Park yourself at a typical residential intersection in the U.S., and you’ll watch a parade of delivery vehicles pass by over the course of the day. Trucks from FedEx, UPS, and the U.S. Postal Service (USPS) crisscross neighborhoods, retrieving and delivering packages, sometimes more than once. Increasingly, they are joined by trucks from regional shippers such as OnTrac or LaserShip, as well as by unmarked vehicles with non-uniformed drivers, who drop off packages for companies including Walmart and online startups such as Roadie, Doorman, and Sidecar. Soon, fleets of vans bearing Amazon’s logo, operated by independent companies, will be joining the mix.
The rising pace of activity along what’s called the last mile of the retail sales chain reflects the boom in e-commerce. According to the U.S. Census Bureau, e-commerce accounts for about 9 percent of total retail sales, and is growing at a double-digit clip. The number of packages delivered annually in the U.S. is expected to rise from 11 billion in 2018 to 16 billion by 2020, according to estimates from Strategy&, PwC’s strategy consulting business. B2C deliveries, generated mainly by e-commerce, account for more than half of today’s volume, and will make up two-thirds of volume by 2020. In many ways, this seems like a sunny story all around. Consumers have more shopping choices than they have ever had, and their online purchases are delivered faster than seemed possible just a few years ago. Retailers can reach many new customers, and are better able to serve existing customers with faster and more flexible distribution chains. Transportation companies are riding a powerful wave of new demand for their services.
But all this growth brings some peril. Retailers and transportation companies alike are facing challenges in this fast-changing marketplace. Both sectors are at risk from Amazon. The company is the behemoth of the e-commerce boom, with 100 million Amazon Prime members, and accounts for 25 percent of all U.S. packages today, on track to reach 50 percent by 2020. With a vertically integrated network that provides inherent advantages, Amazon is positioning itself to dominate both the retail and the transportation sides of the business.
A second threat to retailers and transportation providers is more systemic. The traditional ways of managing the delivery of packages — with hub-and-spoke ground networks, massive regional distribution facilities, and fleets of vehicles — were designed to optimize long-distance, intercity shipping. As a result, they are not well suited to the emerging realities of expanded e-commerce, in which the trend is increasingly local (trips of less than 50 miles are growing at a 25 percent annual rate). Furthermore, transportation companies struggle to accommodate fluctuations in last-mile demand. Peak shipping volume in December, for example, is more than 25 percent higher than in September, which causes shippers to scramble to hire tens of thousands of temporary employees and add capacity every year. Daily swings can be far higher; volume on some days in holiday seasons is an order of magnitude higher than the daily average.
Meanwhile, new delivery approaches — such as stores hiring their own delivery personnel and startups crowdsourcing delivery vehicles and drivers — can operate effectively only on a very local basis, and they gain few advantages by building scale geographically.
For all these reasons, devising a better solution to last-mile delivery will be the next major battle in e-commerce supremacy. To compete effectively against Amazon’s advantage, retailers and transportation providers will need to develop a way to better coordinate and more accurately match demand for the delivery services they can profitably supply on a given day.
The solution is to build a “last-mile exchange” platform that drives delivery decisions, and, crucially, allows retailers and transportation providers to collectively shape delivery demand and adjust continually to the inherent variability of the last mile. Such an exchange could deliver a win for consumers, retailers, and transportation providers. FedEx and UPS are the companies best positioned to disrupt their own business and create this new paradigm. Each could bring a significant share of the overall transactions to the platform. And each has a great deal to gain by evolving from a commodity provider with large fixed costs into a nimbler player that can compete against Amazon, aggressive regional players, or upstarts working out of the proverbial garage.
The Last-Mile Dilemma
The difficulty of delivering merchandise in a cost-effective way on the last mile of the retail sales chain has bedeviled e-commerce from its beginnings. Hazards in the last mile killed off many of the Internet startups in the late 1990s and early 2000s, such as Webvan (see “The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes,” s+b, July 1, 2000). But despite the growth and evolution of e-commerce since then — along with the advent of smartphones, apps, and improved connectivity — the fundamental economics of the last mile haven’t changed. Profitability remains highly dependent on two key factors: (1) the transportation provider’s route density — how many packages can be delivered on a given delivery run, and (2) the drop size — how many packages or items are delivered at each stop.
