Get Ready for the Next Supply Disruption

The COVID-19 pandemic has ushered in an era of supply chain disruption and unpredictability that has severely challenged many companies’ planning and processes, and revealed how far prevailing practices are from the ideal. An MIT Center for Transportation and Logistics poll conducted online at the onset of the pandemic revealed that only 16% of organizations had an emergency response center — an established best practice for mitigating and recovering from unplanned interruptions in the physical flow of goods.1

Unsurprisingly, given the pandemic’s disruptive effects, the same poll found that the highest ambition of supply chain managers was to bolster their risk management protocols and tools. The problem with crisis-driven supply chain initiatives that are focused on protocols and tools is that they are only as effective as the ability of the organization to use them. Having that ability requires the systematic development of capabilities to manage for supply disruptions. These capabilities are combinations of people, policies, processes, and technologies that ensure companies can not only plan for and respond to known business and operating risks but also — and more importantly — manage unknown-but-knowable threats and their associated consequences.

We’ve identified six capabilities that fill this bill: anticipate, diagnose, detect, activate resources for, protect against, and track threats. Together, they constitute the ADDAPT framework, which is based on our research into how public agencies and private enterprises experience and respond to supply disruptions like the COVID-19 pandemic. In medicine, pathology is aimed at understanding the causes and effects of a disease to guide treatment. Similarly, the ADDAPT capabilities help companies understand the causes of supply disruptions and their immediate and long-term effects, in order to both respond to unfolding supply disruptions and prevent their recurrence.

In this article, we share insights from our ongoing research at Loblaw, Canada’s largest supermarket chain, as a case study illustrating the experience of many large companies during the COVID-19 pandemic and how the ADDAPT framework might have helped them. Then we define each of the ADDAPT capabilities, describe why they are needed, and suggest actions for developing them.

Loblaw and COVID-19

The COVID-19 pandemic revealed the strengths and weaknesses in supply disruption management across companies operating in many industries and geographies. Loblaw operates over 2,400 stores and 20 distribution centers across Canada. It employs more than 125,000 people (Canada’s largest corporate workforce) and generates US$41 billion in annual revenue.

Like many companies, Loblaw had emergency plans that specified a chain of command and the appropriate communications with the public and employees for known business risks. However, this mostly covered local emergencies, such as a fire or a strike at a specific distribution center or store. It did not include supply disruption triggers with widespread effects, such as a pandemic or large-scale natural disaster.

Loblaw also had conducted scenario analyses to develop emergency response plans, such as rerouting logistics in the event of a distribution center fire, but the plans were untested. Further, there was no playbook for restoring product flows across the company’s entire logistical network. The company had not worked through how to reestablish and maintain a flow of supplier shipments to multiple distribution centers and, from there, to hundreds of retail stores, whether through company-owned or third-party truck fleets.

Executives at Loblaw, like the leaders in many major organizations, became aware of COVID-19 through the Canadian news media in January 2020 and reacted to it as a health concern. The company did not recognize COVID-19 as an operating concern and a potential supply disruption trigger until early March 2020. Management subsequently implemented enhanced sanitation efforts for distribution and store employees, work-at-home policies, and procedures aimed at supporting sick employees.

By then, Loblaw stores on Canada’s west coast were beginning to experience dramatic shifts in consumption as customers began hoarding products such as toilet paper, nonperishable foods, and baking supplies. The company’s AI-powered, real-time demand management system quickly detected these abnormal spikes in customer demand, but it was not capable of alerting managers to the triggers manifesting in transportation linkages and vendor operations.

As the supply disruption took hold, Loblaw’s leaders quickly pulled together a pandemic task force composed of senior supply chain managers to provide the capacity and knowledge needed to field a coordinated response. The task force used the data from the demand management system to predict product shortages. They relied on an intuitive grasp of the capabilities of the logistical network based on past experience to diagnose and act on internal issues, such as employee safety and staffing. But the task force’s capabilities did not extend to the vendors of the thousands of products sold by the chain or their shipments. The erosion of stock levels in Loblaw distribution centers compelled procurement employees to talk more frequently to vendors to find out what was happening in the supply chain. Previously, these conversations had been limited to exceptional events, such as missed shipments, but now dialogue with supply chain partners became a routine practice.

