The future isn’t what it used to be. With tsunamis in Asia, anthrax in the mailroom, earthquakes in Indonesia, viruses assaulting computers by the thousands, and terrorist explosions in Manhattan, Madrid, and sundry points between, the business of havoc is on a boom cycle. The future is rife not only with unknown dangers, but also unthinkable ones.
Into the maelstrom enters Yossi Sheffi, Ph.D., professor of engineering systems at MIT and director of the MIT Center for Transportation and Logistics. In The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage (MIT Press, 2005), his new book for executives pondering how to reduce corporate risk, Sheffi fluently profiles a concatenation of calamities — a fire striking Toyota’s one and only supplier of brake pressure valves, a port lockout affecting all US West Coast ports, the ravages of foot-and-mouth disease on Britain’s cattle and tourist industries. Each disaster demonstrates it’s not so much the disruption itself, but the corporate approach before and during the shock that determines the outcome.
Consider a 2000 furnace fire at an Albuquerque microchip plant of Phillips NV, the Dutch electronics conglomerate. The fire was minor, caused little damage, made no headlines. Its consequences, however, were mammoth, triggering an unforeseen but serious disruption in supply. One of Phillips’ two key customers, Nokia Corporation in Finland, quickly and aggressively mobilized other global suppliers to staunch the gap and keep its cell phone production lines humming. Phillips’ other key customer and a Nokia rival, Sweden’s Ericcson, was a study in contrast: Taking a laid back, go-with-the-flow approach, Ericcson missed its window of opportunity to commandeer other suppliers, and incurred more than $400 million in losses. A year later, the Swedish company bailed from the phone handset market and merged with Sony.
The companies’ contrasting fortunes, however, were “set well before the fire hit,” writes Sheffi. Corporate flexibility and resiliency spelled one company’s success, the other’s failure. This quick ability to bounce back from disruptive forces, says Sheffi, is the crucial factor that confers competitive advantage in our increasingly volatile global marketplace.
RESILIENCE THROUGH REDUNDANCY
Among the numerous ways Sheffi relays to create supply chain flexibility is “resilience through redundancy,” a method showcased by FedEx. The company that promises to “absolutely, positively [get your package] there overnight” puts two empty planes into the air every evening, the more quickly to deploy those spare craft to locations where grounded planes can unload their packages. Is the added expense worth it? “FedEx is in the business of selling reliability, which is why this kind of redundancy makes perfect sense,” says Sheffi, adding, “It would make no sense for American Airlines to [invest in this type of redundant capacity], because it’s selling only 70 percent on-time reliability.”
Another approach that embeds flexibility into the corporate supply chain is postponement, which Hewlett-Packard exemplifies superbly in its strategy of customizing by country. HP used to manufacture printers according to each European country’s disparate requirements — different power plugs, decals, and instruction manuals — which often left the manufacturer with shortages in one country, surpluses in another. Then the firm changed tactics, and began to ship generic printers to its Dutch distribution center. There, HP configures printers for each country based on local demand, turning six generic models into 138 country-specific printers.
CORPORATE DNA
While some supply chain designs are inherently more flexible than others, one factor that can be decisive in trumping the competition is “corporate DNA.” Admittedly an elusive term, corporate culture is exceedingly difficult to change. But change it can, Sheffi firmly believes, citing Ford executives “who once thought there was a tradeoff between cost and quality … until Toyota proved otherwise.” Continental Airlines is another case in point. “When (CEO) Gordon Bethune took over Continental in 1994, the company was a basket case — number one in lost luggage and last in on-time performance,” relays Sheffi. “Within two years, it became number one in on-time performance. He didn’t change anything but the culture. The airplanes were the same. The customers were the same. Only the attitude of the workers changed.” Such hairpin turnarounds require not only total commitment from senior management, but leadership by example. Proof of principle, in the reverse, Sheffi says, occurred when American Airlines called for a pension reduction for staff, while simultaneously guaranteeing pensions for top officers: The union rebelled and the CEO was sacked.
In this grandly uncertain universe, 100 percent protection against risk is impossible to attain; what’s more, there’s no ‘right amount’ of protection, according to Sheffi. “The amount spent on preparation for risk is always arbitrary. Every company plans for the future, but the extent varies dramatically. Some just hope for the best. Others think and drill and train for disasters. The point is, the less you protect, the more you have to invest in thinking and recovery after the fact. I’m advocating thinking about eventualities ahead of time — it’s what allows a company to transform disaster into opportunity.”