A Q&A with Yossi Sheffi on how the best companies manage the unexpected.
In his new book, “The Power of Resilience: How the Best Companies Manage the Unexpected” (MIT Press), MIT professor Yossi Sheffi explains why modern vulnerabilities call for innovative processes and tools for creating and embedding corporate resilience and risk management.
Sheffi spoke with Longitudes editor Samantha Slappey.
Samantha: Your book is titled “The Power of Resilience.” Why did you choose that name?
“ Globalization is dynamic with companies chasing lower labor costs and lower taxes.”
Similarly, for a corporation or organization, resilience is the ability to return to the previous level of performance after some type of disruption.
In the book you discuss trends that are disrupting companies’ supply chains and creating long-term challenges. Can you explain a few of the trends that you’re seeing?
There are many trends that impact supply chains. One trend, for example, is globalization.
The longer a supply chain, the more participants it has. More participants increase the likelihood that one broken link completely disrupts the entire supply chain.
Furthermore, globalization is dynamic with companies continuously chasing lower labor costs and lower taxes. Consequently, they continuously operate in new and unfamiliar locales where surprises can catch them unprepared.
Another element tied to globalization is the depth of the supply chain. Manufacturers have tier one suppliers who have another tier supplier and another tier supplier and so on.
By the time one gets down to tier five or six, the brand owner doesn’t really know who the supplier is.
In one of the examples in my book, a company was trying to get rid of a conflict mineral in their product.
The problem was the mineral was being procured from mines deep in the supply chain – sometimes dozens of layers removed from the actual product. This created huge identification and communication issues for the company.
A third trend is the rise of the empowered consumer. Customer expectations are growing, and if companies fail to meet these expectations, customers will move to another provider.
The market for most products has significant overcapacity, so if the supply chain fails or you’re out of stock, people will switch without hesitation. This trend magnifies the consequences of disruption.
What advice do you have for a company trying to balance taking smart business chances and being overexposed to risk?
“ If the supply chain fails or you’re out of stock, people will switch without hesitation.”
Take hurricanes in the Gulf of Mexico, for example. They happen every year, and all the oil companies have processes aimed at preparing for and fixing potential damages.
But there’s another type of disruption, which is the so-called “black Swan,” or what Donald Rumsfeld called the unknown-unknown.
These are the things that come from left field. Nobody expected them and nobody has plans to respond to them.
Think about 9/11, the BP explosion in the Gulf, or Japan’s tsunami and nuclear disaster. To prepare for this type of disruption, you need general resilience, rather than a specific plan for a specific disruption.
Manufacturing companies need two elements when responding to a disruption: engineering and supply chain.
The logistics and supply chain people will scour the earth and all the tiers of the supply chain to find inventories. And the engineering people look for alternative suppliers and parts that qualify.
In both teams you need the people who have both the depth that comes with understanding the bill of material and the breadth that comes with understanding the relationship between parts.
Another best practice is to have separate response teams: one worries about the business and one worries about the employees.
There are a lot of issues that have to do with employees in case of big disaster. While these matters are important, they should not interfere with getting back to business.
You want to separate these two activities because you don’t want one to impede on the other.
Your book touches on the Internet of Things. Do you think there is a future for IOT in the supply chain?
My guess is that IOT is just a buzzword right now – but there is some truth to it.
We had a lot of excitement about RFID, which is basically a first step into Internet of Things. The big hope for IOT in the supply chain is tracking and tracing worldwide, all the time, by item.
“ The main problem is that we are fighting against something that’s essentially free: the barcode.”
Now, there are some companies that have sensors that measure temperature, light, location, etc., but these sensors are expensive – $100 to $120 per unit.
So to me, the idea of putting an individual tracker on something like a bottle of water is still way in the future.
There are lots of companies where we see logistics people who want to track and trace everything. But the people above them are not sure that it’s worth the investment.
The question is not so much tracking; it’s what you do with the information that you have acquired.
What is the key learning you want readers to take away from “The Power of Resilience”?
In the past decade, people have gotten a lot better at detecting disruptions soon after they happen.
Now there are more possible disruptions that have to do with cybersecurity, industrial espionage and other attacks that you can sense only after the fact. These require continuous vigilance.
In particular, the consequences of cyber-attacks can be much more serious than identity theft.
That’s because more and more physical systems are being run digitally; so an enemy can take control of such physical systems and destroy them, creating significant damage.
To summarize some of the main lessons of the book, companies should make sure they have separate processes for dealing with employees and businesses after a disruption.
They should have all the communication necessary to run an emergency operation center.
They should make sure that they know who to call for manning the emergency operation center when a disruption is identified, and they should make sure that senior management does not get involved in day-to- day details, but rather talk to the media and Wall Street.
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