Yesterday at the World Economic Forum in Davos, Switzerland Secretary Napolitano unveiled the new National Strategy for Global Supply Chain Security (1.5 megabyte PDF). The President signed-out the document on Monday.
The strategy offers two goals:
Goal 1: Promote the Efficient and Secure Movement of Goods – The first goal of the Strategy is topromote the timely, efficient flow of legitimate commerce while protecting and securing the supply chain from exploitation, and reducing its vulnerability to disruption. To achieve this goal we will enhance the integrity of goods as they move through the global supply chain. We will also understand and resolve threats early in the process, and strengthen the security of physical infrastructures, conveyances and information assets, while seeking to maximize trade through modernizing supply chain infrastructures and processes.
Goal 2: Foster a Resilient Supply Chain – The second goal of the Strategy is to foster a global supply chain system that is prepared for, and can withstand, evolving threats and hazards and can recover rapidly from disruptions. To achieve this we will prioritize efforts to mitigate systemic vulnerabilities and refine plans to reconstitute the flow of commerce after disruptions.
In my judgment we are much closer to achieving “efficient and secure movement” than we are to a “resilient supply chain”. The new strategy could help with each, but the tougher task will be the effort “to mitigate systemic vulnerabilities.”
On January 11 the Wall Street Journal reported,
After a decade of streamlining their supply chains to make them less costly, the natural disasters and political upheavals that marked 2011 showed many multinational companies just how vulnerable those links have become.
A senior supply chain executive recently told me (clearly depending on me to protect his name and the name of his firm), “We have several known choke-points. I’m sure there are many more we don’t know about. It won’t take a major disaster to disrupt supply, just a couple of unusual, probably simultaneous accidents. I think — hope — there would be a similar impact on our competitors. But that doesn’t help our consumers.”
“There are ways to mitigate our risk, but they’re all expensive,” another executive explains. “And for the last decade and the foreseeable future the lower cost of US supply chain management has been our principal economic advantage. We’re much better than the Europeans, tons more efficient than the Chinese. Increase supply chain costs and we lose just about the only advantage the US has left on most commodity trading and even a broad range of high-end specialty goods.”
Again from the Wall Street Journal:
Justifying redundancies is one of the toughest aspects of managing a supply chain, because backstopping doesn’t pay off unless there is a disaster. When CFOs ask about the return on such investments, the answer is, “If we’re lucky, absolutely zero return,” says Sean Cumbie, vice president in charge of global supply-chain management at genetics-testing company Qiagen NV, based in Germany.
The new strategy makes a glancing reference to “appropriate redundancy” which, for most supply chain executives, is like discussing the practical difference between manslaughter and murder. Whatever you call it, the outcome ain’t pretty.
The senior supply chain guys (and a few gals) are the pioneers of the field. In the last twenty years they have transformed the known world. Not just the supply chain world, but the everyday world of billions of consumers. Today the supply chain is faster, cheaper, delivers much higher quality with much more assurance and transparency than a quarter century ago.
On most days the supply chain is also stronger, more flexible, and better at handling a range of emergencies and disasters.
But what we saw in Northeast Japan and Thailand has exposed a parallel reality. Like all networked systems, risk tends to pool in unexpected ways and often unexpected places. What if the earthquake-and-tsunami had hit the economic heartland of Tokyo and Osaka, instead of the Tohoku periphery? What’s would the outcome be if instead of Thai flooding it was an earthquake in San Francisco and down the east side of Santa Clara County? What happens if the Port of Long Beach is seriously disrupted for an extended period? What if cyber-vandals — or economic or national or terrorist adversaries –seriously target the digital systems on which the modern supply chain absolutely depends?
In a report — “New Models Addressing Supply Chain and Transport Risk” (7 megabyte PDF) — released Tuesday, the World Economic Forum found:
Supply chain and transport networks have continuously evolved to deliver capacity, speed, efficiency and customer service through organizational trends such as globalization, specialization, volume consolidation and information availability. The focus on cost optimization has highlighted the tension between cost elimination and network robustness – with the removal of traditional buffers such as safety stock and excess capacity. These developments have shifted risk distributions…(while) their effects have often included sharing risk more broadly around the world, reducing high-frequency risks and focusing risk within sectors, common technologies or nodes. Another common feature has been to disassociate risk from responsibility, misaligning incentives and creating moral hazards – the notion that a party that is insulated from risk will behave differently from how it would behave if it had full exposure to risk.
Most supply chain managers I know tend to discount low frequency, high consequence risks (see related post). They discount this kind of risk because over the last twenty years they have become true masters of risk management. They also discount high impact risks because their CEO’s, Boards of Directors, and shareholders reward them for squeezing every possible penny out of supply chain costs. They discount catastrophic risk because their creation — the modern supply chain — has never experienced a fundamental systemic failure.
Many supply chain executives have become what economists sometimes call “risk preferers”, they have learned to maximize their return by skating with great style, grace, and confidence along the edge of chaos. Each day they become more adept at mastering the chaos. Is the experienced supply chain executive a sorcerer or sorcerer’s apprentice?
The new National Strategy is the starting point for a collaborative process of discussion, analysis, and policy development. It seeks to “develop a culture of mutual interest and shared responsibility” across government and the private sector. It’s the right goal. It’s the right way to pursue the goal.
It is a very ambitious goal.