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< BACK The Resilient Enterprise Overcoming Vulnerability for Competitive Advantage Yossi Sheffi An Interview with Yossi Sheffi What is the central message of your book The Resilient Enterprise? That companies are now exposed to a multitude of unexpected events - from natural disasters such as earthquakes to terrorist attacks and supplier failures - and they not only need to become more resilient to these shocks, they can actually increase their everyday competitiveness and gain strength from such disruptions. But there has always been a level of risk in business, are you being alarmist? You have to look at the data. Yes, business has never been without risk, but the competitive environment has changed and companies are vulnerable to sudden disruptions as never before. For example, the explosive growth of globalization has brought cheaper goods to countries such as the United States, but it has also stretched supply and exposed companies to more uncertainty. At the same time customers are becoming more demanding and companies are pushing supply chains to the limit. Terrorism is on the rise – the list goes on. How can enterprises actually benefit from all this? If an organization is more resilient than its competitors, it is better able to cope with a disruption and therefore has a competitive advantage in these situations. But aside from the impact of a crisis, in order to become resilient companies have to become more flexible, so they can response to the vagaries of the market place faster and better than their competitors. So how does a company become more resilient? This is what The Resilient Enterprise is about. A company can become more resilient by designing its supply chain for robustness. There are many ways to do this, but the list includes developing strong relationships with critical suppliers, while developing alternatives for commodity suppliers; working with interchangeable parts, cross- training employees, deploying flexible manufacturing; utilizing concurrent process of design, manufacturing and distribution; delaying product differentiation downstream in the supply chain so products remain in a fungible state as long as possible; and collaborating with trading partners. One of the most important characteristics of a resilient enterprise is its culture. Such enterprises are fast to communicate bad news and to address the root causes and effects. An example I describe in the book is that of mobile phone manufacturers Nokia and Eriksson. A fire at a major supplier basically cut off the supply of a type of chip that was crucial to their manufacturing operations. Nokia’s open culture circulated the news, and the company recovered very quickly by finding other sources. Eriksson, on the other hand, was more closed, and sat on the news. The result: by the time Eriksson realized it was in deep trouble, Nokia has bought up most of the alternative sources of chips. Eriksson later exited the business. How can organizations be more alert and responsive? One way is to empower people to act when they detect a problem. Did you know that the flight operations on a U.S. aircraft carrier can be halted by the lowest ranking sailor on the deck? If a sailor sees a problem during flight operations, he is empowered to call an immediate halt to the operations of a multi-billion dollar floating air base run by over six thousand well-trained military personnel. Quick action like this ensures that the organization takes corrective action as early as possible, increasing the chances of successfully dealing with the emergency. —more— Shouldn’t companies just keep more inventory? While some inventory increases do give disrupted companies some breathing space to get organized before their customers are affected, it is a very expensive way to operate. Extra inventory not only costs money, it can lead to deteriorating quality and the long-term loss of market share. The Resilient Enterprise looks at ways to mitigate this phenomenon if a company is committed to keeping extra inventory but most of the book is devoted to increasing flexibility as the preferred method for creating resilience. Can you give another example of how resilience is achieved? By making sure that resources can be interchanged when the need arises. For example, Intel, the chip maker, makes sure that the layout of each of its plants is identical. That way it can easily shift production from one facility to another if it needs to. Imagine how powerful this can be in an emergency situation. The company can avoid losing production by shifting the load to another plant. Such a design philosophy is also useful in responding to changing global demand patterns. How do companies start tackling the risk they face? The two most important questions when dealing with a possible disruption (earthquake, tornado, strike, or terrorist attack) are how likely is it that such an incident will occur and how bad can it be if it does take place. Placing different disruptions on a graphical representation with two axes – one that measures the event likelihood and the other its expected severity - can help companies prioritize potential disruptions and response preparations. But many of the risk you are dealing with are difficult to forecast. True. That is why the bulk of the book is dedicated to building enterprises that are generally resilient. They can withstand and respond to many types of disruptions regardless of the nature and source of the events. How much does resilience cost; isn’t it too expensive? It is often assumed that building resilient enterprises can be justified by estimating the cost of a disruption and making the case that this expense is avoided if the organization is prepared for to handle the crisis. This is not a convincing approach since the costs invested in resilience are real while costs avoided do not show up on the income statement or the balance sheet. As the book demonstrates, however, most investments in resilience carry “collateral benefits” or benefits that are a by-product of resiliency. The main one is making the enterprise more responsive to markets that are changing faster and faster, thus obviating the need to justify such investments based on cost avoidance alone. Are there any lessons from recent incidents: 9/11 or the London Bombings? The book is full of examples and detailed case studies about learning from disaster. It looks at companies that made it, and even thrived, and companies that did not. 9/11 is the background to several of these case studies. Neither the Madrid nor the London bombings resulted in any significant economic disruption to major companies. |
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