Unlocking value in manufacturing by taking continuous improvement to the next level
Manufacturers must adopt a unified strategy across different divisions if they are to extract the full value of Industry 4.0.⯠...
Supply chain
Building systemic resilience in supply chainsÂ
Turbulent times can leave businesses scrambling for measures to help them bounce back after disruption. But these actions may in fact increase overall supply chain fragility.
In the summer of 2022, waterways in Europe suffered historic droughts. On the Rhine River, which contributes approximately $80bn to the surrounding economies each year, water levels dropped to between 10% and 50% lower than historical averages.
Ships had to lessen their loads to avoid hitting the bottom, and smaller loads sent shipping prices skyrocketing by as much as 30% overnight. Since the situation is not expected to improve, companies are considering how to ensure supply chain resilience. Many are now using digitalization to provide faster, more reliable intelligence to compare alternative means of transport and reroute shipments accordingly.
River transport is considered a lower-cost, more climate-friendly alternative to higher-emitting land-based means of transportation. However, the technology needed for digital agility comes with a carbon cost â digitalization accounts for 4% of global emissions and is expected to surpass emissions from motorized traffic in the coming years.
Climbing emissions exacerbate climate change and the effects increase the frequency of natural disasters â such as the drought conditions on the Rhine â and irregularities feed back into supply chains. Therefore, what looks like a helpful solution for managing immediate disruptions may increase climate-related material risks along the Rhine in the long term.
This is not an isolated example. According to Resilinc’s database of supplier firms, 200 supply chain disruptions per week were recorded in the first quarter of 2022 and this number climbed to 325 in the second quarter.
Companies from all sectors are now working to build supply chain resilience and keep on-time operations running to avoid economic losses. And yet, one frequent shortcoming of these actions is that systemic feedbacks are overlooked. Increasing buffer stocks puts additional strain on natural resources. Keeping production going at all costs exacerbates unsustainable production patterns and social inequalities. Instead of fixing the root cause of the problem, current supply chain resilience efforts can compromise the resilience of other systems, and the long-term consequences of those actions will feed back into the supply chain and increase fragility.
Adopting a systemic perspective can help to lower a companyâs risks because when organizations are exposed to fewer risks, supply chain resilience progressively improves.
From disaster planning to systemic resilience
Businesses are often advised to anticipate and build resilience to disasters. We argue for a different approach â managers need to start building systemic resilience to ensure long-term survival. Adopting a systemic perspective can help to lower a companyâs risks because when organizations are exposed to fewer risks, supply chain resilience progressively improves. Also, enhancing systems resilience through a companyâs core business and competencies will help create healthier societies and ecosystems.
Managing systemic resilience is already a priority for conservation practitioners and natural scientists providing proof of concept for building systemic resilience. Corporate leaders can learn from their example by considering three key lessons in building resilience from natural science:
âGeospatial technologies are also being leveraged to help companies make more holistic assessments.â
Develop systemic knowledge:
Current efforts to build resilience are based on business intelligence about potential supply chain disruptions and delays. However, building systemic resilience starts with a holistic understanding of the systems the firm depends on, such as societies and ecosystems. Since system interventions can lead to unintended negative consequences if not managed properly, working with scientists and environmental NGOs to understand complex social-ecological dynamics is necessary.
Many tools and guidelines are now available to help companies understand their holistic impacts. KPMG, in collaboration with WBCSD, developed a dynamic risk assessment to capture the systemic nature of risks. Their approach aims to understand the complexity of systemic risks with expert interviews, surveys, and sectoral discussions of key insights. Geospatial technologies are also being leveraged to help companies make more holistic assessments. The Landbanking Group uses AI and satellite to predict the impact of nature-positive practices across carbon, water, soil, and biodiversity.â
Houdini, a Swedish sportswear company, collaborated with a research-based organization to understand both its positive and negative impacts on Earth system processes. Since 2015, the company has partnered with Stockholm Resilience Center/Albaeco on a holistic corporate evaluation, the Planetary Boundaries Assessment. The assessment model considers the companyâs environmental impact from multiple perspectives, such as climate impact and biodiversity, as a foundation for achieving long-term positive impacts that can build systemic resilience.
