Over the past few years, many businesses have been stretched to their limits. Supply chain resilience has been tested in never-before-seen ways, with unprecedented global challenges impacting companies' daily operations and growth.
In 2021, the Global Supply Chain Pressure Index reached an all-time high, indicating incredible supply chain pressure. That could explain why only 2% of senior supply chain executives say they felt fully prepared for the pandemic.
Today, companies continue to recover from the lengthy disruption as freight rates normalize and freight capacity stabilizes. Additionally, of the 305,000 businesses that closed in the second quarter of 2020, over 70% have reopened, according to The Hamilton Report.
But companies can still experience shockwaves in other unpredictable ways. To thrive, companies need to know where they stand, and supply chain stress tests and scenario-planning exercises can help.
What Is a Supply Chain Stress Test?
Stress tests evaluate the ability of a supply chain to withstand disruptions ranging from natural disasters and cyberattacks to supplier shutdowns and demand fluctuations.
They can provide a framework to:
Identify critical weaknesses on the surface and several tiers deep
Understand unique risks and their potential impact
Explore possible mitigation strategies
Business owners can consider a stress test a way to “check on the consequences of a supply chain disruption,” explains Dr. Yossi Sheffi, director of MIT’s Center for Transportation and Logistics.
“What is disrupted is more important than why it is disrupted," Sheffi says. "The results can range from losing a few customers when delivery times are too long to an existential threat to a company.”
Stress tests can reveal the answers to questions like:
Who will be impacted by these disruptions (customers, stakeholders, etc.)?
What will be impacted by these disruptions (internal operations, cash flow, etc.)?
Which parts of the supply chain are most at risk (operations, distribution, customer service, etc.)?
Companies that rely on multiple suppliers can also use stress tests to not only evaluate their own performance, but also as an opportunity to run scenarios that compare how each supplier may perform amid disruption, says Kamyar Shah, CEO of World Consulting Group. “Consider communicating directly with suppliers to get them on board with potential contingency plans. This could strengthen the relationship for future bumps in the road.”
Create a Robust Stress Test Plan
As Sheffi describes, supply chain stress tests can be approached in several ways, from tabletop exercises to full scenario planning.
Manual, discussion-driven approaches use historical data to not only assess common risks but also consider unpredictable disruptions (natural disasters, for example). These exercises can evaluate practices, identify easy wins, and pinpoint ways to manage and withstand disruption as a team by helping you connect with key internal people in supply/demand planning, manufacturing, fulfillment, warehousing, and network planning roles.
Many companies use a method called "crisis simulation," which is a role-play scenario that tests senior executives' responses to various scenarios, explains Michael Pleuger, co-founder of akirolabs, an AI-enabled platform for strategic procurement.
Other types of stress tests can involve technology and software. For example, Accenture and MIT developed a Supply Chain Resilience Stress Test that creates a digital twin of an organization’s supply chain.
Scenarios and impacts are modeled to represent what disruptions may look like to customers, shareholders, employees, and society, as well as how long it would take to restore the supply chain to full functionality. Resilience is then quantified into a single index.
"These tools can model everything from the ripple effects of a single factory outage to the impact of a global trade war," says Pleuger.
According to Sheffi, a combination of tech-forward and tabletop exercises can yield the best results.
“Stress tests are most useful when they involve the actual managers going through an exercise and making decisions as if the event tested is real,” he says. “Managers’ reactions are the most important part of the exercise. Furthermore, by actually going through drill, people retain more of the lessons as compared with a visual exercise.”
Stress Tests in Action
Stress testing at the manual level helped F&J Outdoors realize its rigid dependency on certain suppliers and led to diversifying its supplier portfolio.
“This provided dual benefits: risk mitigation and performance evaluation,” says F&J Outdoors owner Wendy Wang. “Apart from fortifying against disruptions, it gives us a lucid account of how each cog of the supply chain performs under strain, helping shape a more efficient and productive workflow.”
Joshua Haley, founder of Moving Astute, works closely with moving companies across the country and has seen vulnerabilities uncovered through stress tests.
“A relocation service provider conducted a stress test that simulated a major storm impacting their main operating region,” he says. “This exercise revealed vulnerabilities in their backup communication systems and led to the implementation of redundant communication channels, ensuring uninterrupted customer support during future emergencies.”
In other instances, he has seen companies use customer data to simulate sudden spikes in demand during peak moving seasons to optimize resource allocation and maintain service levels during periods of increased activity.
CabinetSelect, a large online cabinet retailer, regularly uses stress tests to navigate challenging situations. Recently, the company simulated a UPS strike scenario, Co-founder Chris Alexakis says.
“The insights enabled us to develop alternative delivery strategies and partnerships, ensuring minimal disruption to customers during such an event,” he says.
Will Your Supply Chain Pass the Stress Test?
While they’re an extremely valuable tool, stress tests alone don’t build supply chain resilience. Taking action can help prevent future problems.
Once you do, the benefits can be long-lasting and impactful: reduced financial loss amid disruption, better supplier relationships, stronger internal collaboration, and service continuity for customers.
“The only thing you can count on in today’s world is change,” says Sheffi. “Supply chain stress tests can be small and inexpensive or large and costly. Either way, all organizations are better off when they conduct them.”
