Value Proposition of Resilience

Investing in resilience is a national imperative and increasingly considered a basic business practice.

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The degree of interdependence across critical infrastructure sectors has been amplified by globalization, advanced technologies and supply chain pressures. Our team at Johns Hopkins University Applied Physics Laboratory is studying — through modeling, analyses and empirical research in places such as the Port of Baltimore and Austin, Texas — the measurable impact of disruptive events, governance and societal demands upon resilience ecosystems in bounded geographic areas.

Governments, communities and individuals are not helpless in the face of natural disasters like Typhoon Haiyan, the category-5 super typhoon that struck the Philippines in November 2013, killing thousands and displacing hundreds of thousands. There are practical safeguards that can be designed within the multidisciplinary worlds of engineering, cyberphysical, and the social, behavioral and economic sciences if we systematically identify the independent variables that contribute to critical infrastructure interdependencies, conduct analyses that support a generalizable model, and test these methods under simulated and real-world conditions. Drawing from the principles of collective action theory and computational analytics, our studies are seeking to quantify the cost accounting and value proposition behind resilience by integrating economic factors into the research.

By creating a more connected world, globalization and technology have increased transparency and business efficiencies while simultaneously making systems more vulnerable. Businesses have more complex supply chains than ever before, allowing for greater speed and specialization. Further, outsourcing allows businesses to benefit from the competitive advantage of diverse countries and companies. Purchasing from a single source reduces costs. And just-in-time delivery is reducing inventory and excess capacity.

But these advances have also resulted in cascading impacts due to a global system with little room for error, in which a local disruption adversely impacts the entire supply chain in distant locations. This connectedness amplifies the consequences of small, local disruptive events as well as high-impact but low-probability “Black Swan” events. And the associated costs are high.

A groundbreaking 2005 study by Kevin Hendricks and Vinod Singhal analyzed the effects of 827 disruption events. The study found that over the course of three years, the average disruption reduced stock returns by up to an incredible 40 percent. The result was a negative regardless of a disaster’s cause. A follow-up study showed that disruptions increase share price volatility by 13.5 percent, reduce operating income by 107 percent, decrease sales growth by 7 percent and increase costs by 11 percent. Infrequent and unlikely disruptions thus can — in an instant — destroy value created over a long period. As the study asserts, “There is a direct relationship between efficiency and risk.”

Supply chain disruptions — of varying degrees of severity — are common. Seventy-three percent of respondents of the Business Continuity Institute’s 2012 Annual Supply Chain Resilience Survey experienced at least one supply chain disruption. Of these, nearly 40 percent occurred below the immediate tier-one supplier, showing the interconnectedness and complexity of modern business practices. Interestingly information technology and telecommunications outages were the top sources of disruption, with severe weather taking a close second. The primary consequences of these disruptions are loss of productivity, increased cost of work, loss of revenue and customer complaints.

Therefore globalization and supply chain efficiencies, while among the great advances of the modern era, are only part of the value equation. Just as important is supply-chain resilience: the ability to withstand a crisis, absorb damage, recover quickly and adapt to disruptive events. Resilience requires long-term planning and investment in redundancy, interoperability and agility. Disruptions often cannot be predicted or controlled, but their negative impacts are incontrovertible. As Hendricks and Singhal conclude, “Investments in increasing reliability and responsiveness of supply chains could be viewed as buying insurance against the economic loss from disruptions.” This is part of the adaptive learning process that resilience offers in response to the lessons of 9/11, active shooters, storms like Katrina and Sandy, and the Ebola outbreak.

In addition to mitigating the risks and hazards of supply-chain disruptions, resilience helps prepare businesses for future market slumps. According to Morgan Swink of the Neeley School of Business, “A firm’s ability to weather economic downturns, deal with volatility and manage costs under shrinking demands depends in large part on the resiliency of its supply chains.” According to research he conducted with Nancy Nix, companies with supply-chain flexibility and adaptability are better able to reduce expenses during a downturn, allowing them to outperform competitors and receive a substantially higher return on assets and equity. Our team at Johns Hopkins is working at operationalizing resilience in various geographic locations — including our nation’s key maritime ports and economic megaregions — in order to establish a better interdisciplinary understanding of interconnected critical infrastructures in terms of physical, informational and social phenomena.

Resilience is “disaster agnostic,” meaning it will favorably mitigate damage, to varying degrees, caused by earthquakes, terrorists, pandemics and economic downturns. And though it may be difficult to quantify, after every disaster, businesses that prepare ahead of time come out on top. For example, an earthquake three years before the 2011 Japanese tsunami helped prepare a semiconductor manufacturer to recover before its competitors because it had established a strategy to shift production to unaffected manufacturing plants. Maintaining critical operations in the face of disruptive events confers a measurable competitive advantage in the marketplace.

We know from the emerging national policies and governance that investing in resilience is a national imperative and increasingly considered a basic business practice. In addition to mitigating disaster-related damage by introducing new flexibility, it increases productivity, revenue, reputation and shareholder value. Investing in resilience before disaster strikes is the smart choice for individuals, companies and governments alike. What is the value proposition or return on investment? For individuals, it is an investment in adaptive safety and security. For the government, it saves lives and property. For businesses, it protects the bottom line and sharpens their competitive advantage.

Dane Egli is a senior advisor at Johns Hopkins University and author of Beyond the Storms: Strengthening Homeland Security and Disaster Management to Achieve Resilience. Jared McKinney is a dual-degree graduate student in International Affairs at Peking University and London School of Economics.
         

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