Why Companies Don’t Build More Resilient, Fault-Tolerant Supply Chains

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Published June 4, 2021

Mouser Electronics Technical Content Team | Estimated reading time: 3 minutes, 44 seconds.

Disasters wreak havoc on everyday life, including the effectiveness of a supply chain. Events in the past decade have underlined this reality and created issues all along a manufacturer’s supply chain.

In 2011, the Great East Japan Earthquake took an immense human and economic toll and was regarded as the most expensive natural disaster in world history. On an industrial scale, it was cited as the single-largest technology supply-chain disruption in more than 50 years.

To build more resilience into their supply chains, many companies took significant action but some did not and it showed nearly a decade later. In 2020, pandemic-induced production outages in Asia, including a critical semiconductor chip shortage, created additional shocks in global supply chains.

These unanticipated disruptions prompted a popular industrial term: supply chain resilience. A supply chain's design is perhaps the most important factor in a manufacturer’s ability to withstand unforeseen shocks and continue to perform at normal or near-normal levels.

These global disruptions beg two questions that manufacturers should consider: How resilient is your supply chain? Why don't more companies take action to diversify and reduce risks?

Ron Keith, founder of Supply Chain Resources Group Inc., took notice and identified five reasons why ill-prepared companies don't put more attention into building more robust fault-tolerant supply chains. We can all learn from these failures.

1. Excessive Focus on Supply Chain Efficiency

Stanford University professor Hau Lee categorized supply chains based on uncertainty, suggesting that higher levels of supply uncertainty require a design focused on either risk hedging or agility. Highly efficient supply chains are not well-positioned to react to disasters and pandemics. Most of the tools and methods used for making supply chains more robust can add to the per-unit cost. Dual/multiple sourcing, strategic inventory buffers, make-and-buy strategies, and manufacturing regionalization add both cost and benefit to operating the supply chain. But the simple fact is that the leanest, most efficient supply chains are fundamentally not very resilient.

2. Uncertainty About the Probability of a Disruptive Event

Rather than guessing about timing, most companies assign a probability of a disruptive event occurring in a given year. But the list of possible events is long and varied, and few supply chain organizations employ statisticians or actuaries. Determining what probability to use is challenging and it is impossible to determine what level of prevention spending is warranted.

3. Uncertainty About the Impact of a Disruptive Event

Even if the probability or timing of a supply chain shock could be known with some level of certainty, it’s extraordinarily difficult to accurately forecast the impact of a significant, broadly disruptive event such as COVID-19 that impacts a wide swath of the supply chain. Some health-related events create partial disruptions that can be dealt with after the fact by throwing money at the problem. But broader, system-wide shocks to a supply chain can cause devastating financial impacts, including a complete loss of revenue that results in a loss of market share. 

4. Inability to Measure Resilience or Fault Tolerance

The concept of a more robust supply chain is understood by most practitioners, but few know how to measure it. Most of the academic work around supply chain resilience focuses on complex network modeling. Modeling is a very useful tool for determining the robustness of various supply chain designs and disruption mitigation tools. But the results make for a key performance indicator (KPI) that is hard to put into operation in real-time, and viewed by some supply chain team members as a bit obscure.

5. Misplaced Corporate Performance Measures and Incentives

A number of measures of a supply chain’s performance are relatively easy to measure. Some include service level, on-time delivery, period-over-period cost reduction percentage, inventory turns, errors and omissions (E&O) percentage, premium freight spend, and the total number of suppliers. All of these are important measures of either cost or performance. But tying financial incentives to maximizing (or minimizing) any of these traditional key performance indicators almost always provides sub-optimal financial performance, and/or generally reduces the resilience of the overall supply chain.

The primary tools available for building fault tolerance into supply chains typically involve investments that add some level of ongoing cost. Calculating an ROI is difficult, and subject to a high degree of return uncertainty, which generally makes it hard for supply chain professionals to justify the costs. But the cost of disruptions is causing many tech companies to reconsider spending a little extra to build a more resilient supply chain. Everyone associated with a supply chain will be thankful.

This article contains information from TTI and the Mouser Electronics technical content team