Building a Resilient Enterprise

Hurricanes, earthquakes, pandemics, prolonged strikes and terrorist attacks are just some of the crises companies can expect to deal with in the next few years. Companies will also experience a host of business-related disruptions. Globalization is stretching supply chains at a time when market volatility is on the increase, exposing companies to more risk. Moreover, enterprises can ill afford to interrupt business operations, given the intensity of the competition and the cost pressures they are under. A resilient company is not only better able to endure the vagaries of global trading, it can actually gain competitive advantage by being one step ahead of the competition when a disruption hits. A fast recovery is crucial.

Resilience, a notion borrowed from material science, represents the ability of a material to recover its original shape after a deformation. For companies, resilience measures their ability to, and the speed at which they can, return to their normal performance level (including production, services, fill rate, etc.) following a disruption.

The best way to deal with a potential disruption is not to have one. Thus, most government efforts are aimed at prevention and security – trying to minimize the possibility of a disruption. The nature of these prevention efforts vary according to the type of expected disruption. Such disruptions can be due to natural phenomena (like floods or tornados); accidents (think Bhopal, Chernobyl or Exxon Valdese); and intentional disruptions (not only from terrorists, but also due to sabotage or labor strikes). The potential for natural disruption can be minimized by an appropriate choice of location, building codes and insurance. Accidents can be avoided by a robust safety program and active use of “near miss” analysis. Intentional disruptions, however, are different. By their very nature they are likely to take place in the most vulnerable place at the least expected time.

Detecting Disruptions
The first challenge when a disruption takes place is to detect it. The most dangerous disruption is one where the organization under attack does not know they are under attack. Thus, organizations need a detection system to realize that something is afoot. It took Baxter an incredible detective effort in 2001 to realize the cause of the flaw in their filters, which was killing some of their dialysis patients. And it was difficult to detect the problem since it is not clear what constitutes a “normal” rate of death during dialysis and what constitutes an “outlier.” Statistical process control methods can be used to identify abnormal patterns and indicate a problem, be it faulty filters or a problem with Firestone tires on Ford Explorer SUVs.

Other disruptions are, of course, easy to detect. A supplier goes off line, the port is closed, or a plant is down. To achieve resilience, firms must build either redundancy and/or flexibility into their supply chain.

Redundancy typically includes safety stock of material and finished goods. Such inventory can give a company time to plan its recovery following a disruption. Indeed, many companies have increased inventories when preparing for a disruption, such as the extra parts New United Motor Manufacturing, Inc. (NUMMI), a joint venture between General Motors and Toyota to build vehicles in the United States, accumulated in the spring and summer of 2002 as the West Coast labor relations deteriorated, leading to the Pacific Coast ports lockout. Extra inventory, however, is expensive to hold, in particular for high-impact/low-probability event. These events require large amounts of inventory to be held for long periods of time. Furthermore, as demonstrated by “lean” and “six sigma” manufacturing processes, it can also lead to sloppy operations resulting in increased costs and reduced quality.

Building in flexibility is a far more effective source of resilience than stockpiling material. Flexible or agile supply chains can help a company not only withstand disruptions by adapting quickly to changing conditions, but also better respond to the day-to-day gyrations of the marketplace. One begets the other, because a supply shortage and a demand spike are, at their core, a problem of supply/demand mismatch. Companies that have built their supply chains to respond to significant demand fluctuations have also built in the ability to respond to supply shortages.

Building resilience through flexibility involves change on a number of fronts, including:

• Developing the ability to move production between plants, using interchangeable and generic parts in many products and cross-training 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 the procurement strategy with supplier relationships.

The ability to interchange parts and even manufacturing facilities makes chipmaker Intel much more flexible and hence resilient. The company’s plants are based on the same basic layout, so if one is hit by a stoppage for any reason, Intel can switch production to a sister facility relatively easily. The company used this option during the 2003 SARS outbreak in Asia.

Concurrency, or the ability to execute different supply chain processes in parallel, reduces time to market by shortening cycle times. Trimming time to market also means the recovery period after a disruption is likely to be briefer. To this end, Lucent created a special Supply Chain Network organization in 2001. This network cuts across the company’s engineering, procurement, manufacturing, distribution and even sales divisions, enabling processes in these areas to be managed concurrently.

