The components of resilience

Resilience. A key ingredient in supply chain risk management. Also a key ingredient in logistics risk management, as my recent book review of Risicomanagement en Logistiek points out. In that book the authors apply a framework with three types of resilience to logistics management in order to show what goes into the making of a resilient enterprise. This resilience framework splits resilience into cognitive resilience, behavioral resilience and contextual resilience, which must all come together for resilience to emerge, and is referenced in the book as taken from this article. When I wrote my review of the book above I had not yet read the article itself, so my understanding of the three types of resilience came from the book alone, so here is the full review of the source.

Adapation

The notion of adaption implies that organizations adapt to uncertainty and surprise changes by taking deliberate, intentional and rational steps to regain equilibrium, as championed by Chakravarthy (1982), who proposed a framework of adaptive fit, with three states: unstable fit, stable fit and neutral fit. An unstable fit comes as a result of a defensive strategy towards the change, while a reactive strategy fosters stable fit, and a proactive strategy that looks ahead and anticipates many possible changes promotes neutral fit. The fit assumes that the environment shifts from one state of equilibrium to another, and that the organization is able to adapt to this. However, increasing supply chain complexity and a highly dynamic global business world is not stable, it is turbulent, and demands a new way to managing supply chain network risk: robust transformation.

Transformation

Robust transformation, so the authors say, is defined as

a deliberately transient, episodic response to a new, yet fluid, environmental condition.

Like adaptive fit, robust transformation enables a firm to accommodate the level of complexity displayed in its environment, and it enables a firm to capitalize on environmental changes in ways that create new options and capabilities. But it does not trigger the firm’s immune system response, to use the authors’ own words.

Three responses

Environmental change invokes three responses in organizations:

• First, an implementation of (new) routines in response to change
• Second, routines result in an organizational change
  • adaptive fit
  • robust transformation
  • reinforcement of established organization
• Third, organizational change results in performance consequences, short-term and long-term

The authors stress that there is no one right or wrong response here; the type of environmental change and duration of environmental change is what should determine which way to respond.

Routines and Complexity

Organizational routines are instrumental in how environment complexity and environmental changes are handled by firm. Three main options exist:

• Routines that disregard complexity, where habitual patterns override any attempt at actively managing complexity, by withdrawing from and avoiding change or by escalating committment and continue on the initially set course until it fails.
• Routines that reduce complexity, where organizations  seek adaptive fit by emphasizing order and stability, by regulating interactions and relationships and by limiting differentiated interpretations of the environmental change and how to respond to it.
• Routines that absorb complexity, where organizations maintain a broad repertoire of options and enough action flexibility to create effective and contingent responses.

The first is perhaps a sort of see no evil, hear no evil, do no evil, “ignore it and it will go away” kind of response. Unfortunately, this sort of risk management by ignorance or avoidance is not unheard of in supply chain management. The second probably works well as a quick response getting back to business as usual as soon as possible. The third requires a company that takes comfort in chaos and that thrives in an environment of creativity and continuous organizational learning, something that in itself promotes organizational resilience, as I wrote about in a previous post.

Performance Consequences

Each type of environmental change and organizational (pre-)conditions and the resulting response leads to different performance outcomes. Success is only possible with the right response, under the right conditions, matched with the right change, as illustrated in the figure below:

Resilience capacity

This is the final part of the article that sums up the what is said above, and here the three components of resilience capacity that I described in my review of Risicomanagement en Logistiek are detailed:

• Cognitive resilience
• Behavioral resileince
• Contextual resilience

The first is what enables an organization to notice, interpret, analyze and formulate appropriate and ingenious responses beyond mere survival. The second is what enables a firm to learn about a situation and what moves a firm forward in a collaborative manner. The third is what provides the setting for using the previous components and is marked by deep social capital and a broad network of resources.

Resilience capacity, according to the authors, is learned. It is developed and honed over time, with every new change the firm encounters and successfully (or unsuccessfully, i.e. learning from failures) resolves. Most importantly, resilience capacity will lead the company to correctly judge the proper response to environmental change: complexity absorption and robust transformation for temporary or perpetual change, and than adaptive fit for skipping from one equilibrium to the next.

Conclusion

When looking into supply chain risks and how organizations should face these risks, which is the main topic for this blog, organizational change is indisputably one issue that should be considered. Resilience has grown to become they key ingredient in supply chain risk management. However, supply chain resilience does not come from looking at the supply chain alone; changing routines and processes cannot create resilience.   As Ken Simpson wrote in one of his most recent posts on developing resilience,

Culture and structure are important starting points in creating the environment for resilience. Creating the environment to become resilient requires engagement at strategic levels and as part of overall organisational development.

Resilience can only come from an inner transformation of the whole organization. I think today’s article has a lot to offer and supply chain management and logistics can benefit a great deal from including social and organizational sciences in their thinking, as James Stock already said in 1997.

