The challenges associated with supply chain disruptions are everywhere in the news.  Most recently, global supply chains have been thrown into chaos by US tariff policies and regulatory shifts that block certain commodities from being shipped across borders.  COVID woke up many companies to the fact that they were woefully unprepared for a major pandemic as well as other blockages and disruptions to supply chains moving products.  As a result, multiple consultancies, software providers, and others are seeking to cash in on the market for “supply chain resiliency”.  The idea being pushed by many of these parties is that the availability of real-time visibility to inventory, to global supply chain disruptions, and improved response time will provide the required capabilities for organizations to react to any unexpected disruptions.

But there is one problem with this approach.  Many of the activities associated with resiliency are reactive in nature, as they involve moving quickly to secure materials, components, or commodities due to an unexpected problem that arises.  I For companies to be truly proactive in planning ahead of a disruption, there is more to it than simply keeping more inventory on-hand in a warehouse, which carries its own set of risks such as expiration, lower working capital, and yearly inventory write-offs.  Instead, what is needed is a new approach, one that involves imagining the types of vulnerabilities that might be possible, and ensuring that there is a plan in place to address it.  In a recent article published in the Harvard Business Review, Walt DeGrange and I wrote about the experiences of two large companies who employed AI to do just that. The DoD refers this type of strategic planning as “wargaming” i, or “stress testing” in the financial services sector.  But what is often overlooked is that Gen AI is always backward looking, but in order to really create a relevant and realistic scenario to stress test, than human thinking is the best means to capture the context and reality of what is happening in today’s fast moving world. This requires an approach called “disciplined imagination”, which we describe further in our HBR article.

What is a Wargaming / Stress Testing?

The idea of wargaming has been around for many years. The first wargames were based on the game of chess in Prussia and were designed to teach future military officers about military strategy.  Over the years, wargames have been used by the national intelligence community, to create scenarios that might occur under different geopolitical conflicts that might occur.  Wargames eventually evolved into modern risk management two by two matrix frameworks, that generally examine the likelihood or probability of an event occurring (low vs. high), vs. the impact of the event if it were to happen (low vs. high). The idea, of course, was for a company to focus its resources on the high impact, high probability potential eventst that might occur in the future.

Stress tests are referred to as “wargaming exercises” in the Department of Defense, as well as in economic statecraft and government intelligence.  Stress testing became a common term following the 2008-2009 financial crisis, when financial services companies and banks were required to demonstrate that they had accumulated enough assets to be able to endure a run on their money.  These exercises primarily involve development of fictional scenarios that might possibly occur. 

 However, when it comes to building supply chain stress wargaming exercises, there is a much more complex set of issues to consider.  And AI and digital twin models can’t envision such complexities.  Supply chains are constantly shifting and changing, and most companies have no idea who is in their supply chains, especially when they get past their Tier 1 suppliers.  And there is often little insight into how to proactively prepare and mitigate potential problems that might occur.   And the reality is that there is no one path towards identifying supply chain stress tests.

Putting aside the support and funding that governments funnel to think tanks, consulting firms and intelligence agencies; companies are left to their own devices on the development of vulnerability analysis. The caveat to businesses left to their own devices is that there can also be a disconnect on what executive management is privy to and what information is available to those tasked with the practical application of idea generation and scenario development.

So how are supply chain wargaming scenarios identified?  We examine the case of one company which devoted significant resources and efforts in creating stress test scenarios that are used to inform executive leaders across all its four business units.  These have been crafted into a high-level set of stages, that reflect the experience and reality of how stress tests can be developed, tested, debriefed, and proactive measures to resolve them.

The Foundational Elements

Before jumping into scenario development, it is essential to have the elements that create the analytical foundations for stress testing.  At a minimum, an organization with a global supply chain should invest in the following data capabilities:

• Construct a value stream mapping of your supply base. This is the most essential component of building a supply chain capability, and thus should not be taken lightly.  It may be easy enough to review your spend analysis, and identify your tier 1 suppliers, what they produce, where their factories (not their HQ’s) are located, how their product fits into your organization’s end products, and the revenue associated with that product.   But that is not enough.  The mapping should also be extended to include your supplier’s suppliers, (often called Tier 2 suppliers).  

• Don’t try to include everyone. Try to get to the 85% solution, and don’t underestimate the complexity of supplier network mapping.   For that reason, it is often best to begin by including only direct suppliers and excluding indirect suppliers.  Direct suppliers produce materials or components that go directly into your products.  If you don’t have these products, your supply chain is shut down.  It only takes one missing component to shut down a supply chain.  Just ask the Big Three who in 2021 had to keep semi-finished vehicles on lots, until they could get the semiconductors to finish producing the interior electronics that required these chips.  Often, indirect suppliers (travel agents, IT support, janitorial and food services, etc.) are not critical to keeping your business going, and alternates can almost always be found.70-80% of the

• Assign an experienced project manager.  Creating a supply chain network model that can be used for stress testing is not a small undertaking.  Hire someone who knows how to manage deliverables and timelines – they don’t have to be a supply chain expert.  He or she will have no preconceived notion of what a supply chain risk management system is – start with a blank canvas.  The job of collecting and organizing data will involve multiple business units and managers, so a project manager tasked with a solid deliverable and an end date is required to move this forward.

• Validate your supply network.  It is far more important to ensure that you have the right geographic coordinates and the right supplier, linked back into the product bill of material and the business unit sourcing those materials.  This information is essential, and may require a lot of work.  This cannot be achieved with purported “AI tools” – experience has shown that these tools may help to create an initial idea, but are ultimately never validated.  The best way to find out who your Tier 2 suppliers are, and where they are located, is to ask your tier 1 suppliers to provide that information.  They will not be happy with this request. 

 Once this database has been developed, validated, and mapped, you have the right foundation to consider running stress tests on your supply chain.