Consider your own experience as an e-commerce consumer today. If you receive one package with a new thumb drive from the USPS on Tuesday morning, a package of beauty supplies from FedEx a few hours later, a book delivered by UPS on Wednesday, and a box of groceries from Walmart on Friday, it’s easy to appreciate the inherent inefficiencies in these four delivery trips. Imagine, instead, that a transportation provider could deliver all four of those packages from one truck, in one trip, at one time. Efficiency would soar, and per-package shipping costs would be roughly 50 percent lower, which could result in lower costs for consumers and higher margins for retailers, transportation providers, or both.
It’s clear that traditional legacy couriers such as FedEx, UPS, and the USPS (which is both a public-sector competitor and a partner, because FedEx and UPS, along with Amazon, offload a significant percentage of their last-mile deliveries to the postal service) are being pressured to keep up with demand. Historically, as in manufacturing, building scale was the primary lever for lowering last-mile costs. But today, the rising tide of e-commerce threatens to swamp the biggest commercial ships. The more that big retailers such as Amazon, Walmart, and Target ship, the deeper the per-parcel shipping discount they expect. Legacy couriers have also been slow to utilize peak pricing; their revenue is typically tied to annual contracts with fixed prices. And declining margins make it hard to justify the last-mile investments needed to keep pace with growth.
Most responses to date have been reactive. OnTrac and LaserShip have grown rapidly by targeting smaller retailers (historically the more profitable customers) with offerings in high-volume service areas that are mispriced in a national network. Other players in the e-commerce marketplace are attempting to make the delivery–supply component of the cost equation more flexible. Crowdsourcing personal vehicles and delivery personnel is one way to offset the “fixed” nature of traditional transportation providers by matching delivery demand with more variable supply. Walmart has tested a variety of solutions, including curbside pickup (“click and collect”) as well as an “associate delivery” service, in which employees can opt in to deliver consumers’ purchases, using their personal vehicles, on their way home from work.
Target was so concerned about the last mile that in late 2017, it paid US$550 million for Shipt, a crowdsourced provider that was less than five years old. Amazon is leveraging its acquisition of Whole Foods to combine grocery with other e-commerce package offerings in order to increase route density. Not to be outdone, Walmart is adding “pickup towers” to 500 of its U.S. stores in 2018 to concentrate demand into a single delivery point. These automated delivery hubs hark back to a concept we profiled more than 15 years ago (see “Oasis in the Dot-Com Delivery Desert,” s+b, July 1, 2001), in which players developed solutions to aggregate online purchases in secure neighborhood drop boxes instead of individual homes. Most of the startup ideas failed in the United States. But DHL has 3,000 “Packstations” throughout Germany, and about 90 percent of the German population can get to one within 10 minutes. Similar third-party delivery point concepts can be found in countries including Costa Rica and Latvia.
The difficulties of managing demand on a given day — which is especially evident at peak times such as Black Friday and holiday seasons — are built into the current e-commerce ecosystem. Transportation providers typically don’t know about a purchase until well after the online shopping cart transaction is complete. (How often have you tried to track a package on the FedEx or UPS website only to be informed that the shipper is awaiting information about the purchase?) Information is often siloed in the retail companies themselves, within order management, inventory management, and shipper transaction management systems — forcing delivery information later in the process.
When retailers have sales campaigns that create shipping surges, they don’t necessarily communicate the surging demand to their transportation providers. And even though shipping peaks can be massive for both retailers and transportation providers, the two players are independently guessing what the volume will be. As a result, retailers often place tremendous pressure on fulfillment and shipping resources.
Building a Last-Mile Exchange
The solution to this problem is a last-mile delivery exchange that connects consumers, retailers, and transportation companies via a digital platform. It could solve many of the difficulties challenging the e-commerce ecosystem today and produce benefits for consumers, retailers, and the package delivery providers, yielding improved convenience, transparency, efficiency, and cost savings. Such an exchange would create a path forward through the disruption caused by increasing consumer expectations, advances in technology, the emergence of new entrants, and the rise of the sharing economy [see the 2016 PwC report “Shifting Patterns: The Future of the Logistics Industry” (pdf)].