Reference

Lengnick-Hall, C. (2005). Adaptive Fit Versus Robust Transformation: How Organizations Respond to Environmental Change Journal of Management, 31 (5), 738-757 DOI: 10.1177/0149206305279367

Author links

• utsa.edu: Cynthia Lengnick-Hall
• uncc.edu: Tammy E Beck

A conceptual framework

The title of the paper is From Risks in Supply Chains to Risk in Virtual Enterprise Networks: Ideas, Concepts and a Framework.

Conceptual in its approach and drawing from other areas of research, this paper introduces four distinct groups of VENS, namely Constrained, Directed, Limited and Free VEN, and concludes that VEN risk management can and should learn from supply chain risk management. The abstract was accepted and I have now submitted my final paper. The final paper will be made available on this website after the conference.

The paper is largely based on my submission for a book chapter titled A Conceptual Framework for Risk and Vulnerability in Virtual Enterprise Networks for the book on Managing Risk in Virtual Enterprise Networks: Implementing Supply Chain Principles. The chapter has been accepted, pending some final revisions, and will hopefully be available in print by the end of this year or early in 2010. See my brief pre-review of Managing Risk in Virtual Enterprise networks.

Read online

Jan Husdal MITIP 2009

Links

• MITIP 2009: Conference website

Related

• husdal.com:
  Managing risks in virtual enterprise networks
• husdal.com:
  MITIP 2009 – a conference worth considering
• husdal.com:
  Call for papers – MITIP 2009

Finding myself

It is actually quite interesting how I found this article. Remember my post on the Catch 22 of Academic Publishing? In that post I realized that the final value of academic publishing lies maybe not in the number of articles you publish, but in the number of publications that are actually cited. The higher the number of citations, the higher the level of utility. As it turns out, many of the articles on this site, which indeed are academical work,  but  are far from being academically published (as in academic journals), are nonetheless  widely used in the academic community, even to the point of being mistaken for my PhD. As I was following up on my post on the actual scholarliness Google Scholar, I decided to put Google Scholar to the test and search for myself to see what else that would turn up. That is how I came across the article for today’s post, where the author had used a very early (and I’m compelled to say ‘premature’) version of my thoughts on flexibility and robustness as one of their references.

Attempting to make sense of it all

The way the authors go about in their review is reminiscent of the approach in an article previously reviewed on this blog, namely Vanany, Zailani and Pujawan (2009) Supply chain risk management: literature review and future research, where the focus was on anything supply chain risk management, hence my title for today, reflecting on the very similar title for my review of Vanany et al, Supply chain risk management – a complete review? And do Babu & More (2008) deliver a complete review of anything supply chain flexibility?

The review of More & Babu

In their 34-page review the authors examine an impressive list of 107 articles and classify various aspects of supply chain flexibility. It is indeed a voluminous paper and not the easiest to keep oversight in,  and the authors do a formidable job in keepings things separate, I have to give them credit for that.  So, let me give you a short run-down off the essential findings:

Understanding supply chain flexibility

First,  More & Babu highlight some of the definitions and characteristics of (supply chain) flexibility used in their list of articles, before reverting to a definition of supply chain flexibility they themselves used in a previous conference presentation:

the inherent ability, or characteristics of the supply chain and its partners,

• to be sensitive to minor and major disturbances in the business environment,
• to correctly assess the actual situation,
• to quickly respond, adjust and adapt with little time, effort and cost, and
• to effectively control the organization, and
• to keep the performance stable.

While I agree that this definition encompasses most elements that need to be in place for a supply chain to be flexible, in my opinion it is not ‘crisp’ enough and it does not stand out vis-a-vis supply chain agility. However, the difference is clarified later in this paper, and I realize that the author use supply chain flexibility as an overarching or overlapping concept,that has much common ground with other concepts.

Types of supply chain flexibility

In defining ‘types’ of supply chain flexibility the author list no less than 71 different types, linking each type with the appropriate reference. I believe that some of these could and should be aggregated into other types, thus reducing the overall number, but it only goes to show that flexibility in one industry is different from flexibility in another industry.

Dimensions of supply chain flexibility

After describing the various types of supply chain flexibility, More & Babu propose three domains of dimensions for supply chain flexibility:

• core flexibility
• global flexibility
• supplemental flexibility

Core flexibility, obviously being the most important dimension, is described more in detail, the others more cursory. This is not a glitch, but only natural, since the other dimensions essentially are a result of  core flexibility, which relates to:

• Manufacturing
• Sourcing/Procurement/Purchasing
• Logistics Distribution
• Information and communication (ICT)
• Organization
• Human resources
• Market

Global flexibility is essential for achieving spatial and temporal flexibility and is seen as a response to environmental uncertainty. Although not clearly defined in the article, global flexibility encompasses all elements needed for stretching a supply chain around the globe, from supplier to end customer, particularly related to a network that can change time and space.