Bounce forward:
Many corporate climate strategies build supply chain resilience to bounce back quickly after the effects of unsustainability. But while this can be an effective way to manage resilience, bouncing forward, or transformation, is another option that firms can consider. We need innovative solutions and completely new ways of operating that also help nature to restore. These approaches will likely require the transformation of business models and entire industries.
The WBCSD provides guidance to help companies capture the opportunities for sustainability transformations. The guidance suggests that effective leadership and governance, strategy and planning, progress and commercialization, networks and engagement, and continuity and tenacity can help companies navigate transformation successfully.
One inspiring aspiration is Interfaceâs (the US-based carpet tile manufacturer) Factory as a Forest initiative in its radical climate take-back plan to help restore the natural ecosystems the company depends on. Building the resilience of ecosystems can help prevent the effects of climate change from happening in the first place by tackling the issue at the root cause. This would completely transform their factories from polluting to working with nature to provide positive benefits.
Enhance biodiversity:
Companies are already enhancing supplier diversity because diversity helps systems recover after a disaster due to increased alternatives and options for recovery. Diversity is also important for ecosystems â the more variety of species in a system, the better it can adapt. Some companies are compromising resilience-enhancing biodiversity by clearing virgin land for large-scale monocropping. Many others are acting on biodiversity to protect and enhance ecosystem resilience.
There is a wealth of guidance now available to companies on how to measure and sustainably manage biodiversity. The Taskforce on Nature-related Financial Disclosures is a good starting point for companies to identify, assess, manage, and disclose nature-related issues. They recently published the guide, âGetting started with adoption of the TNFD recommendations.â The WBCSD provides guidance on Nature Action, including âthe development of science-based targets, guidance for consistent and credible business actions to nature-positive ones such as high integrity nature-based solutions.â
According to Business for Nature over 1,000 companies are already committed to protecting and restoring nature. For example, Sky Group, the German-based media and entertainment company, is collaborating to restore seagrass as an important carbon sink. IKEA is involved in many reforestation projects along its supply chain and beyond to advance its nature-positive agenda. Many other sustainability leaders in various industries, including Unilever, Google, and Danone, are also taking action.
Enhancing systemic resilience reduces the risks a company might face and, eventually, decreases its vulnerability.
A better way to build resilience
Natural disasters and the consequences of other risks related to unsustainability create massive financial risks to companies. According to Resilinc, over 100,000 companies are already using its technology-driven solutions to respond to supply chain disruptions, and disruptions are expected to continue.
Enhancing systemic resilience reduces the risks a company might face and, eventually, decreases its vulnerability. Instead of managing resilience to single-issue future disasters, companies need to start building resilience in the larger social, ecological, and economic systems around them to secure more stable operating environments.
Numerous articles have been published about how organizations can build resilience at various levels. Managers can find advice on how business leaders, non-profit organizations, and the social sector can navigate the challenges of building their capacity to withstand various challenges. However, most of the available guidance on the subject does not address the fact that resilience is a systemic concept and needs to be managed systemically â including societal and ecological resilience â to reduce a companyâs vulnerabilities.
When building supply chain resilience to future shocks, managers cannot afford to overlook the resilience of the systems their company depends on. A systemic approach to resilience can help build strong societies and ecosystems and prevent potential crises.
Authors
Related
A circular model for sustainability Â
Companies need a new, holistic approach to sustainability if they are to head off criticism and accusations of greenwashing....
Why mining matters in the era of climate change
The mining sectorâs ability to produce the raw materials required for climate change mitigation will have significant supply chain implications, argues IMDâs CarlosâŻCordon. ...
How AI could help navigate complex trade rules and save billions on tariffs
The sheer complexity of trade regulation and the risk of non-compliance mean companies are missing out on billions in tariff savings from Free Trade Arrangements (FTA) in their global supply chains. New...
Learn Brain Circuits
Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on - they only take five minutes.
Â
Explore Leadership
What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
Â
Join Membership
Log in here to join in the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.
Â