The exchange would effectively flip the script. Rather than react to demand and respond to others’ decisions, transportation companies and retailers could engineer demand earlier in the sales process and dynamically balance supply and demand, much as Uber uses surge pricing to encourage more drivers to work during times of peak needs in peak locations. Such a platform designed for e-commerce package delivery would need to be multisided, involving both retailers and last-mile transportation providers. Instead of passing on information from point to point in a linear fashion, it would need to dynamically share data among all the players. The exchange participants would need to have sophisticated algorithms that help them decide how much to bid to deliver a given package to a particular location on a particular day at a particular time. For example, assume a carrier already has a planned delivery of a dress from Nordstrom to a home in Dunwoody, outside Atlanta. That carrier could offer a great price to deliver an additional package to the house next door (from Nordstrom or another retailer) and an even better price for another delivery to the same customer. Accordingly, Best Buy might be willing to offer a discount on a television with excess inventory in Atlanta.
The last-mile platform would need to connect the retailers’ order management and inventory data with package and delivery resource data in real time. Because sending data from mainframe to mainframe will no longer be feasible, a cloud-based ecosystem would be optimal, pooling package data, resource availability data, and analytics with insights, and featuring dynamic optimization of pickup and delivery routes. Drawing another parallel, such a platform would need analytic sophistication comparable to that of the ecosystem that supports Google’s AdWords, which auctions key search terms billions of times each month to ensure the maximum value for both advertisers and consumers on Google’s search platform. Data security — including consumer privacy, protection of proprietary company data, and transaction security — would be critical. This strategy would pay multiple dividends.
Consumers would benefit from seeing direct shopping incentives and options at the initial point of sale. And they would receive indirect shopping incentives because retailers would pass through shipper offers of lower-cost shipping on days when delivery demand is low. Consumers would generally also have more visibility into, and more interaction with, the entire delivery process.
Retailers would benefit from the power of aggregation, keeping their own online storefronts and identities but offering more and better shipping options through the last-mile exchange that would rival the experience that Amazon provides. Their shipping costs would fall.
Legacy couriers would build more flexible and efficient networks. Supply chains at FedEx and UPS are already highly optimized to deal with the fixed constraints designed into their existing networks. But the last-mile exchange would empower them to meet the challenge of managing supply chain costs despite the inherent variability in e-commerce volume growth. They would be able to see demand fluctuations earlier in the e-commerce sales process and shape demand with incentives, dynamic pricing, and real-time matching of resources. They could, in effect, reframe the problem to better design and utilize their fixed delivery fleets — minimizing the need for multiple trucks delivering packages on the same streets in a given time frame. (They might even create a secondary market swapping packages between networks to eliminate such redundant coverage.)
Disrupt Yourself
Although the proposed exchange may seem theoretical and futuristic, there is every reason for companies to act now to make it a reality. E-commerce volume will continue to boom, and the challenges facing transportation companies will become more serious. Consumer expectations have been reset since 2005, when Amazon introduced free two-day delivery for Amazon Prime customers. And expectations continue to escalate. Consumers now see two-day delivery as the default, and increasingly expect their purchases to arrive the day after they place their orders, or even on the same day. Just a few years ago, transportation companies were delivering packages only five days per week. UPS moved to six-day delivery in 2017. Amazon began arranging Sunday deliveries through a deal with the USPS in 2014 — and it’s inevitable that the entire package delivery business will move to a routine seven-day delivery cycle before long. The last mile of the retail sales chain will likely become even more crowded with more competitors.
The current e-commerce trajectory is pointing toward a future in which FedEx, UPS, and other transportation companies become commoditized players in a game whose odds favor other players. But acting now would enable companies to alter this trajectory. Creating a last-mile exchange would fundamentally disrupt the last-mile delivery business by addressing demand in a more sophisticated way. FedEx and UPS, as noted earlier, are best positioned to be the disruptors. Their significant shares of overall transactions, as well as their huge resource bases and highly evolved delivery capabilities, give them the stakes they would need to place such a large bet. It’s also possible that a consortium of retailers and transportation providers could band together to create an exchange. The specific details are also likely to evolve as blockchain technology becomes accepted more widely.
Finally, although consumers and retailers will see significant benefits if e-commerce delivery becomes more efficient, solving the last-mile dilemma may well be an existential challenge for transportation companies. Creating a new last-mile exchange would enable them to shape a future that would be more favorable to them.