Postponement (i.e. postponing the final configuration of a product later in the supply cycle when better demand information is available) and built-to-order operations allow for diversions of parts and semi-finished material from surplus areas and products to satisfy shortages. Fewer products in a finished state (or at the final destination) give the company more leeway to refinish the products according to actual demand, which may be very different following a disruption, and not have to hold unwanted finished products. The same logic applies to postponed distribution operations. 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.

Aligning procurement with supplier relationships is a powerful way to boost flexibility. Companies have two fundamental choices when developing supplier relationships: extremely close relationships with one or a small group of core vendors, or a much more extensive network that is kept at arm’s length. Neither strategy is right or wrong, but each has its demands. If companies prefer the close-knit option, they must have an intimate knowledge of their suppliers so they can detect potential problems early. A company that relies on a few select suppliers cannot afford supplier surprises. Such a strategy, however, requires substantial investment in the supplier relationships. If a company prefers to keep its trading partners at arm’s length, it must maintain multiple relationships to spread the risk of one supplier failing unexpectedly.

Collaborative relationships with trading partners can also pay big dividends, since the vendors become allies in times of crisis. Such relationships allowed Toyota to recover very quickly, with the help of more than 100 suppliers, after a fire that gutted the sole plant of its main P-valves supplier in February 1997.

While redundancy and flexibility will help a company become more resilient through supply chain design, the most crucial factor that distinguishes companies that bounce back from a disruption from those that do not is corporate culture. There is something in the DNA of certain companies that makes them resilient. Study organizations such as Nokia, Toyota, UPS, Schneider National, FedEx, Dell and the US Navy to understand the principles that make them flexible and resilient. While on the surface these organizations may not seem to have much in common, a closer look shows that they share several frequent cultural traits:

Empowering Employees
First, they empower their front line employees. While it is well-known that production line employees in Toyota factories have the authority and responsibility to stop the line when they see a quality problem, it is less known that any sailor on the deck of a US carrier has the right and responsibility to stop flight operations when they detect a developing problem. Front-line employees are close to the action and can assess what is needed; as a disruption develops there is usually not enough time to go through the usual chain of command. Thus empowered employees are the ones who can ensure a small disruption does not develop into a calamity.

Constant Communication
Resilient companies also believe in constant communication. Resilient enterprises communicate obsessively and ensure they can communicate in a disaster. Constant communication allows employees to know the state of the system when disaster strikes and emergency communications allow for the recovery efforts. Thus, Intel keeps an emergency center in each region of the world where does business and each center is equipped with landline telephones, cell phones, SSB communications, satellite phones, Internet connections and even globe-spanning ham radios. But resilient organizations not only have the gear; they also create the environment where communications are important and bad news travels fast.

A Big Picture Outlook

Companies with resilience in their DNA provide a big picture outlook for their workers. Employees in resilient enterprises are passionate about their mission and care deeply about what they do. Don Schneider, chairman of the largest truckload company in the US, Schneider National, explains to his 20,000 associates that they are not really in the trucking business. As transportation enters the cost of every item sold, efficient, low-cost trucking reduces the price and increases availability of products. Schneider, for example, is really in the business of raising the living standards of US consumers. Similarly, at UPS, employees are keenly aware of how dependent their customers are on timely deliveries and thus “nobody goes home until all the packages are delivered,” regardless of disruptions.

Innovative and Flexible
Finally, resilient organizations appear to be regularly conditioned to be innovative and flexible in the face of disruptions through frequent and continuous “small” challenges. UPS, like FedEx and other transportation carriers, operates a vast network subject to weather, traffic congestion, city construction and many other daily disruptions. Conditioning drives the firm’s culture and how it responds to the cards it is dealt; the frequency and broad range of “normal” disruptions (or exercises) builds a “get ready for anything” mentality that permeates the ranks of the firm.

Unfortunately, an organization’s culture can be difficult to change; but it does not have to be an impossible task. The success of the quality movement in the 1980s and the safety campaign in the early part of the last century serve as strong examples of how corporate culture can change dramatically. Several corporate turn-around cases, like that of Continental Airlines under Gordon Bethune, show the importance and the plausibility of changing corporate culture. Even the culture of populations can change as demonstrated by the anti-smoking and anti-drinking and driving campaigns in the US.

These successful cases should serve as blueprints for companies striving towards resiliency, because while supply chain design is important, it is the culture that will ultimately build a resilient enterprise.