Resilience and Sustainability in Supply Chains.

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RESILIENCE AND SUSTAINABILITY IN SUPPLY CHAINS

Holmes E. Miller Kurt J. Engemann

Department of Accounting, Business, Center for Business Continuity and Risk
Economics, and Finance Management
Muhlenberg College, Allentown, PA 18104 Iona College, New Rochelle, NY 10801
holmesmiller@muhlenberg.edu kengemann@iona.edu

Abstract
This chapter presents an overview of issues regarding resilience and sustainability in supply
chains, and how the two interact. Initially, supply chain resilience and supply chain sustainability
are discussed separately, and commonalities are highlighted. Drawing on results from the
literature, each is analyzed along three dimensions: An economic/cost related dimension; an
environmental dimension; and a social impact dimension. A more direct relationship between the
two concepts is then presented. We frame the resilience-sustainability relationship by presenting
four possible cost/benefit categories: Operational, Compliance, Direct and Indirect. These
categories, analogous to total cost of quality categories used when analyzing quality management
decisions, can serve as a basis for informing decision makers when seeking to make decisions
regarding resilience-sustainability strategies. Underlying our discussion are concepts drawn from
business continuity and risk management, which are used to develop strategies to improve the
resilience-sustainability relationship.
Keywords: Supply chain, Sustainability, Resilience, Risk management, Costs and benefits,
Quality

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1. INTRODUCTION
For some, supply chain resilience and supply chain sustainability are concepts that appear to
require tradeoffs rather than concepts that are mutually supportive. For example, strategies
necessary for supply chain resilience that involve many suppliers might run counter to
sustainability strategies where guidelines regarding supplier behavior might constrain the number
of eligible suppliers. Seeking to meet environmental goals might result in single sources of supply
or a limited number of acceptable suppliers. Yet first impressions often can be misleading. In this
chapter we will examine supply chain resilience and supply chain sustainability separately and
then discuss how the concepts in many ways are mutually supportive rather than conflicting. This
symbiosis not only is true today, but will increase as business practices, information technologies,
and customer preferences evolve.

Before analyzing each concept, we will briefly define terms. A resilient supply chain is
one supporting a company that can, “bounce back from a large disruption—this includes, for
instance, the speed with which it returns to normal performance levels (production, services, fill
rate, etc.). Companies can develop resilience in several ways: increasing redundancy, building
flexibility, and changing the corporate culture. The first has limited utility; the others are essential.”
(Sheffi, 2005). While “bouncing back” is explicit in this definition, we also should be aware of
the disruptions that necessitate the bouncing back. While natural disasters are the most noticeable,
other human-related events also may cause disruptions to supply chains. Recent examples here
include fires caused by negligence and surges in customer demand.

Perhaps the most widely used definition of sustainability was developed in 1987 by the
Brundtland Commission (formally known as the World Commission on Environment and
Development (WCED). It states that sustainable development, “meets the needs of the present
without compromising the ability of future generations to meet their own needs.” This definition
focuses on the environmental dimension, which while critical to all businesses, limits how
businesses today view sustainability. Augmenting the sustainable development concept in
business is the concept of the triple bottom line (TBL), which considers the economic,
environmental, and social dimensions of a business. Many companies report not only their
economic results, but also metrics measuring environmental progress (e.g. tons of waste sent to
landfills, energy consumption, amount of product recycled, and CO2 emissions) and efforts
regarding corporate social responsibility.

We will apply TBL concepts to supply chain resilience. As we will see, each of the three
above mentioned categories fosters supply chain sustainability. While not critical to our discussion
here, we note the relevance of concepts of Resource Dependence Theory (RDT) (Pfeffer and
Salancik, 1978), which examines how organizations depend on external resources (e.g., material,
managerial) that affect the organization’s behavior. Moreover, how these resources are procured
and managed is central to both the tactical and the study of how the external resources of
organizations affect the behavior of the organization. The procurement of external resources is an
important tenet of both the company’s tactics and strategies, and for supply chains, is a critical
success factor.

The following sections discuss supply chain resilience and supply chain sustainability
separately, and then link the two and discuss how effective strategies to achieve resilience are

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congruent with those fostering supply chain sustainability efforts. Finally, we compare
commonalities of supply chain resilience and sustainability with quality management and discuss
how concepts in quality management can be used to frame discussions involving supply chain
resilience and sustainability.

