Supply Chain: Insights on Resiliency

Insights detailed in this chapter derive from the IBM Center report, Preparing Governments for Future Shocks: Collaborating to Build Resilient Supply Chains, as well as informed by the Future Shock roundtable discussion and resources.

During the last three years, a perfect storm of natural and geopolitical events has disrupted worldwide supply chains in ways that few governments could have anticipated. Even as nations, businesses, and consumers strive to nor- malize, new interruptions have created bottlenecks in an enormously com- plicated and interconnected system of purchasing, operation, distribution, integration, and consumption.

This chapter explores the role governments play in preparing for supply chain disruptions. It assesses how governments can foresee potential challenges, plan responses ahead of time, and be ready to minimize the impacts of supply chain disruptions. It outlines insights and recommendations on how best to diagnose threats, design responses, sustain supply chains, and mitigate disruptions by building supply chain immunity.

Setting the Context

In a 2022 survey, 38 percent of global CEOs reported that supply chain dis- ruption is one of their greatest challenges.1 And now, the impact of supply chain disruptions on national economies and social systems is driving govern- ment leaders to also put a top priority on building supply chain resiliency.

In the U.S., disaster and emergency events have typically been regional and limited in duration; examples include hurricanes, floods, fires, earthquakes, industrial accidents, or terrorist attacks. In all such cases, events generally evoked immediate action from emergency responders. The response to large scale disasters typically involves distribution of critical medical and disas- ter response supplies to surrounding regions, often following an established procedure for procuring and distributing supplies (e.g., food, shelter, water, and relief goods). Supplies are normally readily available, and past disaster response efforts have involved few problems in identifying qualified local sup- pliers for immediate contracting, acquisition, and shipping to impacted sites.

The COVID-19 pandemic was dramatically different. The national response infra- structure has never encountered an emergency where every industry sector was affected by disruptions at the same time. Government agencies were unfamiliar with how to address a disaster of this magnitude, which impacted every state in the country, every industry, every population, every hospital. The pandemic revealed significant gaps in the government’s response capacity to this crisis, and response efforts have been the subject of many task forces and inquiries.

The president’s FY2023 budget request to Congress focused significant attention and investment proposals on strengthening supply chain operations and improving supply chain risk management and resiliency. The execution of these programs can be transformed by leveraging a “whole of government” scope and industry-leading supply chain management and shared services business models to their delivery.

Insights and Recommendations

What is the role of governments in preparing for supply chain disruptions that impact government services, national defense, and national economies? How can governments foresee potential challenges, plan responses ahead of time, and be ready to minimize the impacts?

Insights from the Future Shocks roundtables and related research suggest that governments can establish a shared service center of excellence to develop protection against supply chain disruptions. After establishing these supply chain risk management organizations, governments should have the centralized resources to diagnose threats, design responses, sustain supply chains, and mitigate disruptions by building supply chain immunity.2

Create a shared service approach to build supply chain resiliency. Many disruptive scenarios require different responses from multiple government entities. This leads to a clear conclusion: to garner multiagency support and cross-sector collaboration for quick response, a shared service strategy can be a key form of engagement to build supply chain resiliency.

A shared service approach for supply chains would also incorporate a “cen- ter of excellence” (COE) model. A COE would consist of multiple agencies, and could include a data center with key information, predictive modeling capabilities, and an effective vendor-managed inventory. A multiagency shared service, with full-time subject matter experts contributing unique expertise and perspectives on supply chain disruption events. This team could also build out diagnostic data and organize more predictive models as foundations for “future state” planning scenarios.

However, managing a shared service is no easy task. Overseeing such an enterprise requires managing experts from multiple government agencies. A COE of this composition should also include leaders from the private sector to help ensure that the right channels are used for driving policies and implementation. 

Research shows that the most critical components for building supply chain resiliency include: 

To strengthen the effectiveness and security of supply chains, agencies need to quickly execute decisions that drive actions, with a direct line to the right actors in each link of the supply chain. Developing these capabilities requires a combination of appropriate skills, supply risk technology, and communication channels that enable agile responses. Effective preparation cannot be taken for granted; supply chain readiness requires a defined process and a governance framework to analyze and respond, often based on limited options.

For these reasons, government-led, industry-involved shared service entity represents the most effective instrument for delivering capabilities to man- age supply chain resilience.

Action Steps

Diagnose the acquisition ecosystem. Governments should begin by diagnosing the entire acquisition ecosystem and identifying key vulnerabilities, critical supply risks, and suppliers impacted by these risks. This takes considerable time and effort, given the difficulties involved with managing diagnostic work among multiple agencies and numerous businesses, trade associations, and international partners.

