Resilience Versus Agility

Just a short thought as we move into this weekend . . .

Simple definitions of resiliency and agility as they relate to your value network might be as follows:

Resiliency:  The quality of your decisions and plans when their value is not significantly degraded by variability in demand and/or changes in your competitive and economic environment.

Agility:  The ability to adjust your plans and execution for maximum value by responding to the marketplace based on variability in demand and/or changes in your competitive and economic environment.

You can take an analytical approach that will make your plans and decisions resilient and also give you insights into what you need to do in order to be agile.

You need to know the appropriate analytical techniques and how to use them for these ends.

A capable and usable analytical platform can mean the difference between knowing what you should do and actually getting it done.

For example, scenario-based analysis is invaluable for understanding agility, while range-based optimization is crucial for resiliency.

Do you know how to apply these techniques?

Do you have the tools to do it continuously?

Can you create user and manager ready applications to support resiliency and agility?

Finally, I leave you with this thought from Curtis Jones:  “Life is our capital and we spend it every day.  The question is, what are we getting in return?”

Thanks for stopping by.  Have a wonderful weekend!

Scoring Your Value Network for Risk

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A previous post in Supply Chain Action introduced some important questions for establishing and sustaining a resilient supply chain.  They included:

  1. How do you evaluate the resiliency of your value network?
  2. Do you have the capability to electronically represent your value network from one end to the other?
  3. Have you determined how to represent the value of inventory, currency and data that pulses along the paths in the value network?
  4. Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?
  5. If so, do you have a plan for dealing with such an interruption?
  6. What have you done to make sure key people know the plan and can execute it?

In addition to my previous two posts, “Building Resiliency into Your Value Network” in Supply Chain Action and my guest post on Bob Ferrari’s Supply Chain Matters, I promised more on the topic. This is a partial fulfillment of that promise.

In the network of suppliers, manufacturing plants, and distribution centers through which you create value for your customers, there reside potential points of failure.  These points of failure can be identified by an item and/or a location.  If the location, say a country or facility in a flood plain is the potential point of failure, then all of the items that are sourced, manufactured or stored there inherit that risk.  But the magnitude of the risk is not the same for every item at that location.  A scheme for scoring value network resiliency is required in order to answer the questions I have noted above.  Here is basic formula that I dreamed up to get your thinking started if you don’t already have one:

Simplistically, resiliency might be said to be (1 – risk) where risk is the outcome of the following expression:

LT/Rd * Rv * M * C * G

where the terms of this expression are defined in the following fashion:

  • Lead Time (LT) – can be analyzed, quantified and expressed in number of weeks or months
  • Redundancy (Rd) – how many substitute products/components or alternative sources exist?
  • Revenue (Rv) – total estimated annual or quarterly revenue (e.g. in $millions) from the sale of an item or from the sale of products in which the item is a component
  • Margin (M) – proportion of the revenue (from the sale of an a single unit of an item and/or from the sale of a single unit of each product in which the item is a component or ingredient) that is gross profit
  • Competition (C) – qualitative strength of the competition (How easily would the competition gain share if your supply were disrupted?), perhaps on a scale from 1 to 5
  • Geopolitical Stability (G) – a qualitative score, perhaps on a scale from 1 to 5

Such a score could then be viewed from either an item perspective or a location perspective.  Naturally, one could look at it by item and location as well.

This is an admittedly imperfect approach (is there a perfect one?), so I hope that you will leave a comment with a suggestion.  Obviously, scalers could be applied to each factor.  The point is that you need some way to evaluate and prioritize risk.

Could this be the basis of something useful?  How does your company measure risk or resiliency?

Philosophical thought for the weekend:  Winston Churchill once said, “Without courage, all other virtues lose their meaning.”

Thanks for dropping by Supply Chain Action.

My Guest Posting on Bob Ferrari’s Supply Chain Matters

As noted in Friday’s (28 October) post, my “Supply Chain Action” for the that day is a guest post that is out today on Supply Chain MattersPlease take a look and consider adding Supply Chain Matters to your RSS.

Building Resiliency into Your Value Network

In June of 2005, Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario published a paper entitled, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility.”  In this piece, Singhal and Hendricks quantified the negative impact of supply chain disruptions using empirical data.  They found that supply chain or value network disruptions impact both the value and profitability of the enterprise.  They specifically identified the following:

Firms suffering from supply chain disruptions experience between 33% to 40% lower stock returns relative to their benchmarks over a three year time period that starts one year before and ends two years after the disruption announcement date.

The average effect of disruptions in the year leading to the disruption announcement was a 107% drop in operating income, a 7% lower sales growth, and an 11% growth in cost.

Furthermore, they found that firms struggled to recover from supply chain disruptions.

In August of 2005, hurricane Katrina struck . . .

In September of 2005, Dr. Yossi Sheffi of MIT published his book, The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage and simultaneously a related article in Sloan Management Review.

In the years since, the importance of supply chain risk management and of building resiliency into the value network has only become more apparent, most recently underscored by the earthquake, tsunami, and nuclear disaster in Japan, floods in Thailand, and other disruptions.

Both Sheffi and Singhal and Hendricks emphasized, among other points, the need for flexibility in the value network.  It is my observation that decisions related to flexibility are key drivers of enterprise value (“Don’t Manage a Supply Chain, Lead a Value Network”, The Journal of Enterprise Resource Management, Third Quarter, 2011), even without a serious disruption in the value network.

I will not recapitulate all of the advice from Sheffi and Singhal and Hendricks here, but I do want to make a couple of important points:

First, you need to plan to be resilient.  Planning to be resilient is a non-trivial exercise.  It should be very intentional and will require deep analytical expertise.  You will need to quantify the uncertainty, calculate a risk-adjusted total cost, identify alternative courses of action and select a primary best option (see the diagram below).  It may also be prudent to develop or acquire tools that will let you quickly asses challenges to your value network that you did not anticipate.   At the 2011 CSCMP Annual Global Conference, I heard Dow Chemical talk about how they apply analysis to understand the nuances of the tradeoffs along the frontier of profit and risk.  Don’t underestimate or short-change the analytical effort.

Second, you need to practice for how you will execute when (you cannot afford to think “if”) there is a disruption.  I have heard Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management from Cisco Systems speak on how Cisco prepares and trains for the eventuality of a disruption.

We are only scratching the surface here.  You can, of course, get Dr. Sheffi’s book on Amazon.  I think that Dr. Singhal and Dr. Hendricks will be happy to provide you with their paper.  You can, and should, also get the support you will need to perform the analysis to support risk-adjusted decisions.  Finally, you should make an effort to rehearse or train on how you will handle various types of disruptions so that your people have at least minimal familiarity with the predetermined alternative courses of action or at least know where to find them.

I hope that this post has stimulated your thinking, and that it will motivate your action as well, helping your organization perform with a resilience that will serve its stakeholders well when “normal” operations are disrupted.

As you go into the weekend, remember these words of Leo Tolstoy, “Everybody thinks of changing humanity and nobody thinks of changing himself.”  Don’t be “everybody”.

Have a wonderful weekend!

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