Author Profiles:
Tim Laseter is a managing director at PwC US, and an advisor to executives for Strategy&, PwC’s strategy consulting business. Based in Arlington, Va., he is also a contributing editor of s+b, and a professor of practice at the University of Virginia’s Darden School. He is the author or coauthor of four books, includingInternet Retail Operations.
Andrew Tipping leads the U.S. transportation team for Strategy&. Based in Chicago, he is a principal with PwC US.
Frederick Duiven specializes in advising transportation clients on growth strategies for Strategy&. Based in Arlington, Va., he is a director with PwC US.
Good Distribution Practices (GDPs) are supply chain quality assurance measures that ensure products are consistently stored, transported and handled under suitable conditions as required by the marketing authorisation (MA) or product specifications.
Q1 Updates
New rules for Russia activate:
On the 1st March, Russia’s new rules on the storage and transportation of medicines, which were published in 2016, came into effect. This activation impacts all pharma firms operating in the Russian market, they need to confirm that any contracted third parties used ( warehouses for example) are also up to standard.
New FDA GMP guidance for combination pharma products:
An update was made to Lebanon’s Guidelines for Good Storage and Distribution Practices of Pharmaceutical Products. This refresh aimed to align the guidance with international standards and guidelines. More specifically regarding the conduct of Lebanese warehouses with the social responsibility approach.
Ireland’s Health Products Regulatory Authority published insight on the quality system for general sale wholesale distributors. This covered a range of subjects including the likes of inspections, change control, quality risk management, pest control programmes, temperature mapping and monitoring, waste management, transfer of medicinal products between branches and product transportation.
Saudi guideline translated into English
The Saudi Good Storage and Distribution Practice guideline which has been active since 2014, was recently translated into English. One key aspect that has received attention is the topic of the qualified person – an individual who is responsible for the implementation and maintenance of a quality system.
After the product, price, and promotion has been decided, the product/service has to be available to the consumer where and when they want to buy. Consumers should be able to get to the product easily, and the product has to be in the right place (e.g. expensive chocolate shouldn't be in a small grocery store) to sell well.
Channels of distribution Businesses need to know how to get the product to the consumer. They may use a variety of channels of distribution:
Channel 1: The manufacturer sells directly to the customer. e.g. agricultural goods are sold straight from the farm, businesses buy raw materials from another…
Channel 2: Involves selling to retailers. Common when the retailer is large or the product is expensive.
Channel 3: Involves the product going through wholesalers as well. Wholesalers break bulk so that retailers can buy them in smaller quantities. This is common for perishable items such as foods.
Channel 4: Involve selling the product overseas through an agent, who sells them to wholesalers on behalf of the company. This may be because he/she has better knowledge of the local conditions.
Methods of distribution Methods of distribution for different channels of distribution can include:
Department stores: Usually in the centre of town that sells a wide range of goods from many producers.
Chain stores: Two or more which has the same name/characteristics.
Discount stores: Offers a wide range of products, including branded products, at discount prices. Often all the products are similar.
Superstores: Very large out-of-town stores.
Supermarkets: Very large retail stores with all kinds of goods. (usually daily needs, foods)
Direct sales: Goods are sold directly to the consumer.
Mail order: Customers order via the post by looking at the catalogue
Internet/e-commerce: Customers order via the internet by looking at the website.
E-commerce The use of the internet to carry out business transactions. Businesses could communicate via email as well. Producers as well as retailers can use the internet to sell to customers. Advantages and disadvantages of a wholesaler Pros
Breaks bulk.
Reduces storage costs for retailers and producers.
Fewer transactions are needed for the producers. (only a few wholesalers) they no longer need to do as many deliveries.
Gives credit to small retailers.
May deliver to small retailers reducing their transport costs.
Promotion carried out by wholesaler instead of producer.
They give advice to retailers/producers on what is selling well.
Cons
More expensive for small retailers.
May not have the full range of products to sell.
Takes longer for perishable products to reach the retailer.
Wholesaler may be far from small shops.
Selecting the channel of distribution to use When selecting the channel of distribution to use producers need to consider a few things:
Type of product?: Is it sold to other producers or customers?
Is the product very technical?: Will you need to explain how to use the product? If yes, Channel 1 should be selected (e.g. airplanes)
How often is the product purchased?: If it is bought every day, it should be available in many retail outlets, otherwise people might not bother to buy it at all.
