Why Hedging Is Essential for Resilient Supply Chains

The COVID-19 pandemic exposed the fragility of our over-optimized supply chains, healthcare systems, and national resiliency efforts when confronted with a widespread crisis. Just-in-time supply chains deliver lean, regularly scheduled inventories. But the system suffers cascading failures when demand spikes and supplies aren’t readily available.

Historically, stakeholders, confronted with calls for change and improvements, end up planning for the future by solving the problems of the past. Through hedging, the public and private sectors can avoid that trap.

Hedging uses mathematical algorithms, backed by high-performance computing, to inform stakeholders about supply chain, personnel, and training needs in a variety of scenarios. Hedging goes beyond basic forecasting, offering insights on how systems function in a multitude of uncertain environments. We need this new approach to planning supply chains with built-in agility and adaptability in design. Here’s how hedging and resilient systems design can ensure better preparation for the healthcare system in the future.

Hedging Against Possible Futures: Creating Resilient Systems Design

As the name suggests, just-in-time systems ensure healthcare practitioners have just what they need to make it through the day or week. The value proposition behind these systems is clear: they limit waste, keep overhead low, create predictability, and increase profits. But just-in-time designs are fragile, relying on predictable demand and consistent access to materials. If everyone in a supply chain uses just-in-time design, any disruption can affect the entire chain. At the height of the pandemic, this meant extreme shortages of PPE, a run on the strategic national stockpile inventory, and long waits while the private sector scoured suppliers for materials and ramped up production.

Resilient systems design aided by hedging takes a different view. By leveraging the power of scenario analysis, stakeholders examine multiple possible futures and design a system that is responsive to multiple vulnerabilities. With scenarios, leaders see a list of potential threats and can evaluate whether they are adequately prepared or need to do more and where. From there, stakeholders can build response plans for a myriad of needs instead of failing in multiple ways while attempting to respond to a single issue.

Using hedging to build resilient systems empowers stakeholders to plan for multiple crises at the same time— something that is increasingly likely in our era of rapid change. Consider this: when COVID-19 was at its peak, could the United States have responded to an additional and imminent national security threat safely and effectively? Hedging gives stakeholders the tools to design systems that handle multiple complex issues simultaneously and prepare for their breaking points.

Rethinking Return on Investment: Futureproofing Systems

Building anti-fragile or resilient systems isn’t just about having more inventory on hand as a buffer. It’s about optimizing for support and resilience.

In healthcare, response time is critical. When treating COVID-19 patients, PPE is essential for the safety of healthcare workers. But we also need people who are trained to set up ventilation equipment and a small army of less-specialized staff who can simultaneously lead a vaccination effort with the rest of the population. Hedging helps policymakers and healthcare providers evaluate, for example, how many staffers might be required and their training needs, in addition to the number of face masks and vials of vaccines required for the population. Overall, hedging helps uncover and manage critical system interdependencies and downstream effects of crises, aiding in planning around the right assumptions and building more resilience for an uncertain future.

As we recover from the COVID-19 effects, healthcare organizations are looking at what went wrong and how they can do better. Through hedging’s scenario analysis, healthcare providers and policymakers can plan on multiple fronts, effectively futureproofing formerly fragile systems. To do this well, the public and private sectors need to work in concert to invest in support systems, not just the lowest cost and fastest way to produce supplies.

In a resiliency framework, effective return on investment means closed system-wide capability gaps. To get there, specialized federal or state programs can help suppliers ramp up production quickly or incentivize the private sector to bring more manufacturing operations to the U.S. The results of scenario analysis inform decision-making on how to support nationwide logistics to facilitate supply delivery or redirect spending from outdated programs to an effective response to emergent threats.

Using Hedging Effectively: Optimizing Resilient Design

The fragility of our healthcare and economic systems raises questions about our national preparedness for disasters and whether we can respond effectively to significant and simultaneous threats. Hedging enables leaders to deal with uncertainty far better than rigid solutions. In the era of artificial intelligence and predictive analytics, companies are realizing that overtrained artificial intelligence models do not deal with uncertainty well. Investments in supply chains take months or years, and companies can’t rely on solving the problem right away. Recent disruptions, like Ever Given’s Suez Canal blockage and raw material shortages, highlight the need to prepare for a wide variety of events outside of our control.

Through better supply chain design and hedging, leaders can avoid some of the problems COVID exposed. When hedging is paired with predictive analytics, organizations can not only have better detection capability but the confidence that the system can withstand disruption.

Resilient systems design aided by hedging can help solve these problems by optimizing for support and effective response in key ways:

• Imagining a broad range of possible futures and uncovering improvements needed today
• Forecasting human capital, expertise, and inventory needs to support critical response capabilities
• Redesigning systems for responsiveness in both normal times and during crisis and articulating their return on investment
• Designing a secure and resilient future based on unknowns instead of optimizing for the past.

LMI is applying these methods across the federal government, including the Department of Defense and Navy, to hedge against shortages of weapon systems and medical equipment.

LMI has a 60-year history of providing innovative, analytically based solutions to government logistics challenges, including using risk-based hedging models to optimize inventory. We work at the intersection of science, policy, logistics, and analytics to facilitate innovation in healthcare provision and payment, implement federal healthcare priorities, advance health security, and optimize service delivery and program effectiveness.