2. DISCUSSION

2.1 Supply Chain Resilience

As noted, a resilient supply chain is one that can bounce back from a disruption. The bouncing
back process involves various states, including steps taken before known possible disruptions
occur, steps taken to mitigate the damage of the disruption, and steps taken to fully recover. An
extensive literature exists regarding supply chain resilience (see Zsidisin and Wagner, 2010;
Zsidisin and Ritchie, 2009; Martin and Peck, 2004; Chen et. al., 2013; Munoz and Dunbar, 2015;
and Pettit et. al. 2010) and the concept of resilience supply chains has been made all the more
visible with recent events regarding, tsunamis, hurricanes, earthquakes, factory fires, and market
disruptions.

Although natural disasters first come to mind when thinking about supply chain disruption
risks, other risks also exist. Drawing on some ideas in Fiksel (2003), we will categorize disruption
risks in three categories: Systemic, Environmental, and Social. Since each of these three “titles”
are broad and may be defined differently in other contexts, their definitions in our context are as
follow:

• Systemic: Risks related to the supply chain itself, the resources supporting it, and the
related infrastructure. Examples would include poor supply chain design resulting in single
points of failure, insufficient capacity to meet product delivery deadlines, unforeseen
customer demand, incompetent suppliers and logistical partners (e.g., as regards timeliness,
quality, safety), strikes, logistical delays, spikes in resource prices such as oil, changes in
customer preferences, inability of infrastructure capacity (air, rail, water, electrical) to
support production and delivery, and general managerial deficiencies causing mismatches
between demand and supply.
• Environmental: Risks related to the natural environment and how it affects the supply
chain. Examples include hurricanes, earthquakes, fires, tsunamis, heat waves, power
outages, depletion of raw material resources, cold spells, snow, solar eruptions, and
volcanoes and their aftermath. Although many of these risks result in events that impact
the system and might be confused with systemic risks, the difference is that systemic risks
are those that occur “internally” and exclude those caused by the natural environment.
• Social: Risks related to social and organizational systems that are external to the firm.
Examples include political risks such as changes in trade agreements, government and
international organization regulations and guidelines, nongovernmental organization
(NGO) campaigns, uprisings, wars, use of child labor, mistreatment of workers in factories,
and adverse responses from local communities.

Three resiliency strategies mentioned by Sheffi (redundancy, flexibility, and corporate

culture) provide a general frame work to address these risks by considering specific examples in a
strategy-risk combination grid. Given the large number of possible occurrences, Figure 1 gives

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some examples:

INSERT FIGURE 1 HERE

The examples in Figure 1 illustrate how supply chain resilience requires managing
multidimensional risks and calls for strategies that cross disciplines, and that range from the
technical to the economic to the political. Global supply chains have increased the complexity of
this process. Ensuring supply chain resilience involves monitoring and managing both physical,
human, organizational, and social resources in an environment that is constantly evolving along
technological, economic and political dimensions. Summarizing cases from Figure 1 (and others
not mentioned) leads to these managerial strategies:

• Actively manage known economic and other risks. This includes avoiding single points of
failure throughout the supply chain, such as relying on one supplier, or relying on multiple
suppliers, all of which are vulnerable to a single event. On the product side, it encourages
modular product design and the ability to shift production among various product types
depending on demand changes. It also involves managing known political and
environmental risks.
• Communicate within and without the supply chain. This includes communications with
suppliers (including those below Tier 1) and also customers. Outside the supply chain,
communication includes governments, NGOs, and local communities. Facilitating
communication involves adopting leading edge information technologies and fostering
organizational relationships within and outside the supply chain.
• Encourage good practices. Supply chains that abuse labor and occupational safety laws,
allegations of abuse of child labor laws, that foster environmental depletion such as
overfishing, and that engage in political corruption are vulnerable to shocks which reduce
their resilience.
• Constantly monitor supply chain architecture. Resilient supply chains depend on having
the right architecture, not only for the present but also over time. Just as a building’s design
may become obsolete, to ensure resilience a supply chain’s architecture must be assessed
and revised based on evolving supply and demand realities. Resources affecting the
architecture are not only physical resources such as factories, roads, and ships, but also less
tangible resources such as supplier and customer relationships, relationships with logistics
providers, and capabilities related to working under regulatory constraints.

2.2 Supply Chain Sustainability

Thinking about sustainability in business goes beyond focusing only on environmental factors, and
also includes economic and social factors. This is referred to as the triple bottom line (TBL).
Many organizations report on all three factors, using evolving TBL metrics. Moreover, standards
organizations, such as the International Standards Organization (ISO), have implemented many
sustainability-focused standards (ISO, 2017). Examples include: ISO 14001 Environmental
Management; ISO 20400 Sustainable Procurement; ISO 26000 Guidance for Social
Responsibility; ISO 45001 Occupational Health and Safety; ISO 50001 Energy Management; and
other specific guidelines such as those for food safety, water quality, greenhouse gases, and
intelligent transport systems.

