand scheme of a firm’s business strategy? We often think of supply chain strategy as wholly independent from business strategy and risk management strategy as an altogether separate abstraction layer. This fallacy needs to stop.
If 2020 taught us anything, it was that as consumers and business leaders, we underestimate the pivotal role of the supply chain until we’re inconvenienced, or we run out of toilet paper. It also taught us that supply chain risk is business risk. If the mechanisms, processes, and partners that power our value chain suddenly come to a grinding halt and we’re unable to deliver to our customers, then effectively, we have no business.
Despite An Abundance Of Technologies, Supply Chains Were Caught Off Guard
Why were firms so ill-prepared for the series of unfortunate events that came with COVID-19? We’d like to think it’s because their adopted sophisticated technologies and calculated risk management strategies failed them, but we’d be incorrect. Yes, firms have a myriad of technologies at their disposal (e.g., big data, internet-of-things sensors, AI, blockchain, predictive analytics, and crowdsourcing platforms), but these technologies optimize supply chains for efficiency and profitability, not risk identification or mitigation. In the meantime, the supply chain risk management tech stack most often consists of Excel and SharePoint.
Optimism Bias And The Lies We Tell Ourselves
“We’ve never encountered a pandemic, so we wouldn’t even know how to prepare” is the lie good companies tell themselves to write off losses. What happened during COVID-19 isn’t a once-in-a-thousand-year floor; we’ve seen this playbook before — although not all at once. Surely firms witnessed the complexity and ambiguity created by Brexit. They saw the devastating impact to supply chains from the tsunami in Japan, the flooding in Thailand, and Hurricane Maria and updated their own risk playbook. Some did; most did not.
Why? The explanation is a lot more reductive: Optimism bias or unrealistic optimism causes many companies to falsely believe that they’re intrinsically less likely to experience a negative event. Unlike a security and risk professional who categorically expects the unexpected, or a business continuity manager planning for disaster, supply chain pros are uniquely more prone to these phenomena largely because the pillar of supply chain success relies on consistency to maximize efficiency. And yet, nothing about today’s business conditions is consistent.
Resilience Is A Journey, Not A Destination
Even though the effectiveness of a company’s supply chain is as vital to its market valuation as its financial health, brand reputation, and customer relationships, generally firms don’t address supply chain risk with the same gusto as other areas of the business. Yet, as interconnections and interdependencies within supply chain networks increase, the risk of failure in one part of the network will have a negative effect on the rest of the business. The end result is that the firm is more vulnerable and susceptible to adverse market reactions and decreased customer retention.
Because COVID-19 was the catalyst for a sudden onslaught of digital transformation in 2020, the IT buzzword quickly became “resilience.” However, for a firm to be truly resilient, it cannot just become digital, but continue to deliver on its brand promise while striking the balance between optimizing efficiency and proper risk management. For supply chain resilience, you must relearn the art of hedging risks with supply chain buffers, such as alternative suppliers and carriers or strategic inventory stockpiles.
Don’t Be Caught Unaware Again
Read our new report “Rethink Supply Chain Risk And Strategy In An Uncertain World,” where we explore five strategic steps to help firms embrace risk management to avoid undue disruption and bolster supply chain resilience.
Written with Melissa Bongarzone, research associate at Forrester.