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Resilience in the Supply Chain

The COVID-19 pandemic has exposed significant weaknesses in the design of supply chains that have resulted in serious disruptions in businesses around the world. What is imperative is a new approach and the need for intelligent supply chains that prioritize transparency, anticipate new risks and enable faster decision-making. A stress test like the one offered by Lean.IQ enables companies to simultaneously get an unprecedented insight into their supply chains and the effects of possible disruptions with the help of a multi-scenario analysis.

A regular review of existing supply chains makes perfect sense, because the circumstances under which you have chosen suppliers can change and possibly also give rise to risks. Together with IPL Consulting and the Hochschule der Bayerischen Wirtschaft (HDBW), we use a scientific approach to identify and visualize weak points.

The "stress test" for the supply chain begins with the creation of a digital twin that models a company's physical supply chain. Without this step, it is impossible to understand the level of risk that a company faces in the event of a disruption. The exercise also included running several “what-if” scenarios to test supply chain capability and withstand a variety of challenges. The result is a key figure that shows how much time is required until a certain node is fully functional again (“Time to Recovery”), as well as the maximum period in which a supply chain can continue to balance supply and demand (“Time to Survival "). Once you have created a digital twin, you have a tool to specifically reduce the effects of future disruptions.

With more of the joint experience of the technology partners in the areas of supply chain, operations and analytics, the resilience of the supply chain can be quantified with the help of clear key figures. This enables companies to quickly identify potential sources of error in their supply chain and to assess their associated financial risk; suitable mitigation strategies and concrete measures are defined based on the results. Because the scenarios are standardized, companies in both the public and private sectors can compare their resilience with peers and competitors in all industries.

The approach is also scalable and adaptable to changing market conditions and customer expectations as individual supply chains evolve. You can also use the Lean.IQ analysis module to ensure an uninterrupted supply of your value creation process.

Companies operate in a constantly changing environment in which operational risks are increasing. There are four main factors that contribute to increasing operational vulnerability.

  • The first factor is a trend towards global manufacturing networks and the associated need to maximize operational benefits. This then leads to less redundancy, but also to more dependency on a few suppliers, which in turn increases the risk to the supply chain if there are disruptions at the suppliers.

  • The second factor is the ongoing consolidation of the supplier base and the goal of minimizing the expenditure of resources for individual supplier management. This inevitably leads to a stronger concentration of suppliers and less scope to react flexibly to the most critical components.

  • Thirdly, the trend to continuously urge suppliers to lower costs is leading to an increasing number of sub-tier sourcing in emerging markets. However, this will further extend the manufacturers' supply chains and add additional dependencies and potential sources of error. If the products also have a low level of standardization, there are only very few alternative suppliers available for these components in an emergency.

All industrial sectors are confronted with these increased risk of malfunctions. Trends towards longer supply chains and reduced operating buffers are affecting many industries. In addition, there is an increasing number of unforeseeable, extreme natural events that challenge the supply chains to the utmost.

As a result, executives have a dual mission: they must systematically deal with extreme risks such as hurricanes, epidemics, earthquakes or port closures, and manage operational risks such as planning errors, procurement problems and transport failures. In order to do justice to this role, transparency in the value creation processes and clear key figures for evaluation are required.

Supply chain risk management is therefore about estimating the probability of events with a low probability and a large impact. The Lean.IQ approach focuses on assessing a company's vulnerability, as an interruption can occur anywhere in its supply chain. It is a rational concept aimed at deepening his understanding of the risk of disruption both in-house and in the extended supply chain, and quickly and consistently assessing his initiatives to reduce risks in the supply chain.

In the evaluation, we can aggregate the relevant data, e.g. depending on a geographical region, and then break it down in detail. The tool can then also be used in addition to traditional risk analysis methods in order to further strengthen the informative value. It is also possible to integrate the results of the model with other indicators. The following indicators can be mentioned here as examples:

  • Every supplier's financial risk including financial health and operational risk metrics

  • Metrics for service level performance and quality control compliance.

Suppliers that trigger one or more risk areas (i.e. disruption, financial or operational) can subsequently be identified. By including this model in a comprehensive supplier risk analysis process, you create greater security in operational processes and you can allocate your limited resources specifically for risk management and risk reduction.

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