“For Supply Chain Resilience, Firms Have Two Basic Choices: Redundancy or Agility”

The disruption to shipping caused by conflict in the Middle East is the latest reminder of the fragility of global supply chains. The shift towards resilience began during the COVID-19 pandemic, which exposed vulnerabilities in systems long designed for speed and low cost.  

The risks remain visible today: the Middle East conflict has left dozens of container ships stranded near the Strait of Hormuz, delaying shipments of food, fuel and vehicles and highlighting how quickly geopolitical shocks can ripple through global trade.

For the former Chief Economist in the U.S. Department of Commerce Susan Helper, the challenge facing companies is not simply to add buffers, extra stock or secondary suppliers. It is to rethink how supply chains operate.

“There are two basic choices firms have for resilience,” she says. “One is redundancy. You have extra inventory and extra suppliers, so if something happens to one, you can switch to the other.”

That approach can provide insurance against disruption, but it comes at a cost. Holding more inventory ties up capital, while spreading orders across suppliers reduces purchasing power.

A second strategy is agility, which means rather than building up buffers, companies focus on reacting quickly when problems arise. That often depends on close relationships with suppliers, which makes it easier to identify problems early and adjust production when disruptions occur.

“The more beneficial approach is flexibility,” Helper says. “The ability to quickly react to problems and reduce lead times.”

Recent crises offer examples of how that can work in practice. During the semiconductor shortage of the pandemic, Japanese carmaker Toyota was better prepared than many rivals. After the 2011 earthquake in Japan disrupted supplies, the company began mapping its supply chain in detail and stockpiling critical components such as chips.  

“Toyota did not suffer from the chip shortage for at least the first year,” Helper notes. “Partly because they had a lot of inventory, they knew chips were hard to substitute for. But they also had a longer-term relationship with Renesas, their long-term chip supplier, which meant they had better communication about which ones were in short supply.”

Tesla also proved relatively adaptable to the chip crunch as demand for electronics surged and production was disrupted during COVID-19. “They had a lot of software knowledge inside the firm,” Helper says. “So, they could redesign their software to use the chips they were able to get.”

Government policy can also shape the environment in which supply chains operate. One important factor is geography. Producing closer to customers can reduce the time it takes to respond to disruptions. Helper says: “Building near where you sell has many benefits.”

Governments can also help by improving visibility across supply chains. Many companies have only limited insight into suppliers beyond their immediate partners. “There is a role for governments in collecting data from individual companies, aggregating it and making it publicly available,” Helper notes. “That helps identify where the weak points are.”

For business leaders, the broader lesson is that resilience does not have to come at the expense of efficiency. “There’s a big trade-off between efficiency and redundancy,” Helper insists. “But with agility, there’s less of a trade-off. Reducing lead times and solving problems quickly is useful in normal times as well.”

In other words, the capabilities that help firms manage shocks may also strengthen their competitiveness when trade is relatively stable.