Building Resilience: Balancing strategy, risk and investment

How well will you respond to the next disruption?

The world has become increasingly complex, and continued globalisation of supply chains and consumer markets, presents opportunities, but also vulnerabilities that organisations must consider seriously. COVID-19 has exposed many of these vulnerabilities across global supply chains, and 3-years on, many sectors are still experiencing significant challenges. As a part of SPP’s supply chain resilience spotlight series, we explore Australian organisations’ exposure to these vulnerabilities, and propose a framework for measuring and building resilience.

Organisations must comprehensively address resilience through pre-emptive action, timely responsiveness and targeted recovery.

Resilience (supply chain or otherwise) refers to the ability of an organisation to identify, prepare for, respond to, and recover from expected and/or unexpected disruptions that may undermine business operations. COVID-19 exposed deep-seated vulnerabilities, particularly in supply chains that had been previously not been identified as a high risk, and not been viewed as a strategic priority. The realisation of these neglected vulnerabilities has caused organisations to reconsider the real risk of external threats and overall importance of supply chain as a strategic function. This has been spotlighted by the significance of recent and continuing global disruption.

So what does it mean to be resilient today?

For many businesses, this has been a difficult question to answer. Changing global dynamics, realisation of critical supply chain vulnerabilities and prolonged recovery have taken many businesses by surprise.

SPP’s Resilience Framework proposes a robust, pragmatic definition of resilience, helping organisations to assess and diagnose the gaps to be addressed in building organisational resilience. 

As we face into prolonged periods of uncertainty, and manage through the extended impacts of a global pandemic, there is no more important topic than resilience for organisations who not only seek to survive but thrive in a dynamic environment. 

The first step is to take an honest assessment of the current resilience, in order to identify the areas for strategic resilience investment, balancing risk appropriately to sustain the organisation through crisis.

Figure 1: SPP’s resilience framework

It is clear that to address these persistent vulnerabilities, resilience must be considered through a more robust model that incorporates prevention, response and recovery into strategic planning.

For many industries, the effects of these disruptions are yet to subside. The sustainability of many organisations has come into question, as global supply chains struggle to return to pre-COVID levels of performance. Unfortunately for many, the damage of COVID induced supply chain disruptions has resulted in critical failure and a premature end to operations.

Managers everywhere should use this crisis to take a fresh look at their supply networks, take steps to understand their vulnerabilities, and then take actions to improve robustness.”

Whilst the cost of proactively pursuing resilience can be high, the cost of disruption is much higher.  Billions have been lost as a result of recent supply chain events.

• In 2020, geopolitical tensions between China and Australia caused the PRC to apply a 220% tariff on Australian produce. Wine exports, fell from 121 million litres to 10 million litres within 12 months, creating a loss of nearly $1B in trade revenue.
• In 2020, the Toll Group suffered multiple technology outages after a cyber attack. These attacks disrupted delivery tracking systems, preventing visibility of deliveries, resulting in financial and reputational damage. Similar cybersecurity attacks disrupted US-based JBS Foods, crippling the organisation for 5 days until a $14m ransom payment was made.
• An estimated 26,000 international fruit and vegetable pickers were denied Australian entry for the 2020 harvest season. This resulted in an estimated $45 million in lost harvests between December 2020 to February 2021.
• A 2002 10-day shut down of key ports in the US from a labour dispute estimated to cost to the US economy $1- 2 billion USD per day due to from supply chain disruptions.

Australia is more vulnerable than most, with COVID-19 exacerbating the underlying vulnerabilities of Australian businesses – in particular their supply chains.

It is firstly important to recognise that this national vulnerability is not a new phenomena – Australian businesses have always been vulnerable to supply chain disruptions. Advancing technologies and increasing labour flows have enabled Australian businesses to source cheaper inputs and to access new markets. As more Australian businesses have sought to capitalise on this recipe of cheaper global inputs and greater market accessibility, vulnerabilities to supply chains have intensified.

98% of Australian trade and jobs has been tied to or is in some way reliant on sea freight

National reliance on a single industry – in this case sea freight – threatens the collective resilience of supply chains. The destabilisation of global freight due to COVID-19 has resulted in significant delivery delays, increasing pressure on Australian businesses (inventory, operations & reputation) attempting to servicing customer demand.

60% of Australia’s critical imports (such as personal protective equipment) are supplied by a single country (China).

Failure to diversify sourcing of critical imports diminishes response agility to disruptions. This was exemplified by the extreme PPE shortages during COVID-19 and depletion of the National Medical stockpile, with many Australians unable to access facemasks, nitril gloves, gowns and protective eyewear.

68% of businesses do not measure, track and report supply chain performance, or do not take an integrated, whole of business approach to doing so.