To manage the supply chain disruption, the task force needed to activate resources on an exception basis, often manually overriding the demand management system to reset order volumes and stocking-level targets for stores and distribution centers. Trucks were rerouted and volumes increased through greater coordination with carriers, but the storage and picking capacity of Loblaw’s distribution centers remained a constant constraint on product volumes and flow paths.

As the pandemic evolved, new distribution center workers were hired, which involved the HR function. Alternative sources for some products had to be found on short notice, and when that was not possible, existing sources and inventories had to be triaged and rationed. The variety of choice in some product lines was reduced to maintain volume in stores. All of this improvisation was effective in keeping Loblaw’s stores open and profitable, but formulating responses in the moment consumed valuable time and effort.

Loblaw had the systems, data, and analytics needed to detect known supply disruption triggers, and its leaders were rightly confident in the experience of its supply chain managers and its culture of hands-on, collaborative problem-solving. But a more detailed playbook with options and guardrails reflecting realistic lead times would have enabled the company to reduce the risk of stock-outs and missed deliveries more efficiently. For example, the transportation function learned that new carriers could be onboarded in days instead of weeks by focusing on a minimal set of requirements — a lesson that could have yielded a short list of preferred and vetted carriers before the disruption.

Like many companies dealing with COVID-19, Loblaw had internal performance metrics (such as missed or delayed shipments) that tracked the effects of supply disruption. But it did not have the dedicated people, processes, and systems to monitor evolving external conditions, which would have enabled not only an early warning but also faster mitigation during the pandemic. For instance, pinging suppliers about their operating capacity and sourcing uncertainties to anticipate delivery shortages at distribution centers was not a routine practice at the company, but it became one during COVID-19. Today, Loblaw is considering the metrics and supporting infrastructure needed to better deploy product, people, and capacity in future supply disruptions.

The ADDAPT Framework

The framework is built on the presumption that the number of known and unknown-but-knowable risks that can interrupt the planned flow of goods in the absence of mitigation plans is infinitely large. These risks are potential supply disruption triggers, and they vary from routine problems, such as output defects and equipment breakdowns, to malicious acts, such as cargo thefts and terrorist attacks, and acts of God, such as earthquakes and hurricanes.

The ADDAPT framework differs from traditional risk management planning in the breadth of its risk focus. It stretches the capability of organizations by committing resources to examining the internal experience with known threats and collecting external input from suppliers, customers, and experts. Importantly, the ADDAPT framework encourages companies to invest in describing unknown risks and, by doing so, transitioning unknown risks so that they become unknown but knowable threats. This may take organizations out of their comfort zones in that they might need to engage with external experts and viewpoints that pose uncomfortable questions that begin with phrases like “What if …?” or “Have you thought about …?”

The six ADDAPT capabilities are interrelated. Together, they make supply chains more resilient by conditioning companies to anticipate, diagnose, detect, activate resources for, protect against, and track both known and unknown-but-knowable threats. (See “ADDAPT for Supply Chain Resilience.”) In the best-case scenario, they enable companies to avoid interruptions in physical flows of products. In a suboptimal scenario, they help companies experiencing supply disruptions to recover faster and limit their losses.

Anticipate: Organizations tend to overlook their vulnerability to supply disruptions because they either forget past experiences with known triggers and their consequences, or they are unable to foresee unknown but knowable triggers and their consequences. Similar to the simulated war games conducted by the military, the Anticipate capability leverages an understanding of previous supply disruptions and increases awareness of potential supply disruption triggers by continually gathering, piecing together, and codifying information from disparate sources, and then subjecting the organization to stress-testing using simulations, drills, and thought exercises.