Supplemental flexibility appears as a rather foggy concept and I am not sure what the authors mean, but I guess it is anything else related to flexibility and not covered above. Or it could be flexibility that is not intended or designed or built in, but just happens to be there when needed?

Supply chain flexibility for business excellence

This section of the article deals with supply chain principles and how they relate to or are different from supply chain flexibility. I should add that while some of them are well described and well discussed, others are only given a more cursory review.

Supply chain flexibility – lean

While lean may work well in a predictable and non-volatile environment, flexible works better when faced with disruptive events.

Supply chain flexibility – agile

Agility is an extended concept of flexibility, and is achieved when the system is inherently flexible and able to repond to unpredictable events. A flexible system can be, but isn’t always agile; an agile system is always flexible.

Supply chain flexibility – responsive

Responsiveness is the ability to react  to customer demands or market changes. An inherently flexible system is able to respond; however, it is possible to be flexible, but not responsive, while responsiveness will always imply that there is an underlying flexible system. A flexible supply chain with time (to meet and satisfy the changes) as the primary constraint is a responsive supply chain.

Supply chain flexibility – resilient

Here the authors follow Sheffi in that more flexibility equals more resilience, thus enabling continuous reconstruction and the ability to bounce back after any disturbance.

Supply chain flexibility – robust

Interestingly, my own article on robustness and flexibility, which they reference, makes it into the ‘robust’ category. I’m not sure that’s where I would put it, but maybe yes. At that time (2004) my ideas on flexibility were still in the molding. However, as More & Babu see it, flexibility is an external concept, robustness is an internal concept, being flexible is to adapt and adjust, being robust is to accommodate and absorb. Faced with a disruption or external event, a robust supply chain will continue unchanged, while a flexible supply chain will continue changed. Robust is being risk averse and seeking certainty. Flexible is accepting uncertainty and and the risk that comes with it. I am not sure that is how I saw it in 2004, but looking back at my definitions of robust and flexible, yes, that interpretation is justified.

Forces and dynamics of supply chain flexibility

This is one of the more interesting parts of the paper, where they look at three (four) new terms: (domains and) stimuli, enablers and inhibitors, all contributing to how, or how not, supply chain flexibility can be achieved. The individual items pertaining to these terms make up an impressive list, which is very thorough, drawn from the reviewed literature.

Stimuli

Stimuli are the elements that compel the supply chain partners to take actions in response to a changing environment. Listing 16 domains (e.g. customer, competitor, technology, market, product, and 13 more…), the authors look at which stimuli that would bring forth supply chain flexibility. In technology, for instance, it could be rapid advances in technology, in product it could be shorter and shorter life cycle of products, and so on. Some 70 or so stimuli are listed.

Enablers

Enablers are tools and techniques that support the implementation or realization of supply chain flexibility. The authors divide the enablers according to six ‘segments’ in the supply chain, starting with supply and procurement, and divided into sub-segments, and list some 150-200 enablers (I gave up counting).

Inhibitors

Inhibitors are internal and external forces that impede the supply chain. Here we have another ‘everything that comes to mind’ list, including no less than 62 inhibitors, ranging from market constraints to the more mundane ‘low morale’.

The dynamics of three forces

This is where the paper really lets me down, slightly. While the discussion itself is excellent, the figure that is supposed to illustrate the three concepts and the discussion leading up to it, is more or less completely void of any of the aforementioned, at least in the way it was presented. It is almost as if this is a completely different model, a good model, but not what I expected.

The verdict

The basic message I am reading out of this paper is that ‘It is all supply chain flexibility’, whatever we name it, whatever other concepts we bring in, it all comes down to one thing: being flexible. I am also impressed with the breadth of the paper. That is the upside.

If there is a downside to this paper it has to be the length and the attempt at being exhaustive to the point of including way too much detail. This leads to an overly lengthy listing of items, i.e. the discussion of stimuli, enablers and inhibitors, which would have fared much better had it been focused on a few aggregated items. While the stimuli, enablers and inhibitors are said to be drawn form the literature, no particular references are made to which is drawn from which literature.

I would also have liked to see the a model that actually incorporates the three forces.

While apparently geared towards manufacturing and operations, the wider scope of supply chain seems to be somewhat missing from the paper, e.g. I did not find the any of the seminal papers by Cooper, Lambert and Pagh in their reference list. Not that they should have been there, not really, but I usually expect at least one of those papers in a paper on supply chains.

Conclusion

That said, given the breadth and length, there IS much food for thought. And to answer the question stated in my title, yes, it is a complete review of supply chain flexibility as far as I am able to judge.

