Supply Chain Frontiers issue #10. Read all articles in this issue.
How can organizations prepare for crisis situations such as the aftermath of Hurricane Katrina? They can build resilient supply chains that are capable of withstanding and recovering quickly from unexpected disruptions.
In his book The Resilient Enterprise, published on October 1, 2005, by MIT Press, CTL Director Yossi Sheffi explained how organizations can become more resilient and even gain strength from shock occurrences such as natural disasters, suppler failures and labor strikes. Sheffi will join other experts including The Honorable Robert C. Bonner, Commissioner of U.S. Customs and Border Protection, at a special CTL symposium "The Resilient and Secure Supply Chain" on September 29, 2005, Cambridge, MA, to talk about ways to reinforce supply chains against disruptive shocks.
Resilience, a notion borrowed from the materials sciences, represents the ability of a material to recover its original shape following a deformation, Sheffi explains. For companies, it measures their ability to, and speed at which they can, return to their normal performance level (production, services, fill rate, etc.) following a disruption.
Resilience can be achieved either through redundancy or through building in flexibility. Extra inventory, however, is expensive to hold. Furthermore, as demonstrated by "lean," "six sigma" processes, it can also lead to sloppy operations resulting in increased costs and reduced quality. "By contrast, increasing supply chain flexibility can help a company not only withstand disruptions but also better respond to the day-to-day vagaries of the marketplace," said Sheffi.
To build in flexibility for resilience, companies must involve many facets of supply chain design by:
- Developing the ability to move production among plants, use interchangeable and generic parts in many products, and cross-train employees.
- Using concurrent processes of product development, ramp up, and production/distribution.
- Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain.
- Aligning their procurement strategy with their supplier relationships.
These principles create not only resilient supply chains that can recover from disruptions but also flexible supply chains that can respond to day-to-day demand changes. "One begets the other, because a supply shortage and a demand spike are, at their core, a problem of supply/demand mismatch," Sheffi said. Companies who have built their supply chains to respond to significant demand fluctuations have also built in the ability to respond to supply shortages.
How exactly do these supply chain principles increase resilience? According to Sheffi, postponement and built-to-order operations allow for diversions of parts and semi-finished material from surplus areas and products to satisfy shortages. Thus, with only a few days of committed orders, Dell was able to fare much better than Apple during the 1999 Taiwan earthquake, which disrupted the worldwide supply of memory chips.
The use of a small number of commodity parts not only simplifies operations and concentrates the procurement outlays; it also creates flexibility to move the business among suppliers should one falter. As example he cites is when Intel's Systems Group reduced its mix of 2,000 different types of resistors, capacitors, and diodes to only 35 types. The company not only simplified procurement and reduced costs but also increased Intel's ability to respond to demand changes and supply disruptions.
Reducing time to market also means that the time to recover from disruptions is likely to be short. To this end, Lucent created a special Supply Chain Network organization in 2001, said Sheffi. Cutting across the company's engineering, procurement, manufacturing, distribution, and even sales divisions, the network increased the company's agility.
The use of multiple suppliers with different characteristics allows HP to not only have redundancy but also builds in flexibility. HP's choice of supply plants for its printers division means that during ramp-up and end-of-life they can use their agile (yet more expensive) plant, but during the steady demand period of each printer, they can use the more efficient plant.
Finally, collaborative relationships with trading partners can help companies go to the market faster. Such relationships also allowed Toyota to recover very quickly, with the help of dozens of suppliers, from a fire that gutted the sole plant of its main P-valves supplier in February 1997.
However, Sheffi believes that the most important factor that clearly distinguishes between companies who bounce back from a disruption and those who do not is the corporate culture. Organizations like Nokia, Toyota, UPS, Schneider National, FedEx, Dell, and the US Navy can be studied to understand the principles that make them flexible and resilient. While on the surface, companies such as Dell and the U.S. Navy may not seem to have much in common, a closer look shows these resilient companies share several common traits, especially within their corporate culture.
Yossi Sheffi's book The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage is based on three years of MIT research and offers not only recommendations but also the business case for investments in security and resilience. For further information on attending "The Resilient and Secure Supply Chain" symposium please contact Nancy Martin at: nlmartin@mit.edu