How expensive is the product?: If it is expensive and has an image of being expensive, then it will be sold in a limited number of retail outlets.
How perishable is it?: If it is very perishable, it should reach the customers quickly or be available in many outlets so it can be sold quickly.
Location of customers?: Channel 4 might be used for customers overseas. E-commerce would be viable anywhere apart from the countryside.
Where do competitors sell their products?: Usually producers will sell their product in retail stores where their competitors sell too so that they can compete directly for consumers.
Methods for transporting goods This is what kind of vehicles are used to transport the products. They should be fast enough for the product to reach its destination in time. However, they must also be cost efficient and safe. These factors a taken into account when deciding which method of transportation is used.
Road haulage:
Cheap and fast.
Require no rail links.
Can advertise on side of lorries.
Not cost effective if lorries are not used often, may need to hire a specialist transport business instead.
Railways:
Even cheaper and faster than road haulage.
Useful for long distances.
Goods need to be transported to retail stores by road haulage at the end of the destination.
Canal and river:
Slow but cheap.
Good for products far too big/heavy to be transported by road/train.
Need canals and rivers.
Sea freight:
Used mainly for international trade.
Can carry a lot of products.
Products are stored in containers, which can be easily loaded onto lorries. Makes it cheap to load and unload the ships.
Air freight:
Extremely fast but expensive.
Used for small, expensive, or perishable products.
Pipelines:
Used to transport liquids or gases over long distances.
Cheaper than using road haulage for liquids. Roads are not always available.
Drawing up a marketing plan Finally, after all the four P's of the marketing mix have been decided, the Marketing department will put them together into one marketing plan. It will also consider how the 4 P's will be modified or adapted to fit the overall image of the product. If this is successful, sales and profits will be likely to increase. Note: a detailed drawing of the product must be included in the marketing plan.
To prosper in the face of turbulent change, organizations need to improve how they deal with unexpected disruptions to complex supply chains. Companies can cultivate such resilience by understanding their vulnerabilities — and developing specific capabilities to compensate for those vulnerabilities. Joseph Fiksel, Mikaella Polyviou, Keely L. Croxton and Timothy J. Pettit
In an interconnected, volatile, global economy, supply chains have become increasingly vulnerable. Disruptions — even minor shipment delays — can cause significant financial losses for companies and substantially impact shareholder value. Globalization has made anticipating disruptions and managing them when they do occur more challenging. The potential risks of disruptions are often hidden, and the potential impacts may not be understood. This often results in “black swan” events that can be understood only after the fact. As author Nassim N. Taleb has warned, “Our world is dominated by the extreme, the unknown, and the very improbable ... while we spend our time engaged in small talk, focusing on the known and the repeated.”1
Although companies originally moved production offshore to countries such as India and China to take advantage of lower labor costs, events like Iceland’s 2010 volcanic eruption and the Japanese tsunami in 2011 have shown that the vulnerabilities of extended supply chains are real and serious. For example, according to the U.S. Federal Reserve, 41% of Minnesota manufacturers said that Japan’s tsunami had affected them negatively.2 As a result, many manufacturers have reevaluated their sourcing options, and some are shifting operations back to their home markets. While these companies perceive other advantages to reshoring, including improved responsiveness and domestic job creation, reducing their exposure to risk has been an important driver.
The reality is that supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable due to the lack of buffer capacity. For example, many companies that followed the lean inventory model were severely impacted by Japan’s tsunami: Within a week, General Motors Corp. temporarily shut down its Chevrolet Colorado and GMC Canyon plant in Shreveport, Louisiana, because it lacked components supplied from Japan.3
Supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable.
While companies tend to focus on the supply side of their operations when scanning for potential risk factors, they also need to pay attention to the customer side. Increasing demand volatility is an important factor that can affect a company’s operations and ultimately its revenue. For example, in March 2013 Cardinal Health Inc., a distributor of pharmaceuticals and medical products based in Dublin, Ohio, announced that its contract with the drugstore chain Walgreens would not be renewed. Walgreen Co., based in Deerfield, Illinois, had been one of Cardinal Health’s largest customers, accounting for more than 20% of revenue for 2012. The news caused Cardinal Health’s share price to plummet by 8.2%.4 However, the company was able to recover quickly and continue its growth thanks to deliberate efforts to expand and diversify its customer base.