Reference

More, D., & Babu, A. (2008). Perspectives, practices and future of supply chain flexibility International Journal of Business Excellence, 1 (3) DOI: 10.1504/IJBEX.2008.017885

Links

• iitb.ac.in: A Subash Babu
• iitb.ac.in: Dileep More

Related

• husdal.com: De-confusing SCRM – robustness, resilience, flexibility and agility
• husdal.com: Robustness, Resilience and Flexibility in the supply chain
• husdal.com: Robustness and flexibility as options to reduce uncertainty

Various approaches

Over the years, many definitions have popped up throughout the literature and some of my thoughts have already been posted in my previous post on robustness, resilience and flexibility. Here is an updated version, with references to the supporting literature. Mind you, this is not meant as an exhaustive list, it is just a selection of articles that I have found useful:

Goranson (1992) differentiates between agility and flexibility. Flexibility is scheduled or planned adaption to unforeseen yet expected external circumstances. Agility is unplanned and unscheduled adaption to unforeseen and unexpected external circumstances.

Rice & Canatio (2003) focus on security and resilience by upholding flexibility and redundancy as two methods with the greatest potential to create resilience. Redundancy is capacity that may or may not be used; it is this additional capacity that would be used to replace the capacity loss caused by a disruption. Flexibility, on the other hand, entails redeploying previously committed capacity.

Lee (2004) uses the term “Triple-A” supply chain (agility, adaptability and alignment). Agility means to respond quickly to changes (and disruptions) in supply and demand, adaptability means to adjust to shifting markets and alignment implies an equitable sharing of costs, gains, risks, knowledge and information across the whole supply chain.

Christopher & Peck (2004) contend that resilience implies agility, and define supply chain agility as the ability to quickly respond to unpredictable changes in demand and supply, slightly akin to Goranson’s definition. An agile and responsive supply chain, they argue, requires agile partners upstream and downstream of the focal firm.

Lummus, Duclos & Vokurka (2003) and  Duclos, Vokurka & Lummus (2004) see flexibility as a cross-enterprise undertaking composed of 6 components: 1) operations – the ability configure assets and operations according to customer trends, 2) market – the ability to customize design and build close relationship with customers, 3) logistics – the ability to receive and deliver according to locational changes in supply and demand, 4) supply – the ability to reconfigure the supply chain, 5) organization – the ability to align labor force skills with customer or demand requirements and 6) information systems – the ability information systems architectures and systems with changing information needs in response to changes elsewhere in the organization.

Sheffi (2005) sees flexibility as a way to achieve resilience, stating that instead of relying solely on supply chain redundancy, a well-managed firm should develop resilience, by building flexibility that can be used to ‘bounce back’ from disruptions. To me, that would rather be agility (in line with Goranson’s definition)  than flexibility.

Tomlin (2006) differentiates between contingent and mitigative actions. Flexibility can here be seen as a contingency action, that is: actions taken in the event of a disruption. Redundancy can be seen as a mitigation action, that is: actions taken in advance of a disruption, hence incurring a cost regardless of disruption.

McManus et al. (2007) view resilience as depending on 1) keystone vulnerabilities, criticality and preparedness, 2) situation awareness, stemming from an assessment of the keystone vulnerabilities, and 3) adaptive capacity, which is nothing other than flexibility and agility. Resilience, in essence, is the ability to survive disruptive changes despite severe impact.

Asbjørnslett (2008) sees flexibility or agility as the inherent capability to modify a current direction to accommodate and successfully adapt to changes in the environment, whereas robustness refers to the ability to endure such changes without adapting. Resilience is the ability to survive despite withstanding a severe and enduring impact.

In summary

Flexibility or agility, robustness and resilience are different sides of the same coin, yet at the same time distinctively different animalsThe difference between robustness, flexibility, agility and resilience is illustrated in the figure below, taken from Husdal (2009). Note that there is a distinct notion of different severity in each of these definitions.

The ability to survive (resilience) is likely to be more important in a business setting than the ability to quickly regain stability (robustness) or the ability to change course (flexibility or agility). Supply chain risk management must include all.

Reference

Asbjørnslett, B. (2008). Assessing the Vulnerability of Supply Chains. In Zsidisin, G. A., & Ritchie, B. (Eds.) Supply Chain Risk: A Handbook of Assessment, Management and Performance. New York, NY: Springer.

Christopher, M., & Peck, H. (2004). Building the Resilient Supply Chain The International Journal of Logistics Management, 15 (2), 1-14 DOI: 10.1108/09574090410700275

Duclos, L., Vokurka, R., & Lummus, R. (2003). A conceptual model of supply chain flexibility Industrial Management & Data Systems, 103 (6), 446-456 DOI: 10.1108/02635570310480015

Goranson, T. (1999). The Agile Virtual Enterprise. Westport, CT: Quorum Books

Husdal, J. (2009). Does location matter? Supply chain disruptions in sparse transportation networks. Paper presented at the TRB Annual Meeting, Washington DC.

