The business world has become more unpredictable but also more closely linked at the same time. Wars and geopolitical confrontations can result in closures of markets, limitations of critical materials, and a drastic change of the direction of trade. A powerful hurricane or earthquake which would be a relatively normal event under a static climate would, after climate change, result in destruction, the interruption of production and of a power grid. Currently, major shocks affecting supply chains spread almost instantly and in most cases get magnified before reaching a firm.
Such physical disruptions can be combined with economic shocks and fluctuations in the markets – unexpected inflation, credit contrictions, tariff changes, or even demand drop – so that they all hit a company at the same time. This, of course, does not constitute one after another crisis but a “polycrisis”, which means that one problem will lead to another and vice versa. The ability to withstand challenges and adapt to changes in the environment without ceasing operations is, in the current context, a necessary skill for every player. Besides serving customers when situations become worse, protecting people and properties, and bouncing back faster than their competitors,
If we look at the studies that analyzed the effects of disruptions during crises, we discover that the economic damage was frequently caused by the ripple effect of a shock, and not the original event. Businesses that think of resilience not only as a set of actions after the fact but also as an ongoing series of actions like recognizing risk of concentration, experimenting, and keeping the door open to alternatives are in a much better state than those still working on the assumption of the lowest total cost per unit. The main requirement to begin this new level of preparedness is information and insight that stretch far beyond one’s main suppliers.
Many companies limit their picture of their supply to just their first-tier suppliers, though a closer examination of their risk picture often reveals that some of their most vital parts, logistics bottlenecks, and IT solutions can be found even further downstream than that. Mapping your products facilities transport modes and sub-tier sources to the sources of the geopolitical, climate, and other financial crises will uncover potential points of failure: a facility that depends on a port which is common to many companies, the existence of one country as a major producer of a mineral and of it being a country where an important company has its headquarters, the reliance, in a factory, of one unique piece of equipment, a supplier of a proprietary or non-substitutable software package.
Such analysis of failure should be fed into defining what amount of downtime of each major revenue-generating product and process is actually acceptable and how quickly their business-critical functions can be restored. Because of this, diversification is much less a blanket strategy and more a deliberate choice. The strategy for critical components of the production can include several suppliers who are all of the same quality so that there is one back-up available or two, or even one back-up plus a back-up of back-up. The best result is often a combination of different methods and strategies used simultaneously. Companies can have both local production and off-site production as a hedge and be prepared for possible situations when one location is not available due to a war or some other problem, or even if a situation changes so rapidly that even a decision on a new production location can have no influence any more if new duties suddenly increase the production cost in certain countries beyond any expectations.
The use of a mix between nearshoring/region-centric factories and the maintaining of global options can prevent the over-dependence of your suppliers while you still enjoy the productivity of the efficient way of production. In that case, not every gain from a cheaper location has to be lost. In reality the location is further away could mean higher transport and logistics costs but in exchange, a greater buffer against supply chain disruptions. Also, when a supplier is in a high-risk geopolitical region, a company should think about diversifying their supplier base in the area of that component so that it’s not just one single country’s supplier. Still, having multiple suppliers or locations for every component is not something that all companies can even get to or afford.
Companies which make good use of this method have changed their manufacturing to another place when a canal got blocked or a conflict closed off a region or sudden and heavy tariffs changed their cost structure. Having inventory is a way of getting ready for the unexpected. But strategic stockpiling can also work as a backup in case something goes really wrong. It makes sense if you are prepared for those risks or at least have the knowledge. Still, the size of these buffer materials should be based on your recovery needs rather than just being evenly distributed through the supply chain. Bringing all production activities back to one’s country does not only cost a lot, but there is also a big loss if we are talking about global trade and economic development since there are fewer countries that are willing to trade with you.