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Three drivers for sustainability in supply chains map to the three TBL dimensions:

• Economic: Sustainability can save money. At its heart, sustainability involves reducing
waste. Examples include recycling and reverse logistics; optimizing logistics routes;
consolidating shipments; reducing packaging, and reducing energy consumption costs.
• Environmental: Many waste reduction steps that save money also are environmentally
friendly. In addition, sustainable behavior preserves natural capital, such as navigable
waterways, clean air, biodiversity, and usable land. Natural capital may not appear on a
corporation’s balance sheet but may be critical to a corporation that uses it because it
facilitates, and often is necessary to, business operations.
• Social: Sustainable behavior helps a company’s stakeholders, such as workers, local
communities, and stockholders. Moreover, as people become more environmentally
conscious, customers are demanding more sustainable behavior from companies that
provide their products and services.

Given these forces, Figure 2 contains examples of performance indicators or metrics related
to sustainability. Many of the examples given are informed by those discussed in Fiksel (2003).

INSERT FIGURE 2 HERE

Figure 2 illustrates how following sustainable practices affects supply chain behavior along
many dimensions. Global customer and governmental concern over sustainability issues have put
business and supply chains in the spotlight and have raised questions about performance related to
good practices, as illustrated in the ISO guidelines and other standards. Examples of many of the
performance indicators mentioned in Figure 2, fall in three categories:

• Managing business costs. These include direct economic costs like material, labor and
distribution costs inherent on the product production and delivery system. Also included
are indirect costs related to workplace safety, warranty costs, recycling and brand
perception.
• Managing natural capital and resource availability. These go beyond the costs many think
of, and include resources in the natural environment that the firm depends on. Examples
include: Waterways, air, forests, river deltas, fish populations, and stable environments for
business operations and supply chain viability.
• Fostering relationships. These include relationships with customers, employees,
communities, governments, investors, and NGOs. Implicit in the relationship is concern
for both parties’ well-being and adherence to sustainable practices.

A resilient supply chain that is not sustainable, in the TBL sense of the definition, itself is
an unsustainable concept. There is a great deal of congruence with elements related to
sustainable behavior when one thinks of how events impact supply chains and affect their
resiliency. This relationship is discussed more fully in the next section.

2.3 Resilience and Sustainability

Resilient supply chains and sustainable supply chains have many common success factors.

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Rather than viewing sustainability as a “brake” to achieving supply chain resilience, sustainability
can foster supply chain resilience in three ways. First, sustainable supply chains avoid many
shocks that can disrupt supply chains, and threaten supply chain resilience. This avoids the need
to trigger business continuity plans and saves financial and other resources. Second, when events
do occur that threaten a supply chain’s viability, following good sustainability practices can foster
a return to normal operations by marshaling economic, human, and political resources. These
good practices also facilitate having more robust business continuity plans. Third, when shocks
to the supply chain occur, employing a sustainability mindset can create goodwill among
customers and other stakeholders, which can enhance the firm’s brand, and can develop long term
loyalty. A resilient supply chain whose products are abandoned by its firm’s customers is not a
desired outcome.

Figure 3 presents linkages between supply chain resilience and supply chain sustainability.
In it, the observations at the end of each of the above two sections constitute the row and column
titles.

INSERT FIRGURE 3 HERE

The relationship between supply chain resilience and sustainability is illustrated by four
resilience categories (Risk Management, Coordination, Good Practices, and Supply Chain
Architecture) and three TBL categories (Managing Business Costs, Managing Natural Capital and
Resource Availability, and Fostering Relationships). Using this framework, efforts to manage
supply chain resilience often depend on following sustainable supply chain practices; the two
concepts are mutually supportive.

Supply chain resilience and sustainability can be viewed through a lens similar to the one
employed for quality management. Past critics of quality practices felt that, while perhaps a noble
concept, achieving higher quality meant incurring higher costs. In the same vein, some critics of
business sustainability claimed that following TBL practices increased costs and reduced profits.
Implicit in this critique, was that imposing sustainability requirements created additional
constraints in supply chains that reduced options -- for example, using only “sustainable suppliers”
reduced the number of available suppliers and led to single points of supply, capacity bottlenecks,
or slower logistical responses.