Lee, H. L. (2003). The Triple-A Supply Chain Harvard Business Review, 82 (10), 102-112

Lummus, R. R., Duclos, L. K., & Vokurka, R. J. (2003). Supply Chain Flexibility: Building a New Model Global Journal of Flexible Systems Management, 4 (4), 1-13

Mc Manus, S., Seville, E., Brunsdon, D., & Vargo, J. (2007). Resilience Management: A Framework for Assessing and Improving the Resilience of Organisations (Report No. 2007/01). Christchurch, New Zealand: Resilient Organisations.

Rice, J. B., & Caniato, F. (2003). Building a secure and resilient supply network. Supply Chain Managment Review, 7(5), 22-30.

Sheffi, Y. (2005). The Resilient Enterprise – Overcoming Vulnerability for Competitive Advantage. Cambridge, MA: MIT Press.

Tomlin, B. (2006). On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks Management Science, 52 (5), 639-657

Related

• husdal.com – Supply Chain Flexibility: a complete review?
• husdal.com – Robustness, Resilience and Flexibility in the supply chain
• husdal.com – Robustness and flexibility as options to reduce uncertainty

A holistic concept

The paper defines the concept of vulnerability as it applies to production systems and is built around three concepts:

• A taxonomy of vulnerability factors as a basis for or guideline in establishing scenarios
• An input/output model to describe production systems
• A two-step vulnerability analysis for productions systems

I found the paper interesting in many ways, and that is why I decided to take a closer look at it and see if it fits into the context of supply chain vulnerability.

The concept of vulnerability

In 1997 the concept of vulnerability was still relatively unexplored. Resilience and vulnerability are two terms that have grown in both the research literature and the popular literature in recent years, yet, surprisingly, already in 1997, the authors draw a clear line of distinction between the terms vulnerability, robustness and resilience.

A robust or resilient system is able to withstand or absorb disturbances without catastrophic failure and still persist.

Robust means being able to resist an accidental event and return to the same stable situation than before the event. Resilient means being able to return to a new (often “lower”) stable situation than  before the event.

The key message is that a robust system will retain its system structure intact, while a resilient system has to adapt to regain a new stable position. There is a distinct notion of severity in these definitions. In a business setting, the ability to survive (resilience) is much more important than the ability to quickly regain stability (robustness).

Disruption profile, from: Asbjørnslett (1997)

This figure, taken from the article is very similar to Sheffi’s disruption profile and the description of Resilient Organizations in New Zealand.

Vulnerability factors

The paper distinguishes between two sets of factors, external and internal factors. Within these factors there may be latent threats that can cause potential harm if the factors manifest an accidental event. The figure may not be directly transferable to the realm of supply chains, but one could propose that internal factors are “in-house” or directly controllable, whereas external factors are “out-house” or “outsourced” to use SCM lingo, and only indirectly controllable, if at all controllable.

Input/output model

The input/output model, see figure below, is transferable, if, the flow through the production system is  replaced with a supply chain going from supplier via focal firm to the customer.

Input-Output Model, from: Asbjørnslett (1997)

The external and internal factors can no be used as a checklist against the inputs (and outputs) and form the basis of a vulnerability analysis. Similarly, these factors can be used vis-a-vis a supply chain, to assess its vulnerability.

Vulnerability versus Risk Analysis

A vulnerability analysis is not the same as a risk analysis. A risk analysis is focused on the human, environmental and property impacts of an accidental event, while a vulnerability analysis is focused towards the survivability of the system.

Risk analysis vs. vulnerability analysis, from: Asbjørnslett (1997)

A vulnerability analysis then, focuses on 1) an extended set of threats and consequences, 2) adequate resources to tackle the event and bring the system back to new stability, and 3) the length of disruption before the new stability is established. Clearly, Vulnerability analysis has a wider scope than risk analysis. In particular vulnerability analysis addresses how to mitigate the identified threats and restore and restart the system after an accidental event. This is akin to the distinction between mitigative and contingent actions in Tomlin (2002).

Vulnerability Analysis

Finally then the paper describes the stepped vulnerability analysis. First, a scenario assessment is developed, listing threats and likelihood of potential scenarios and whether or not there are contingent or mitigative measures already in place. Second, a quantitative analysis of the former is performed, ranking threats and scenarios by criticality in terms of human, environmental, business and property impacts. Third, the ranked threats are plotted in a vulnerability matrix similar to the one below.

The fourth step is to take the most critical events in the vulnerability matrix and list how these threats are to be dealt with, in order to reduce a) the likelihood of the event occurring and b) the consequences should the event occur.