Coping With Supply Chain Risks
Traditional methods for coping with supply chain risks are based on the notion of stability as the “normal” state of affairs: Events such as explosions or floods are seen as unwanted deviations from the norm. In recent decades, most large private enterprises adopted systematic approaches to managing their risks, notably through insurance and active mitigation of supply chain risks. The importance of risk management was elevated by a number of high-profile disasters, including the deadly release of poisonous gas from a Union Carbide plant in Bhopal, India, in 1984, which resulted in thousands of deaths. Further motivation came from standards set by nongovernmental organizations such as the International Organization for Standardization and from government legislation, including the U.S. Securities and Exchange Commission’s requirements for disclosure of “material” business risks and the German “Law for Control and Transparency in Business Entities.”5
A more integrated approach to risk management, called “enterprise risk management (ERM),” became popular in the mid-1990s and has been widely adopted by large corporations.6 It gives company executives a detailed and comprehensive view of the risks associated with different business activities, enabling managers to make more informed decisions about how to manage risk portfolios. Another risk management process, known as business continuity management (BCM), incorporates elements from disaster recovery planning and crisis management, including how to respond to disruptions and maintain backup capacity for operational systems.7
While processes such as ERM and BCM can help companies avoid supply chain disruptions and recover normal operations quickly, they also have serious limitations. To begin with, they rely too heavily on risk identification. In a complex and turbulent global supply network, many of the risks that a company faces are unpredictable or unknowable before the fact. These “emergent” risks are often triggered by improbable events whose causes are not understood, and their potential cascading effects are difficult to understand a priori. Clearly, it would be impractical for companies to identify and investigate all the potential risks that may be hidden in their global supply chains.
Second, ERM and BCM depend on statistical information that may not exist. Risk assessments are limited by the quality and credibility of the assumptions upon which they are based, and faulty assumptions or data can lead to misallocation of resources. Of particular challenge are low-probability, high-consequence events for which there is little empirical knowledge; managers may underestimate the probabilities of these events or the magnitudes of their consequences because they have never experienced them.8
Third, the traditional ERM process of risk identification, assessment, mitigation and monitoring is based on a simplified, “reductionist” view of the world. Each risk is identified and addressed independently, and hidden interactions are seldom recognized. This procedural approach can lull organizations into a false sense of complacency that could be shattered by an unexpected event (for instance, an oil spill in the Gulf of Mexico). The complex, dynamic nature of global supply chains requires constant vigilance to discern systemic vulnerabilities, as well as exceptional agility and flexibility when disruptions occur.
Finally, traditional risk management is predicated on the goal of returning to a stable operating condition; risks represent potential deviations from this “normal” state. However, a more realistic view is to recognize that every disruption represents a learning opportunity that may suggest shifting to a different state of operations. For example, a company that anticipates increased flooding in Southeast Asia might migrate its supply base elsewhere. Identifying latent opportunities in the risk landscape will enable a company to exploit those opportunities faster than its competitors.
The Need to Cultivate Resilience
We believe that organizations need to improve how they deal with supply chain complexity and unexpected disruptions so that they can prosper in the face of turbulent change. Organizations tend to become less resilient as they grow more complex. However, they can cultivate resilience by understanding their supply chain vulnerabilities and developing specific capabilities to cope with disruptions. They can try to emulate some of the behaviors seen in natural systems — tolerance for variability, continuous adaptation and exploitation of opportunities created by disruptive forces. Resilient systems don’t fail in the face of disturbances; rather, they adapt. Depending on the type of disturbance, the adaptation can be rapid or gradual.
A decade ago, authors Gary Hamel and Liisa Välikangas described the quest for resilience as seeking “zero trauma.”9 Few corporate managers believe that zero trauma is a realistic goal today, but some now recognize that resilience can be an important success factor that complements their traditional risk management processes. We define resilience as “the capacity of an enterprise to survive, adapt and grow in the face of turbulent change.”10 In practical terms, resilience means improving the adaptability of global supply chains, collaborating with stakeholders and leveraging information technology to assure continuity, even in the face of catastrophic disruptions. Resilience goes beyond mitigating risk; it enables a business to gain competitive advantage by learning how to deal with disruptions more effectively than its competitors11 and possibly shifting to a new equilibrium.