By acknowledging Murphy’s law, organizations with a mature Anticipate capability are aware of a continually evolving list of triggers that have in the past and may in the future cause supply disruptions. Thus, rather than reacting in panic when a supply disruption trigger occurs, employees are able to move quickly along the learning curve, from understanding how it will impact the supply chain to mitigation and recovery.

Key actions to take:

• Incentivize employees to share concerns about known and unknown-but-knowable supply disruption triggers.
• Formalize procedures, and assign personnel to hear concerns about those triggers.
• Establish a learning lab to plan what-if scenarios for supply disruption triggers.
• Regularly conduct drills and mock exercises to simulate supply disruptions.
• Hold regular retreats with organizational stakeholders, think tanks, and experts to imagine future scenarios for the business, both positive and difficult.

Detect: When the physical flow of goods deviates from plan, other activities go sideways too. For example, delays in scheduled deliveries of parts can shut down manufacturing once safety stock is depleted. The sooner a company becomes cognizant of such deviations, the more time it has to find and activate other sources of supply.

The Detect capability proactively establishes trip wires that sound alarms when supply disruption triggers interrupt the physical flows of products. These alarms should be prioritized for products whose physical flows face the highest probability of being interrupted or whose physical flows, if interrupted, place the organization, its strategic suppliers, and its key customers under the greatest duress.

Key actions to take:

• Encourage organizational stakeholders to report occurrences of known supply disruption triggers and/or deviations in physical flows of products.
• Inform organizational stakeholders, strategic suppliers, and key customers of the trip wires for known supply disruption triggers.
• Connect trip wires to communication protocols for organizational stakeholders, strategic suppliers, and key customers.
• Formalize rules, processes, and systems to easily, quickly, and widely communicate data that tracks known supply disruption triggers and the flow of products.
• Create accessible dashboards to facilitate interpretation of deviations in planned activities (such as patterns of supply and demand), and to inform and shorten decision-making cycles.

Diagnose: Detecting and experiencing a supply disruption should prompt an investigation. Without such follow-up, organizations cannot learn effectively, nor can they codify this learning to support other ADDAPT capabilities. The Diagnose capability requires the time, resources, and critical-thinking skills to separate relevant facts from irrelevant ones during a supply disruption and to formulate effective, timely responses. Once things are back to normal, the Diagnose capability requires the time and resources to learn about the risk that triggered the supply disruption so that such insights can offer ways to protect against future disruptions by the same risk.

Diagnosis depends on being able to analyze data in real time, as a supply disruption is unfolding, and after things have settled down. As with detection, the faster companies can diagnose an unfolding supply disruption, the sooner they can design and implement appropriate short-term responses. When the crisis abates, companies should focus on completeness and develop a holistic understanding of the supply disruption it just experienced. The ability to diagnose supply disruptions enables organizations to avoid type III errors, where focusing on the wrong issues leads to misguided interventions.

Key actions to take:

• Provide the time, money, and expertise needed to support employees and relevant stakeholders as they engage in problem-solving activities.
• Proactively engage external stakeholders, including strategic suppliers and key customers, in the development of a complete description of supply disruptions, immediate recovery interventions, and longer-term mechanisms, to prevent future supply disruptions.

Activate: The priority for companies in the midst of a supply disruption is to stabilize the situation and restore interrupted flows of goods as quickly and as closely to their planned rate as possible. This urgency drives the implementation of the short-term solutions formulated using the Diagnose capability.

The Activate capability enables companies to channel and dedicate resources — people, equipment, and cash — to implement remedies. It requires accurate data on resource availability, location, and readiness in order to remove the constraints that block and slow solution implementation. Under normal conditions, capital budget rules and processes provide oversight for proper spending. During a crisis, some rules and processes may have to be temporarily suspended for expediency.