Conclusion

The paper is short, but to the point. Albeit not directly supply chain related, the vulnerability analysis described in this paper can indeed serve as a framework for analysis of supply chain vulnerability, and as such is now in fact widely employed by supply chain risk management professionals. An updated version of this paper has also been published in the book Supply Chain Risk, edited by George Zsidisin and bob Ritchie.

Reference:

Asbjørnslett, B E and Rausand, M (1997) Assess the vulnerability of your production system. Report NTNU 97018. Norwegian University of Science and Technology NTNU, Department of Production and Quality Engineering, Trondheim Norway.

Image 1-3 (Fig. 1+4+5), copyright by Asbjørnslett and Rausand (1997)

Author links

• ntnu.no: Bjørn Egil Asbjørnslett
• ntnu.no: Marvin Rausand

Links

• resorgs.org.nz: Resilient Organisations
• ntnu.no: ROSS – Reliability and Safety Studies

Related

• husdal.com: Risk Management: Contingent versus Mitigative
• husdal.com: Book Review: The Resilient Enterprise
• husdal.com: Book Review: Supply Chain Risk

Flexibility and robustness are two sides of the same coin, yet at the same time two distinctively different  animals. Flexibility is the inherent capability to modify a current direction to accommodate and successfully  adapt to changes in the environment, whereas robustness refers to the ability to endure such changes  without adapting.Resilience, in essence, is the ability to survive these changes despite severe impact.

Let me explain the figure below. The thick line symbolizes the supply chain, going from its current state  “now” to a future state “future”. The  thinner arrows indicate events that may or may not disrupt the supply  chain. The thickness of the supply chain arrow indicates how seriously impacted the supply is by these  events.

A robust supply chain stays on course, so to speak. Yes, there are impacts, but they do not severely hamper the flow of the supply chain or supply network. Example: having a redundant production line, just in case.

A flexible supply chain is able to accommodate disruptions by changing its course and even the target, the flow itself (the throughput) is not impacted. Example: switching suppliers or re-designing a product.

A resilient supply chain is impacted, but it is able to come back to where it was. This may often be the case after disruptions due to natural disasters or after loosing the only single-source supplier.

Although these three terms are distinctively different it is practically impossible to draw a clear line between them as far as supply chains are concerned, saying that a supply chain is either this or that. Which strategy that works best would depend not only on the supply chain in question as a whole, but also which part of the supply chain that may be vulnerable. A best-practice supply chain would in fact encompass all three, making it robust, flexible and resilient at the same time.

For a fuller discussion of robustness, flexibility, resilience and agility, you may be interested in reading an updated version of this post, which also includes literature references: De-confusing robustness, resilience, flexibility and agility

Related

• husdal.com: De-confusing robustness, resilience, flexibility and agility
• husdal.com: Robustness and flexibility as options to reduce uncertainty

Introduction and outline

Any company operating in international markets will face a multitude of risks. Acknowledging these risks and devising a strategy for how to deal with these risks is a prerequisite for survival in today’s competitive market. Assuming that the task to come up with a new strategy implies that the old strategy has outlived itself or at least has proven itself wrong on too many occasions, the stage is now set for a new approach. This chapter first will present the main risks that are facing the company. Then, the available options to reduce the risk will be considered. Finally, in relation these risks, flexibility and robustness will be introduced as a tool to handle uncertainties (risks).

What are the main risks facing the company?

The main risk facing any company is the stochasticity, i.e. the randomness, of the real world. This implies that regardless of any meticulously laid plans for the future, this future will always be uncertain, and no plan will be able to guarantee a certain outcome. Uncertainty takes on many forms: a rise or fall in the raw material prices due to shortages or surpluses, uncertain lead times, uncertain government constellations, and hence regulations in foreign countries, breakdown or failure of a major production facilities, labour union issues and last but not least, the known and the yet unknown competitors, to name but a few. These are just some of the risks which must be considered, as is highlighted by the following, which is not meant be an exhaustive list.

Production and manufacturing

If, say, the company employs a production facility in Norway and one in the Far East (China), the production costs per unit in terms of labour and raw material will differ considerably between these two plants. Global, regional and local market fluctuations can and will affect productivity and cost-effectiveness at both locations. Health and safety and environment regulations may change; the same applies to government regulations and taxation schemes. New production methods and modes may arise which the plant cannot cater for. Especially in the Far East, competitors may be able to produce similar goods at lower cost.

New locations

The issues that already affect the current production facilities are even more uncertain when considering potential new locations. The same issues as above apply here, too.

Inventory

Maintaining an inventory that adapts flawlessly to consumer demand is challenging, since demand, albeit calculable and to some degree directable through marketing efforts, in essence is a stochastic variable.

Transport and inventory are closely knit, and preferably, most of the inventory should always be “on wheels”, that is, on its way to the end customer rather than occupying costly space at a warehouse. Finding the optimal solution for demand, inventory and transport is challenging and changes constantly.