For many businesses, this has resulted in a lack of visibility over production effectiveness and efficiency, as well as reduced ability to pre-empt risk. An absence of real time supply chain performance data prevents businesses from effective operations planning, and limits their ability to diagnose root issues, resulting in reactive and tactical responses.

70% of Australian supply chains do not use common supply chain technologies and are highly manual.

Highly manual processes and use of specialised technologies has resulted in supply chain input risks. Being unable to acquire critical supply chain components that are highly specialised or uncommon can halt production if unresolved. This became a reality for many Australian farmers that were unable to source spare parts for their machinery due to global supply chain shortages.

These inherent national vulnerabilities have been exposed by COVID-19 resulting in major challenges for Australian businesses.

85% of Australian businesses reported staff shortages in 2022 preventing their ability to operate at full capacity. For some Australian businesses, COVID resulted in over half of their staff being unable to work due to sickness and reduced mobility. These mobility restrictions eventuated from border closures, severe lockdown restrictions, and mass flight and transport cancellations, preventing staff from working.

The failure to address the inherent vulnerabilities in Australian supply chains ultimately resulted in serious implications for Australian businesses. 47% of businesses surveyed reported supply chain disruptions during COVID, over a third of which experienced significant disruptions. These disruptions resulted in revenue loss, with 30% of businesses indicating significant revenue loss. For many businesses, the impact of these disruptions are still being felt, and will likely continue over the coming years.

How did Australian businesses find themselves in this position?

A failure to adequately invest in building resilience, to instead pursue top-line growth has increased the impact of disruptions as organisations scramble to respond and recover. Australian businesses have an opportunity now to proactively invest in resilience planning to respond to and recover from disruptions driven by both internal and external drivers.

Internal Drivers – opportunities for proactive investment

1) Failure to apply a strategic approach to the supply chain. 

Viewing supply chain as an operational function rather than a strategic competitive advantage. Supply chain experts are often excluded from executive leadership despite the significant impact of supply chain decisions for both manufacturing and service-based industries.

2) Low levels of investment and utilisation of digital and data capability across supply chains combined with just-in-time / reactionary models, limits whole of supply chain visibility, pre-emptive capability and adequate response and recovery planning.

3) Over reliance on particular suppliers and lack of optionality

resulting in significant concentration risk. This is often exacerbated by the lack of transparency and integration across interconnected global markets and production.

External Drivers – opportunities for resilience planning

1) Prevalence of siloed and fragmented supply chain management,

with contributors along the supply chain unwilling or unable to collaborate and share information both up and downstream. This limits the ability to detect and mitigate supply chain risks and to plan appropriate responses.

2) Heavy reliance on labour flows

(domestic and international) exposing supply chains to resourcing and capability gaps that undermine and halt, and in some cases halts operations.

3) Increasing ESG expectations

of consumers, investors and regulatory stakeholders are re-shaping how organisations are managed and make decisions. Meeting these expectations requires some fundamental changes for some industries which will require significant investment now and into the future.

How resilient is your organisation?

SPP’s Resilience Framework proposes a robust, pragmatic definition of resilience, helping organisations to assess and diagnose the gaps to be addressed in building organisational resilience. 

Our framework distils resilience into three key elements – Readiness, Responsiveness, Recovery – and three organisational behaviours required to build and sustain resilience – strategic decision making, sustained investment and effective tracking & monitoring.

Three key elements to resilience

1) How ready are you to effectively pre-empt disruptions?
– What level of visibility do you have of likely disruptions and vulnerabilities?
– Is your contingency and recovery planning up to date and comprehensive?
– Do you have a team who understand and can implement risk mitigation strategies?

2) How responsive will you be to managing disruptions?
– Do you have flexibility and optionality in sourcing of production inputs (including labour and skills)?
– To what extent do you partner and collaborate with others across the supply chain (e.g. data, relationships)?
– What buffer management strategies are in place to facilitate material flow of product if needed?

3) How efficiently can you recover?
– How adaptable are your operations to changes in the operating environment?
– What options do you have to quickly regain control / shift priorities to respond to shocks?
– What level of sector / industry influence and/or partnerships do you have to shape recovery pathways?

Three organisational behaviours required to sustain resilience

1) How well do you engage in strategic decision making?
– How often are resilience strategies discussed at the highest levels of your organisation?
– How do you view resilience – as a strategic advantage or as a cost of doing business?

2) What approach do you take to supply chain investment?
– Do you take a sustained or ad hoc investment approach to supply chain and operations?
– Do you prioritise and measure resilience investment?

3) Have you embedded tracking and monitoring mechanisms to measure success?
– Do you consistently track and monitor measures of resilience?
– To what extent are you able to access the insights you require inform resilience decisions?

What gaps in resilience did you identify?
Reach out to SPP for expert diagnosis and assistance with building your organisational resilience.