For quality management, the concept of the “total cost of quality” is widely used
(Omachonu and Ross, 2005). The total cost of quality consists of four costs: Preventions costs,
which include material costs and machine maintenance costs; Inspection costs, which include in-
process inspections (such as maintaining control charts) and inspections prior to shipping the end
product to customers; Internal Failure costs which include costs related to scrap and rework; and
External Failure costs, which include warranty costs, return costs and indirect costs related to
degradation of the brand and lost customers. The underlying logic behind quality management
practices is that applying resources to the Prevention and Inspection categories results in lower
Internal and External Failure costs. In this sense, money saved outweighs money spent, and thus
quality management pays off.

A similar logic may apply to sustainability and supply chain resilience. Four resilience-

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sustainability cost categories are:

• Operational Costs -- the ongoing costs of the incremental sustainability-related decisions

incurred when managing a supply chain. These include costs related to personnel, supply
chain architecture (including information systems), product design, procurement, and
distribution costs. They involve all the marginal costs related to time expended and other
resources explicitly used, with the purpose of implementing sustainable practices that
enhance a supply chain’s resilience.
• Compliance Costs -- the costs of adhering to good practices, including codes of conduct
for suppliers, and which also include auditing suppliers and meeting environmental and
labor restrictions in all venues that comprise the supply chain’s geography. As above, these
would include costs of personnel and other resources used in the compliance effort.
• Direct Event Costs -- the direct costs to the firm from its suppliers and customers when a
“resilience event” occurs, calculated with and without following sustainability-related
business practices. These costs would include the costs to bring the organization back to a
normally agreed on level of functioning. They also would include the immediate costs of
dealing with events such as fires, earthquakes, using underage labor, capacity shortages
etc., and customer costs such as immediate lost business and lawsuits. Hopefully,
implementing more sustainable practices would reduce direct event costs, relative to a base
case where non-sustainable practices would be used. The difference reflects the benefits
of following sustainability-related practices.
• Indirect Event Costs – the costs that impact the firm later, due to the resilience event. These
would include lost customers and lost future business, relevant warranty costs, fewer
suppliers wanting to deal with the firm, a loss of attractiveness to future employees, and a
diminution of the firm’s brand. As with the direct event costs, these costs would be
marginal costs (or actually savings) relative to a base case where non-sustainable practices
would be used.

The total resilience-sustainability cost metric provides with an organization the opportunity
to quantify sustainability-related costs supporting supply chain resilience. Considering both
visible and hidden costs helps incorporate sustainable practices into supply chain resilience
decisions and create more robust supply chain resilience solutions.

3. CONCLUSION

Just as customer expectations help define what is a quality product, so do customer and market
expectations define a resilient supply chain. The “bouncing back” definition given above indicates
that the bouncing back needs be done quickly and completely. Moreover, these time and
completeness requirements grow more rigid over time. Just as requirements for supply chain
resilience grow greater, so do those for supply chain sustainability. As with resilience, customer
and market expectations have increasingly pushed supply chains to become more sustainable, not
only along the environmental dimension, but also along economic and social responsibility
dimensions.

As noted above, sustainable and resilient supply chains are linked in three ways: reducing
shocks; returning to normal sooner; and creating stakeholder goodwill. Rather than being viewed

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as a cost that may not be justified economically, sustainability should be viewed as a necessary
element of the solution and an enabler of supply chain resilience. This is especially true when
considering total incurred costs.

Just as sustainable supply chains foster resilience, so do resilient supply chains foster
sustainability. Regardless of the TBL metric one chooses – economic, environmental or social –
non-resilient supply chains degrade TBL performance. Certainly this is true for economic
performance, where lack of resilience results in short and long term economic losses. Supply
chains that cannot bounce back also create barriers to environmental performance. First, they
illustrate managerial flaws underlying the entire enterprise, flaws that also leech over into
environmental management and may lead to cutting corners when faced with environmental issues.
Second, they create the possibility of lurching from one resilience crisis to another, which makes
planning – including planning for improved environmental performance – more difficult. Finally,
non-resilient supply chains harm social performance regarding primary and secondary
stakeholders of the firm because resources (economic and managerial) are diverted or unavailable.

Resilient and sustainable supply chains do not need to result in zero-sum type tradeoffs,
but rather are mutually reinforcing, and go hand-in-hand. Although the definition of sustainability
given above is environmentally focused, a second definition involves an entity that is capable of
being sustained at some level or upheld – a definition very similar to that of resilient. Though each
they appear to be different, a sustainable supply chain is resilient, and a resilient supply chain is
indeed, sustainable.

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