Demand may be uncertain; supply, however, should not be. The biggest risks here are breaches of contract and currency exchange fluctuations. The latter impacts the cash flow, the former may have a sever impact on business reputation.

How to meet risk and uncertainty

Robustness and flexibility are tools for meeting uncertainty, and robustness analysis is a way of supporting decision making when there is uncertainty about the future (Rosenhead, 2002). Robustness is the ability to accommodate any uncertain future events or unexpected developments such that the initially desired future state can still be reached. Flexibility is the ability to defer, abandon, expand, or contract any investment towards the desired goal. Flexibility and robustness are two sides of the same coin, yet at the same time two distinctively different animals. Being robust does not necessarily entail being flexible and being flexible does not necessarily entail being robust. If robustness can be compared to how you dress to meet different weather conditions, then flexibility can be compared to your ability to switch between walking, running, cycling, driving your car, or whichever mode of transport you choose. As Ku (1995) puts it, flexibility is the inherent capability to modify a policy to accommodate and successfully adapt to such changes, whereas robustness refers to the ability to endure such changes.

Figure 1: The principal difference between robustness and flexibility.

Robustness (above) means the ability to stay on course and to accommodate unforeseen external events (indicated by arrows). Flexibility (below) means the ability to accommodate unforeseen external events by changing tracks while being open to deviate from the initial course.

Figure 1 illustrates the terms robustness and flexibility. Robustness means the ability to stay on course and to accommodate unforeseen contingent events. Flexibility means the ability to accommodate unforeseen external events by changing tracks and being open to deviate from the initial course. In reality no strategy should be built on pure robustness or pure flexibility, but should be a merger of both.

Making decisions when faced with uncertainties is a difficult task. The following is a description of some of the tools that are available for decision support. Again, it is not an exhaustive list, merely a shortlist of the most used methods.

Scenario analysis

One way to handle uncertainties is to use scenario analysis, applying the concept of expected values. This turns stochastic variables into deterministic parameters. One clear advantage of this method is that the outcome of a large number of possible inputs or decisions can be analysed. Using scenario analysis, the supposedly most likely, or most expected, future can be determined, and initial decisions made accordingly. The downside of scenario analysis is its inability to handle contingent decisions that arise within the scenario. So, once the scenario is determined, and decisions made, and the future starts running, there is practically no way of returning and making a different decision, certainly not without paying a hefty price. In addition, the most likely scenario may not be the optimal solution. However, scenario analysis does have its value, and it should not be discarded as useless, but it should be kept in mind that it is not able to foresee the future, no matter how much we wish for it to do so.

Net present value NPV

Based on the analysis of various scenarios, the future revenue streams related to these scenarios can be calculated and when discounted to their net present value, the scenario or decision with the highest net present value should be the preferred decision. This works fine as long as the scenario unfolds as planned, but fails miserably when faced with uncertainty. The supposedly most likely scenario is only most likely as longs as the inherent assumptions for the scenario hold, if they don’t, and one can never be sure that they actually do hold, the most likely scenario is a potential recipe for disaster. Another issue with using the net present value is setting the correct discount rate. If it is too high, only highly profitable projects will be considered, if it is too low, the portfolio of possible projects may become too large, or may not reflect the actual risk of undertaking these projects.

Option theory

Options in a sense seem to be the perfect answer to uncertainties. Originally developed for the pricing of options on financial assets, option-pricing theory is equally well suited for capital budgeting purposes. The reason is that many decisions are contingent on the outcomes of stochastic events, hence the similarity between financial options and real life options or real options. The theory of options is extensively covered in (Dixit and Pindyck, 1994), and prescribes optimal investment rules under uncertainty. Since flexibility in projects may have a substantial value and may constitute a significant contribution to the net present value, it is imperative to estimate the value of these flexibilities or options. For all practical purposes, the estimation of real options follows the estimations of financial options and is carried out in the same manner and beyond the scope of this paper.

Risk averse, risk neutral or risk seeking?

In scenario analysis, risk is accounted for by assuming that the most expected scenario actually will occur. In NP-assessments, risk can be accounted for by adjusting either the discount rate or the future cash flows, which both will affect the NPV. In options theory, risk is accounted for by valuing the opportunity cost of making a commitment now or postponing it. The value of an option that is given up (“killed”) is explicitly taken into account.

Regrettably, more often than not risk aversion is the common sense strategy for betting against an uncertain future. As a company, our risk is to a large extent carried by our shareholders, and being risk averse may inadvertently reduce shareholder value, since insurance implies that basically “nothing can go wrong”. However, risk aversion seldom generates higher revenue streams and almost never fosters innovation, which is the prerequisite for staying ahead in today’s market. In a robustness/flexibility setting, the risk averse decision maker would prefer robustness over flexibility. The risk taking decision maker would seek a high level of flexibility. Hence, it follows that a risk neutral decision maker would employ a sound mix of both robustness and flexibility. As Ku (1995) says, flexibility denotes immediate responsiveness while robustness provides an insurance or cushion against undesirable events (p. 409).

