Imagine the Unimaginable—An Underlying Principle of Supply Chain Risk Management
By Ian Hobkirk, Director of Consulting, Supply Chain Optimization, FORTE
Connect, Autumn 2008

The Council for Supply Chain Management Professionals (CSCMP) conference took place in Denver last month. This is usually one of the better conferences of the year – lots of content, not so much selling – and this year was no different. It’s difficult to sum up a conference like this in a few paragraphs, so I’ll mention just one key point that I came away with: risk management is, and will continue to be, a key imperative for supply chain managers.

After nearly twenty years of globalization since the Berlin Wall fell in 1989, our supply chains are indeed “ultra-efficient”, but they are at much greater risk than they were in the past. Supply chains are extended over greater distances, increasing the likelihood of weather issues or natural disasters at some point in the chain. They are also extended into multiple nations, increasing the risk of political or civil disruptions.  The specter of terrorism hangs over us now to a greater extent than before, and more and more of our goods flow through a handful of logistics hubs, increasing the risk of single-points of failure. Companies are requiring more and more of their suppliers to communicate electronically, label and pack product in specific ways and even to perform services like price ticketing and production of store-specific packs that are traditionally done in the distribution center. Many of these same suppliers are based in under-developed countries and lack the infrastructure to withstand any significant turmoil in their businesses. Further, inventory levels are continually decreasing, eliminating one of the traditional buffers against risk. As supply chain management professionals, we do well to ask ourselves: in the pursuit of efficiency, have we placed our supply chains, our businesses and the larger economy in undue jeopardy?

Our society has sadly fallen victim in recent years to what one pundit called, “a failure of imagination.” Just a few years ago, no one imagined terrorists attacking the heart of our society as they have, and more recently, no one imagined home prices declining and large scale mortgage defaults. One failure resulted in a tragic loss of life; the other witnessed the global financial markets brought to their knees. This disturbing trend begs the question: what unimaginable events could wreak havoc with the continuity of today’s supply chains? Or, as Dr. Mahender Singh of the Massachusetts Institute of Technology (MIT) put it, “What hidden assumptions underlie our supply chain designs?”

Dr. Singh opened up the second day of the CSCMP conference with a keynote lecture titled, “Curved Thinking in a Flat World” where he discussed the results of an MIT study that examined geopolitical forces that affect supply chains. The last twenty years have been characterized by unprecedented openness in markets, political stability, economic expansion and the spread of free trade. Many of today’s supply chains are based on the “hidden assumption” that these trends will continue indefinitely.

Dr. Singh heads up a project at MIT called “Supply Chain 2020” that devised three possible scenarios for how today’s global business environment could develop (more information relating to these scenarios can be found at http://ctl.mit.edu/index.pl?id=5439):

• Synchronicity: Characterized by globalization and democratization, trustworthiness and integrity are crucial values in business, constantly shifting market demands and technological breakthroughs, frenetic pace of innovation and customization and critical role of knowledge workers
  
  
• Alien Nation: The opposite of Synchronicity, characterized by people thinking and acting locally, mistrust and security are highly sensitive issues; globalization is restrained by nationalistic policies, trade barriers and national champions, secured energy resources and limited migration flows.
  
  
• Spin City: The middle ground, characterized by interventionist policies of governments, a complex web of conflicting regulations, no international consensus, globalization remains strong but highly regulated and trustworthiness is a competitive advantage to compete globally.

Supply Chain 2020 is an appropriate imagination exercise that could allow our supply chains to be more resilient to risk than our national security infrastructure and financial markets have been over the last decade.

It may be that many supply chain risk management programs have focused on events that are local in nature, such as localized port disruptions, weather events or supplier insolvency, but ignored the unimaginable geopolitical scenarios which could create a greater disruption in our supply chains. These “unimaginable” events, in the context of history, aren’t so unimaginable after all upon a review of the 20th century. When the century dawned, the world was largely at peace, Europe was dominated by a handful of kingdoms that had existed for hundreds of years and the United States was just emerging as a world power. World War I blew up that model, shattered the old power structure in Europe and launched the world economy on a dizzying upward ride in its wake. For twenty years, democracy flourished, new nations emerged and global trade increased. Then, the Depression struck, the new democracies were gobbled up by aggressor nations and it took another World War to restore order to the world. The next forty years were characterized by Cold War, regional conflicts and markets and nations that were completely closed to outsiders. Now, in the beginning of a new century, we have lived through roughly twenty years of political stability and economic expansion, but the cracks are more than evident in both of these trends.

Now that our short history lesson is over, what does all of this mean for our supply chains and risk assessment? Perhaps the simplest exercise in imagination would be for a supply chain executive to ask themselves, “for each of the ten decades in the 20th century, how would my current supply chain model have performed?” In some decades it would no doubt have flourished, but some of today’s supply chains would have ceased to exist under the political and economic conditions that prevailed in parts of the last century.

Beth Enslow, Senior Vice President of Risk Management at Marsh, moderated a panel later that day titled, “Balancing the Risk Plate.” It was encouraging to see that some companies, such as Chicos and Lagasse, have clearly begun to think through these larger scenarios. One of the panelists, Dr. David Simchi-Levi of MIT, suggested that companies continue to evaluate risk along a trade-off curve of flexibility and cost, and implement strategies such as agility, redundancy, sound network planning and sharing or pooling risk. A program such as this, with an honest evaluation of the “hidden assumptions” that are built into the supply chain, will create businesses that can thrive and flourish through the inevitable ups and downs of geopolitics.

The next issue of Connect will feature a discussion of how top companies are evaluating the level of risk in their supply chains, and what actions they are taking to manage that risk. 

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