Vulnerability and risk may be further complicated by context. For example, a life sciences manufacturer described how chip shortages and the low availability of reagents impacted the provision of COVID-19 tests. In terms of national security, vulnerability means understanding the nature of component shortages. One defense industry expert explained, “The Tier 1 supplier was not the problem. The issue was a Tier 4 and a Tier 5 connector that was not available. The lack of one inexpensive part prevented more than a dozen aircraft from being deployed.”

A June 2021 report3 issued by the White House identifies four major supply chains as especially vulnerable:

• Semiconductor manufacturing and advanced packaging
• Large capacity batteries for electric vehicles
• Critical minerals and materials
• Pharmaceuticals and active pharmaceutical ingredients

After identifying vulnerable categories, governments must develop a set of critical risks to monitor these products and services. For example, critical risks impacting semiconductor manufacturing include:

• Fragile supply chains
• Malicious supply chain disruptions
• Obsolete semiconductors and related challenges to profitability
• Customer concentration and geopolitical factors
• Erosion of the U.S. microelectronics ecosystem
• Skilled worker shortages
• Intellectual property theft
• Capturing innovation benefits
• Aligning public-private interests

For governments, information sharing requires visibility into critical events, especially when national defense is involved. However, suppliers may hesitate to provide visibility to governments when warning about sustainment shortages for critical military systems. This inhibits the development of trusted customers and suppliers.

In addition, mergers and acquisitions may mean that prime vendors do not know who is in their supply network, leading to sudden disruptions when a component is no longer supported. In one case, a U.S. firm was acquired by a Chinese company, which meant that the acquired U.S. firm could no longer sell products to the U.S. government. Another lesson learned was the importance of mapping supply chain networks to build effective supplier relationships. Machine-generated supply network maps may be inaccurate without validation. For this reason, network mapping needs organic verification based on source-level data.

Data is essential to reducing risks associated with supply chain disruption. However, data relevant to supply chains does not reside in most government systems. Commercial partners will need to be heavily involved in collecting key information.

Action Steps

Apply design thinking to develop key supply chain components. Design thinking can help governments build supply chain resiliency by developing statements of work, specifications, and sourcing networks with resiliency in mind. Effective networks must be designed at the outset of a program.  

As governments build supply chain immunity in the face of shocks, they need to establish inventory stockpile requirements. Stockpiles apply not only to pandemic-related goods, but also to inventories of critical commodities such as energy, pharmaceuticals, semiconductors, aerospace components, and other national security products. Many government agencies can manage one-time disasters, but struggle with broader crises that shock supply chains daily.

Several government experts support the notion that “you will never stockpile your way out of disruption issues.” To create agile domestic production capabilities at a cost-efficient price will require the further development of advanced manufacturing capabilities. However, this could run counter to national mandates, such as U.S. procurement practices that minimize cost at the expense of quality.

Stakeholder education will also be an important factor in network design. Typically, government program managers focus on cost, assessment, and scheduling. Adding supply chain resilience to these criteria would require a major shift in sourcing strategy. This may include establishing pre-award intelligence requirements that require vendors to make business continuity plans transparent and provide location details about where materials are sourced. This change has been described as “democratization of data”—anyone working on a program can see the data and understand where disruptions may occur. To build supply chain immunity and resiliency, governments need to implement robust shared technology platforms for supply chain visibility and planning. These platforms need to include AI tools, data analytics, intelligent workflows, and supply chain mapping information to inform decision making and resource deployment.

Supply chain visibility also enables decision makers to pivot from a reactive to a predictive stance and mitigate problems before they occur. Real-time analytics and predictive modeling can support future-state planning. To develop this capacity, governments need to define a problem set and then identify the data needed to address that challenge. Supply chain visibility should occur in real time and provide transparency into the status of critical components and materials. To make sure users have total supply chain visibility, the private sector will also need to collect and share relevant data.

Action Steps

Sustain supply chains through risk mitigation and private sector partnerships. After establishing a visibility network and data collection protocols, a government led supply chain shared service strategy can shift to a “sustain” mode. This includes the development of predictive models, mitigation strategies, and partnerships with private-sector organizations to innovate and expand capabilities.

Wargaming is a useful risk mitigation tool. These exercises bring together stakeholders from different functions to explore various scenarios and examine how future shocks to supply chains could impact government assets, leading to improved procurement approaches and local sourcing alternatives.

Supply chain wargaming also supports stockpile management. Participants discussed that the evolving concept of a “virtual stockpile,” which enables distributors and manufacturers to hold materials within their own operations, but also provides data visibility to make these materials rapidly available to governments in a crisis. With the growing sophistication of predictive analytical tools, governments can build on insights gained from wargaming to develop more accurate “what if” scenarios and contingency plans. Technologies such as AI and digital twins—the Port of Rotterdam uses digital twinning to visualize and make decisions quickly and effectively4—could also be used to find out where supply chains can break down under stress conditions.

