The ‘Fourth Industrial Revolution’ – the rise of technologies like the Internet of Things, AI and robotics – has produced unprecedented degrees of automation and connectedness in business operations. This affords great opportunities, but it also exposes businesses to a level of risk that is arguably the highest since the Second World War.
The reliability and resilience of these networks of interdependencies is crucial for business operations, but can be threatened by unpredictable disruptions. These disruptions can arise from extreme weather, longer-term climate change, declining international order, economic crises, changing societal priorities, cyber threats or terrorism or the global outbreak of a deadly disease such as COVID-19. Risk-management can mitigate the risk from these threats but it is no longer enough as it relies on anticipating known and predictable threats, and has proven insufficient and potentially prohibitively costly in managing less known or unpredictable events.
The impact on business from these threats has been increasing since early 2000, with insurance claims for business interruptions associated with infrastructure-related disaster management going from 25% of total insurance losses to almost 50%. We believe that existing approaches for resilience quantification can be applied within value chain analysis to better safeguard business feasibility despite disruptions. While risk assessment quantifies both the potential vulnerability and threat associated with specific scenarios to estimate risk and direct efforts to prevent its realization, resilience emphasizes recovery and adaptation.
A value chain is an established business concept that describes the full range of activities required to bring a product or service from conception through to a valuable product. Value chains do not exist in the sense of having a tangible reality, but are instead a framework for stakeholder interactions and system operations. While supply chains emphasize the needs for supplies and suppliers to deliver goods or services, value chains study where value is, or how it can be created or lost before the desired service is delivered or used. For more information please read our article on understanding resilience value.
Enriching value chain analysis with a resilience approach
Value chain analysis is an established approach that help businesses build competitive advantage. However, it does not include considerations of unpredictable shocks and stressors that can create costly business disruptions.
Connecting resilience to value chain analysis can bolster corporations, industry and whole economies against an array of potentially serious shocks and longer-term stresses and their costs. The recently published paper “The Case for Value Chain Resilience” argues that by injecting resilience concepts and methods into mainstream value chain analysis improves its usefulness to business strategy and planning. It also makes it more relevant to today’s increasingly more complex and interconnected world.
- Value chains integrate more social and information networks with all their complexity, interconnectedness and interdependencies across multiple stakeholders. Therefore, they lend themselves to resilience thinking.
- Value chains do not exist in the sense of having a tangible reality, but are instead a framework for stakeholder interactions and system operations. While supply chains emphasize the need for supplies and suppliers to deliver goods or services, value chains study where value is, or how it can be created or lost before the desired service is delivered or used. From organizational and supply chain perspectives, value can include additional performance metrics such as sustainability and resilience.
- Most stakeholders oversee only specific domains within a larger value chain, but their value production management decisions should not seek to maximize their own benefits without examining other impacts on the system.
- Value chains may have efficiency at component or subsystem levels and perhaps structurally embedded inefficiencies at the global and system level. A resilience assessment can reveal the benefits of inefficiencies such as unused capacity that may be crucially important during periods of disruptions.
- Enriching value chain analysis with considerations of system resilience, meaning the ability to recover and adapt after adverse events, can reduce the imposed costs of such disruptions and better safeguard long-term business feasibility despite a context of increasing threats. To see how this can be done please see our Resilience for Ports project.
To advance the discussion on resilience in business value chains we have:
- reviewed the evolution of value chains as systems grow more interconnected and complex
- connected the concept of resilience with value chain frameworks in theory and practice
- reviewed the literature on supply and value chain risk and resilience to understand current trends and gaps for value chain resilience
- synthesized existing methods of resilience operationalization and quantification for applications to value chain analysis
The paper was authored by Dr Igor Linkov (Carnegie Mellon University, US Army Engineer Research and Development Center), Stephanie Galaitsi (Credere Associates), Joseph Sarkis (Rochester Institute of Technology), Jeffrey M. Keisler (University of Massachusetts Boston) and Savina Carluccio, Oliver Pritchard, Áine Ní Bhreasail from The Resilience Shift.
Dr Igor Linkov is the Risk and Decision Science Focus Area Lead with the US Army Engineer Research and Development Center, and Adjunct Professor with Carnegie Mellon University. Dr. Linkov has managed multiple risk and resilience assessments and management projects in many application domains, including cybersecurity, transportation, supply chain, homeland security and defense, and critical infrastructure.