A classic example of supply chain resilience occurred in 2000 when one of Finland-based Nokia’s key cellphone part suppliers suffered a major fire. By identifying the crisis quickly, Nokia was able to secure alternative supplies and modify the product design to broaden its sourcing options. By contrast, Swedish multinational Ericsson, which was reliant on the same supplier, lost about $400 million in sales due to its slowness in crisis response and eventually exited the cellphone business.12(However, Nokia subsequently made serious missteps in its efforts to compete in the smartphone market and ultimately sold its devices business to Microsoft Corp.)
Supply Chain Vulnerabilities and Capabilities
Our SCRAM (supply chain resilience assessment and management) framework enables a business to identify and prioritize the supply chain vulnerabilities it faces as well as the capabilities it should strengthen to offset those vulnerabilities.
Over the past seven years, we have worked with a number of companies, including fashion retailer L Brands Inc. (formerly known as Limited Brands), Dow Chemical, Johnson & Johnson and Unilever to develop a comprehensive framework for assessing supply chain vulnerabilities and addressing them through enhanced resilience capabilities. (See “Supply Chain Vulnerabilities and Capabilities.") To develop our taxonomies of vulnerabilities and capabilities, we studied existing literature and also conducted interviews and focus groups with managers and employees at Limited Brands and other companies that had experienced supply chain disruptions.13 Subsequently, we identified linkages between specific vulnerabilities and capabilities, enabling us to suggest proactive strategies for improvement, and we developed an assessment tool for business use.14 The resulting framework, which we call supply chain resilience assessment and management (SCRAM), is based on an explicit characterization and prioritization of an organization’s vulnerabilities and capabilities. (See “About the Research.”)
Identifying Resilience Factors and Linkages
Based on our research, we identified six major types of supply chain vulnerabilities, which we define as “fundamental factors that make an enterprise susceptible to disruptions.” A frequently cited factor was turbulence. In the context of our framework, turbulence is defined as changes in the business environment that are beyond a company’s control, including shifts in customer demand, geopolitical disruptions, natural disasters and pandemics. Another category of vulnerability isdeliberate threats, such as theft, sabotage, terrorism and disputes with labor or other groups. Additional vulnerabilities came from external pressures that create constraints or barriers (such as innovations, regulatory shifts and shifts in cultural attitudes); resource limits that have the potential to constrain a company’s capacity (such as availability of raw materials or skilled workers); thesensitivity and complexity of the production process; and the degree of connectivity in the company’s supply chain, which implies a need for coordination with outside partners. Finally, supply chains are vulnerable to disruptions that could affect their multiple tiers of customers and suppliers. (See “Supply Chain Vulnerability Factors.”)
Supply Chain Vulnerability Factors
Our framework includes six major vulnerability factors, each broken into subfactors. Vulnerabilities are typically inherent to the business and difficult to avoid.
In addition to helping us formulate the list of vulnerabilities, focus groups also helped us define a list of capabilities that companies can call upon to respond to their particular vulnerability patterns. In all, we identified 16 relevant capabilities, which we define as “factors that enable an enterprise to anticipate and overcome disruptions.” These are: (1) flexibility in sourcing, (2) flexibility in manufacturing, (3) flexibility in order fulfillment, (4) production capacity, (5) efficiency, (6) visibility, (7) adaptability, (8) anticipation, (9) recovery, (10) dispersion, (11) collaboration, (12) organization, (13) market position, (14) security, (15) financial strength and (16) product stewardship. (See “Supply Chain Capability Factors,” for explanations of these 16 capabilities.) Using the lists of vulnerabilities and capabilities as a template, we tested them at eight companies to understand their interrelationships, with the goal of creating a managerial tool for improving performance. We identified 311 separate “linkages” whereby specific capabilities can counteract specific vulnerabilities.
Supply Chain Capability Factors
The framework includes 16 capability factors, each of which is broken into subfactors. Companies can strengthen appropriate supply chain capabilities to offset the vulnerabilities they have.