Key actions to take:

• Document the location of materials, personnel, and information within or beyond organizational boundaries, in real time.
• Provide formal and emergency access and authorization to deploy relevant resources.
• Establish and deploy standby teams of experts from within and beyond the organization to expeditiously respond to supply disruptions.
• Formalize relationships with preferred alternative suppliers for strategic items, including rules for tapping their capacity.
• Codify contingency and emergency response plans, and share them within organizational boundaries and with critical suppliers and key customers.

Protect: Once the crisis of a supply disruption passes and the physical flow of goods is restored, the focus shifts to the prevention of future supply disruptions. The Protect capability combines learning from supply disruptions that companies have experienced with data-driven creativity to revamp supply chains.

This revamping may entail new sourcing strategies, alternative transportation routings, and/or the redeployment of internal capacity and inventory. It requires organizations to deliberately diagnose and evaluate the viability of short-term solutions activated during a supply disruption as longer-term protection mechanisms aimed at deterring reoccurrences of supply disruptions. Ideally, these new protection mechanisms will make supply chains robust enough to withstand supply disruptions triggered by known risks and more resilient against first-time disruptions triggered by unknown but knowable risks.

Key actions to take:

• Systematically review and evaluate the solutions activated as a rapid response to supply disruptions as desired practices for the long run.
• Regularly update the rules, processes, and systems that support the other ADDAPT capabilities.
• Share updated contingency and emergency response plans broadly within organizational boundaries and with critical suppliers and key customers.
• Conduct actual or virtual war games with relevant internal and external stakeholders to test the effectiveness of protection mechanisms against known supply disruption triggers on an ongoing basis.

Track: Managing and preventing supply disruptions requires continually collecting supply chain data. This data, when analyzed and shared, provides insights into known and unknown-but-knowable supply disruption triggers.

The Track capability enables companies to define and monitor the trip wires that allow the early detection of supply disruptions and ensures that resources are not activated and deployed in counterproductive firefighting. It verifies the effectiveness of solutions that are intended to stabilize interrupted physical flows of goods, as well as the protection mechanisms against reoccurrences of supply disruptions from known triggers. This capability provides the data and analysis needed to support the critical decisions embedded in other ADDAPT capabilities, and it is informed by the outcomes produced by those capabilities.

Key actions to take:

• Make ongoing investments in the personnel and systems needed to monitor known supply disruption triggers in real time.
• Provide dashboards to supply chain decision makers to ensure that they can easily see whether supply chains are operating normally.
• Identify and define the leading indicators of supply disruptions and their associated risks.
• Map and communicate the baseline indicators for physical flows of goods under normal conditions.

Prepare Today for Tomorrow’s Supply Disruption

Like Loblaw, many well-run companies have a strong supply management function that is capable of reacting to operational problems quickly through diagnosis and resource activation. However, most companies could broaden their ability to detect, diagnose, and activate in response to so-called black swan triggers of supply disruption. They also could make additional investments in the people and information systems needed to bolster their ability to anticipate, protect themselves from, and track supply disruptions and their triggers beyond organizational borders.

Leaders should establish supply chain management as a strategic function owned by a senior executive whose primary responsibilities include the early detection of unknown but knowable threats. The function should be supported with state-of-the-art technology capable of detecting changing consumer demand and delivery patterns in real time. Further, it should be able to tap and decipher the voluminous, unstructured data hidden in expert opinions, public databases, and social media information, which often contains the early warnings of emerging threats and supply disruptions.

It’s also important to create and test emergency playbooks before establishing operational response protocols and training supply managers in their use. These playbooks should include prioritized checklists of alternative suppliers, product mix, distribution routings, and reserve capacity for storage, production, and manpower.

Finally, remember to collaborate across the supply chain in the hunt for clues to impending supply disruption triggers, and to field more proactive responses to them. This work should go beyond annual supply contract discussions and disputes over individual missed order deliveries to regular, broad-based discussions with key suppliers about the risks to supply that may lie in each other’s blind spots.

Companies that master the capabilities outlined in the ADDAPT framework will have the best chance of weathering future supply disruptions with minimal impact on their critical customer, employee, and supplier relationships.