To sustain supply chains, investments are required in resilience capabilities. However, many agencies lack the financial resources and authority to make these investments. Contract officers perennially weigh cost, schedule, and performance, often leading to trade-offs between operations and longer-term sustainment capability. Indeed, government procurement often drives other purposes and objectives, resulting in multiple goals and measures of success.

Improving the resilience of government critical supply chains should be considered as a key requirement in procurement decisions, alongside product cost, life cycle costs, and environmental impacts. Procurement also has a responsibility to act as an organized entity on the demand side. Clear demand signals create economic incentives to invest in strategic industries. These signals also increase the willingness to share data and share the development of more comprehensive business continuity plans.

Designating vulnerable industries as essential to a national economy may lead to additional challenges, such as steering investment into critical areas. This requires recognition of structural difficulties within domestic supply chains to meet economic and security objectives. If at-risk essential sectors cannot be sourced without higher costs, then governments need to invest in domestic industries that support national security, such as electric batteries, semiconductors, and pharmaceuticals.

To improve supply chain resiliency, governments must foster strong partnerships with the private sector. By sharing information and developing mutual trust, governments and businesses can help each other adjust to different situations that might arise in an unpredictable, disaster-prone world. The U.S. National Emergency Business Operations Center—part of the Federal Emergency Management Agency—has established a precedent for developing such partnerships.5

Measuring costs and return on investment also supports supply chain resilience. Governments often do not track these costs, nor costs related to expediting fees, emergency alternative sourcing, and overtime. And since financing often occurs through progress payments, costs are simply passed on to the government after being incurred—increasing overall costs in subsequent years.

Action Steps

Modernize supply chains to build resilience. Building supply chain resiliency solutions starts with a strategy involving a government-led, industry-involved shared service and center of excellence. Given the central role of a shared approach to building supply chain resiliency, how can governments set up these collaborative organizations that meet their specific requirements? Though the recommendations outlined in this chapter were developed within a U.S. government context, this framework could also be applied to other democratic governments with similar agency structures.

In the U.S., a shared service for supply chain resilience could include multiple agencies that share a common objective. The European Union already has a similar framework that shares data and information among countries.6 A shared service could span several domestic agencies with direct insights into various types of civilian and national security supply chain disruptions. These could include the Departments of Homeland Security, Commerce, Health and Human Services, Energy, Transportation, State, and Defense, as well as the Intelligence Community. Other nations may choose to house a shared services capability in ministries or bureaus with similar responsibilities.

 Action Steps

• Shared service capability needs to exist as a core responsibility, and the government should own it, lead it, and drive cross-border collaboration with other countries.
• Establish agency mission-support leadership roles for supply chain management that address cross-departmental and interagency component tasks.

Looking Forward.  Assembling the multiple components of a supply chain resiliency solution will need more than government participation. The private sector will also need to be involved when developing this capability. For this reason, private-sector advisors to agencies should include business leaders and subject matter experts from different nodes in the supply chain. These experts could come from equipment manufacturers, distributors, logistics providers, hospitals, retail pharmacy chains, and drug manufacturers.

Governments are responsible to broad constituencies for building supply chain immunity, and a shared services center of excellence provides a practical structure to manage this responsibility. Such a strategy would integrate the expertise of government agencies with private-sector business acumen. It also provides the flexibility to anticipate and respond to continuously changing supply chain disruptions.

Endnotes

1. The 2022 CEO Study. Own your impact: Pathways to transformational sustainability. IBM Institute for Business Value. May 2022, https://ibm.co/c-suite-study-ceo.
2. Handfield, Robert, and Daniel J. Finkenstadt, Supply Chain Immunity: Overcoming our Nation’s Sourcing Sickness in a Post-COVID World. 2022. Springer, https://link.springer.com/book/10.1007/978-3-031-19344-6
3. “Building resilient supply chains, revitalizing American manufacturing, and fostering broad based growth.” A report by The White House. June 2021, https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf.
4. Boyles, Ryan. “How the Port of Rotterdam is using IBM digital twin technology to transform itself from the biggest to the smartest.” IBM blog. August 29, 2019, https://www.ibm.com/blogs/ internet-of-things/iot-digital-twin-rotterdam/
5. “National Business Emergency Operations Center Fact Sheet.” Federal Emergency Management Agency. May 28, 2019, https://www.fema.gov/sites/default/files/2020-03/nbeocfactsheet _ 2019.pdf.
6. “Data Act: Commission proposes measures for a fair and innovative data economy.” European Commission press release. February 23, 2022, https://ec.europa.eu/commission/presscorner/detail/en/ip _ 22 _ 1113.

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Chapter One - Emergency Preparedness and Response 

Chapter Two - Cybersecurity