How to Manage Uncertainty in the Face of Extreme Change

Dealing with uncertainty, whether in the form of a crisis such as a natural disaster or a disruptive force such as technological innovation, has always been a core element of supply chain management.

However, it seems like the level of uncertainty is greater today than ever before.

How can companies steel their business operations against escalating change, and what are the implications for future supply chains? Also, what opportunities do these changes bring, and how can companies take advantage of them to create a competitive advantage?

Ongoing research on resilience and risk management carried out by the MIT Center for Transportation & Logistics over the last two decades or so, shows that companies need a mix of established and new strategies to manage uncertainty in today’s fast-paced business environment.

MIT CTL’s upcoming conference, Crossroads 2020: Understanding Uncertain Futures, will further explore these responses. The event will feature sessions on major sources of uncertainty, including the political and economic divide between China and the United States and the arrival of 5G communications.

Is uncertainty on the increase?

Uncertainty is difficult to measure, so evaluating and comparing it over time involves an element of subjectivity.

Since technological change is a key driver of uncertainty, it is often used as a proxy for measuring the degree of unpredictability that companies face.

The World Intellectual Property Organization estimates that innovators filed 3.3 million patent applications in 2018, up 5.2% on the previous year, and the ninth straight yearly increase. Global trademark filing activity rose to 14.3 million, while industrial designs reached 1.3 million. Asia accounted for more than two-thirds of the patent, trademark, and industrial design applications in 2018, with China driving overall growth in demand for intellectual property rights.

From a supply chain perspective, technological innovations that fall under the banner of digitalization are advancing rapidly.

Political uncertainty is another disruptor that is reshaping supply chains today. The recent eruption of a trade war between China and the United States requires companies to react quickly to policy shifts that whiplash markets between low- and high-tariff environments.

A disruptor that combines both technological and political change is 5G wireless connectivity. 5G promises faster, more ubiquitous communications across supply chains. However, it is also making political waves. Efforts by the US to prevent Chinese tech company Huawei from supplying 5G technology to networks in the west on national security grounds are symptomatic of the widening gulf between the two countries. The controversy is embroiling other countries too. The United States is resisting a decision by the United Kingdom to use Huawei for its 5G networks.

A current, and in some respects, more worrying disruption, is the coronavirus outbreak and its potential global impact. In a recent Wall Street Journal article, Professor Yossi Sheffi, Director of MIT CTL, argues: “Just as scientists are confronting an unknown enemy, corporate executives are largely working blind because the coronavirus could cause supply chain disruptions that are unlike anything we have seen in the last 70 years.”

Sheffi maintains that unlike previous crises that disrupted specific companies for a relatively short time, the effects of the coronavirus outbreak are more sustained. Another distinguishing feature of the epidemic, he says, is that it affects both supply and demand.

Be aware of pointers from the past

Lessons learned from past disruptions can help companies manage the uncertainties they face today.

For example, experience shows that managing people-related issues is a top priority when large-scale disruption strikes. It may be necessary to introduce remote working arrangements or automation to cope with worker shortages. Companies should create a business continuity plan (BCP) that highlights critical vulnerabilities in an emergency, and includes risks associated with personnel. They should also establish an emergency response center that can create, implement, and oversee action plans to manage a disruption down to the plant level.

A thorough analysis of the company’s supply base that includes the sub-tiers of suppliers should inform these efforts. The analysis identifies suppliers of critically important parts, and it indicates alternative sources of these parts in the event that core suppliers fail.

Put customers under the microscope as well. It may be necessary to prioritize which customers receive product when production capacity becomes constrained.

Another notable history lesson is that it’s vitally important to maintain clear communication channels with external parties during a crisis. These parties include government agencies and local contacts.

Today’s world offers some unique challenges

Still, history does not repeat itself, and companies also need to develop response strategies that are attuned to today’s risk landscape.

MIT CTL is helping companies to create a fresh approach to supply chain design, which equips them to react quickly to change. An unexpected market shift might require backup manufacturing or storage capacity in new locations, for example. Such options can be quickly simulated and evaluated using the latest visualization technology that displays outcomes to different strategies. The visualization platform that MIT CTL has developed enables different disciplines to participate in the design process. This multi-disciplinary approach is especially important today, given the increasing complexity of supply chains.

Another response strategy under development at MIT CTL is an adaptation of the well-established Sales & Operations Process (S&OP). A notable strength of the conventional process is that it brings together different disciplines within the company to plan responses to changes in supply and demand.

Called Resilient S&OP, the new variant created by MIT CTL extends the scope of the S&OP process to include supply chain resilience. For example, it takes uncertainty into account when quantifying supply and demand, thereby providing participants with a clearer understanding of the risks and opportunities associated with committing to specific supply/demand levels.

Heeding a core lesson about uncertainty

At the time of writing towards the end of February 2020, it is apparent that the impact of the coronavirus is much more far-reaching than anticipated. For example, there are reports that container shipping services are experiencing unprecedented disruptions, with carriers blanking 46% of capacity in the Asia-Europe trade.

These developments highlight one of the most important aspects of large-scale disruptions: they produce after-effects that are impossible to predict. Consequently, companies need to be ready to manage unknown as well as known uncertainties.

MIT CTL’s Crossroads 2020: Understanding Uncertain Futures conference will take place on April 28, 2020, at the MIT campus in Cambridge, Mass. Professor Yasheng Huang, Epoch Foundation Professor of International Management at the MIT Sloan School, will give a talk about the decoupling of China and the United States. Muriel Médard, Cecil H. Green Professor in the Electrical Engineering and Computer Science Department at MIT, will talk about the rollout of 5G communications. Other speakers will cover developments in sensor technology, 3D printing, and sustainability. Get more information and register here.