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It is a better solution to limit redundancies only for those places or functions that are very critical; such is the case when their failure is simply fatal. The physical aspects and hardening of operations are as important as making your supply channels secure and diverse. If a plant is in an area that is vulnerable because of flood storms heat, or earthquakes, then such a disaster would not only stop the operations temporarily but possibly lead to more permanent closure of the plant. Elevating equipment, building up better drainage facilities, and providing good cooling as well as emergency power are among the physical modifications that can be carried out by the plant to minimize the threat of disasters. Logistics planning needs to include alternative port use and other transportation methods.
Workforce development and protection planning like training employees from different departments, building remotely accessible/distributed work teams, and ensuring workers’ safety in cases of extreme heat or conflicts should be included as part of your strategies so that in situations where a work team can’t get to their workstation your business still has enough resources to continue its running. Of course, your electronic equipment will need to be prepared just like your buildings and other physical facilities. Having more than one geographic location and different providers for data and services backups can be the first line of defense, mostly when a major outage affecting a data center or a control tower of a company is not the only case, the most serious one is also not excluded – a total disruption of a whole system that the company is reliant on to run its business.
Financial and strategy resilience can be considered as being at the same level with operations. Scenario planning should not be limited to what was on the company’s risk register last year, but instead it should also cover events like wars, climate extremes, demand slumps, and policy shocks. The board can choose which parts of a risk to cover by insurance, which ones to set aside by keeping reserves and how much liquidity to have if they use stress scenarios which model the impact on cash, working capital, and covenant of different types of disruptions.
Insurance and risk transfer should change based on the changing level of risk rather than be an annual purchase item. Capital allocation that considers climate-related and geopolitical scenarios while deciding on site selection and product strategy turns resilience into a tool for investment decision making not a burden and cost center. Technology is a tool to speed up decisions but never a substitute for the human ability. Having a control tower, the possibility of analyzing the future via predictive analytics and having a tool for AI-assisted forecasting will enhance the ability to detect demand and provide warning signs early.
Having a dashboard which reflects spare capacity and alternative supply routes is already allowing a company to change their route when a main ship route is closed or a particular market is no longer available for business. The exact tools may be helpful to model and foresee different things, such as tariffs, conflict, or bad weather before they become reality. Though, those tools will not replace the need for continuity plans that have been well tried and verified, the decision making rights to clearly delineate the responsibilities and authority, the “game days” exercises that simulate real-life situations for suppliers, the company, and human workarounds to be the subject of testing and discovery of potential deficiencies.
Governance is the key to making sure that the different pieces of a system fit together seamlessly. Resilience cannot be a one-time project; the board must take the initiative by making geopolitical events and climate changes part of the regular agenda and not seeing them as something exceptional that is not dealt with regularly or at great length.
Contractual agreements with major suppliers should be more than just a standard document. They must involve, for instance, setting the supplier’s responsibilities upon major incidents, having a level of supplier sub-tier visibility, and offering transition assistance. A joint effort of public and private sectors as well as a system among the industry players sharing information on the kinds of threats they foresee can greatly help in bringing down the level of risk that is systemic and is so big that no single enterprise can address it.
It all comes down to a culture: firms that make uncertainty a design constraint will move faster when the next upheaval comes. The main idea is that instead of reacting after the shock has occurred and trying to absorb the consequences, the business is preparing beforehand for the unexpected to happen and design it into the business operations.
Resilience is not, that means, synonymous with being prepared to handle every kind of catastrophe. Rather, the term resilience is used in a way where a business is fully confident that there are elements within the business which cannot be allowed to fail at a great cost to the company. That is, the company has figured out the ways to prevent such failures and if by some chance they happen, they have a way of dealing with the fallout.
Ultimately, the way the organization views the future, its ability to come up with a number of alternatives and ways to deal with different situations in the future, and its financial cushion are the factors that determine whether in the face of the unknown an organization will either absorb or get defined by it. Visibility options financial buffer, and practice of responding are the four pillars of resilience as well defined as those factors.