Flexibility and robustness as options to reduce risk

Flexibility and robustness should be seen as tools, or options if you so wish, in attitude towards risk. Figure 2, taken from Gerwin (1993), describes how robustness and flexibility can be used to reduce uncertainty or adapt to it. Note the distinction between reduction and adaptation that clarifies the difference between robustness and flexibility. Robustness reduces uncertainty because necessary steps are taken to minimise the (unwanted) effects of uncertainty. Flexibility does not minimise the effects per se, but (simply) adapts to it. Flexibility means the ability to change or react when necessary (Ku, 1995); robustness means the absence of a need to change or react (p. 413).

The following presents an overview of how robustness and flexibility can be put into use in the mentioned business areas, see also Bengtson (2001) and Olhager et a. (2002).

Figure 2: Using robustness and flexibility in reducing and adapting to uncertainty.

In: Ku (1995) – adapted from Gerwin (1993)

Production and manufacturing

With regard to the mentioned risks continuing to invest or upgrading one or both of the existing plants, shutting down one, or shutting down both and moving the production facilities to a new location. In addition, there may be the option of shutting down temporarily. Another option could involve changing the type of products produced, such that the high-cost factory serves the high-end market and the low-cost facility serves the mass market. Finally, there is also the possibility of installing re-configurable machinery such that new production lines can be set up easily.

New locations

Moving to new locations is risky. A whole new facility must be set up, including the logistics that need to go with it when production starts, both in terms of supplying raw materials, hiring workers, complying with new regulations and bringing finished products to the market. Several options should be explored, and strategies should be devised that allow for quick de-constructing and re-establishing of production facilities.

Inventory

Inventory uncertainty relates to uncertainties in demand and supply, producing over capacity at all costs is not an option. However, if lead times between facilities and/or warehouses are acceptably low, a flexible stocking system is probably better than a robust system that requires constant overstocking.

Transport

Reducing risks in transport will involve flexibility in fleet size/type and/or vehicle routing. A robust system is most likely too rigid and unable to respond quickly to changing demand.

Supplying and purchasing

To reduce the risks, several types of contracts must be sought, both long-term and short-term, that can be cancelled if conditions turn unfavourable, i.e. if the exchange rate suddenly drops and profits diminish. Applying forwards and futures is another method for securing a guaranteed future cash flow.

Conclusion

A strategy for robustness and flexibility must be inextricably linked to the strategies for all business areas, which need to contain measures of robustness and flexibility, and it is the interaction of the individual robustness and flexibility of these business areas that determines how robust and flexible we are as a company. Flexibility and robustness come at a cost. In any case, it must be determined whether flexibility or robustness is the better option.

References

Bengtson, J (2001) Manufacturing flexibility and real options: A review. International Journal of Production Economics, 74, pp.213-224. Elsevier Science.

Dixit, A K and Pindyck, R S (1994) Investment Under Uncertainty, Princeton University Press, Princeton NJ.

Gerwin, D (1993) Manufacturing Flexibility: A Strategic Perspective, Management. Science, Vol. 39, No. 4, April, pp. 395 – 410.

Ku, A (1995) Modelling Uncertainty in Electricity Capacity Planning. Unpublished PhD thesis. London Business School, London, UK. Available at www.analyticalq.com/thesis/ch6.pdf (Last accessed 10 Dec 2004).

Olhager J and West, M W (2202) The house of flexibility: using the QFD approach to deploy manufacturing flexibility. International Journal of Operations and Production Management, 22, 1, pp. 50-79.

Rosenhead, J (2002) Robustness Analysis. EWG-MCDA Newsletter, Series 3, No.6, Fall 2002 Available at www.inescc.pt/~ewgmcda/ForRosenh.html (Last accessed 10 Dec 2004).

Wallace, S W (2003) Decision making under uncertainty: The art of modelling. Unpublished course text. Molde University College, Molde, Norway.

Reference

Husdal, J. (2004) Flexibility and robustness as options to reduce risk and uncertainty. Unpublished working paper. Molde University College, Molde, Norway. Available online at http://husdal.com/2004/12/15/flexibility-and-robustness-as-options-to-reduce-risk-and-uncertainty/ (Last accessed on [date]).

Read online

Flexibility and Robustness as options to reduce uncertainty

Updates

This paper has been updated in these later posts, where the framework has been further refined:

• husdal.com: Robustness, resilience and flexibility in the supply chain
• husdal.com: Robustness, resilience, flexibility and agility