Our resulting SCRAM framework provides a general methodology for companies to identify their most important supply chain vulnerabilities and to set priorities for capabilities that need to be strengthened. For example, a company that faces unpredictable market demand could strengthen a number of capabilities: flexibility in manufacturing to satisfy surges in demand; accurate, up-to-datevisibility of demand status to support timely decision making; early anticipation and recognition of market changes to enable strategic responses; and close collaboration with customers and suppliers to ensure coordinated action. Similarly, a company concerned with dependence on a complex supply network could work on flexibility in sourcing by identifying alternative sources, flexibility in manufacturing by reducing lead times, and anticipation by recognizing early warning signals of possible disruptions. Based on the results of their SCRAM analysis, managers can develop a portfolio of capabilities to address important resilience gaps and strengthen overall competitiveness.15
Putting the SCRAM Framework to Work
Although similar organizations are likely to share some similar features, different companies — and even business units within companies — will have their own distinct profile of vulnerabilities and capabilities. An organization with high vulnerabilities that does not have adequate capabilities will be overexposed to risks; in response, it should invest resources in improving the particular capabilities in question. Conversely, an organization that faces low vulnerabilities but invests heavily in capabilities may be eroding its profits unnecessarily. (See “Finding the Zone of Balanced Resilience.”) Clearly, there is no “one-size-fits-all” approach. Organizations need to pursue a balanced resilience strategy by developing the right portfolio of capabilities to fit the pattern of vulnerabilities that they face.
One company that has incorporated the SCRAM framework into its way of doing business is the Dow Chemical Co. Since 2010, Dow has implemented this framework at more than 20 of its global business units, achieving significant business benefits. For example, after applying the SCRAM process to its P-Series family of glycol ether products, Dow identified several disruption scenarios, including a production site shutdown, a raw material supply outage and an internal raw material allocation shortage. The company developed a simulation model to test the consequences of these scenarios and was able to confirm a 95% service level with its existing capabilities. Moreover, the analysis revealed opportunities for reduction of fixed assets and working capital, resulting in $1.1 million in annual savings.16 Another Dow business used SCRAM to improve its resilience to raw material supply shortages and identified more than $1.5 million in preventable losses.
The SCRAM approach represents a systems view of supply chain dynamics, helping companies to understand the inherent vulnerabilities that could lead to disruptions and the capabilities that are within their control. By learning from experience and developing a better understanding of their vulnerabilities and capabilities, companies can reduce the frequency of disruptions and the severity of their impacts, resulting in increased customer satisfaction and reduced supply chain operating costs. While reducing inherent vulnerabilities may be difficult, there are many options for improving capabilities. The cost of the improvements must be balanced against the expected supply chain performance benefits.
Early adopters of resilience thinking have already demonstrated how they can augment traditional risk management practices with new capabilities that help them to anticipate, prepare for, adapt to and recover from disruptions. In some cases, they are able to treat disasters as opportunities for gaining competitive advantage. For example, before the 2010 eruption of the Eyjafjallajökull volcano in Iceland grounded millions of air cargo shipments, DHL, the international shipping company, had an emergency plan in place. It was thus able to rapidly redirect 100 flights from its hub in Leipzig, Germany, to destinations in southern Europe that were less affected, and also to shift many deliveries to ground vehicles. Ultimately, DHL was able to avoid significant financial impact while strengthening customer loyalty.17
Early adopters of resilience thinking have already demonstrated how they can augment traditional risk management practices with new capabilities that help them to anticipate, prepare for, adapt to and recover from disruptions.
Building resilience is not a substitute for other methods of ERM. Rather, it is an ongoing process that enables companies to embrace change in a turbulent and complex business environment by expanding their portfolio of capabilities. The field of supply chain resilience is still young, and there is a great need for additional research, both to understand the resilience of complex industrial systems and to develop innovative methods and technologies for improving enterprise resilience.18This research will benefit from drawing upon multiple disciplines, from ecology to social sciences to systems engineering. From a management perspective, executives need to understand the cost-benefit trade-offs associated with building capabilities in order to judge the return on their resilience investment; this will require additional empirical research. Finally, there is a need to expand resilience thinking into other aspects of enterprise management, such as organizational resilience and behavior change. Establishing a culture of resilience will help companies to thrive in an age of turbulence.
REFERENCES (18)
1. N.N. Taleb, “The Black Swan: The Impact of the Highly Improbable,” 2nd ed. (New York: Random House Trade Paperbacks, 2010).
2. U.S. Federal Reserve Board, “The Beige Book” (April 13, 2011), www.federalreserve.gov/monetarypolicy/beigebook.
