By Catherine Bolgar Originally published in The Wall Street Journal, May 2, 2007 Download this article [PDF, 241 KB]
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Take too long to get back on your feet, and you could find that your customers have fled to your competitors. Achieving high performance demands consistency in business results, which can only be achieved through consistency in operations and business execution. A study by Accenture, the global management consulting, technology services and outsourcing company, found that 73 percent of the executives interviewed had experienced a serious supply-chain disruption in the past five years, according to Doug Hofmeister, global director of business resilience services at Accenture. As a result, the companies failed to meet customer expectations or their profits took a hit. How do you ensure that your company can bounce back quickly from disruptions, big or small? It's impossible to plan for every type of problem. Instead, "you have to build in resilience," says Yossi Sheffi, director of the Massachusetts Institute for Technology's Center for Transportation and Logistics in Cambridge, Mass., and author of The Resilient Enterprise. "The principles that build a generally resilient enterprise will help you no matter what will hit you." Unfortunately, being resilient has never been harder. Globalization, lean manufacturing and ever-shorter product cycles take out any cushion that protected companies in the past. "Most companies haven't really thought through developing a global operations strategy and operating model for resilience in an ever-changing supply/ demand network. Based on Accenture's extensive research and client work, fewer than 12 percent of multinational companies surveyed have developed a long-term strategy for adaptively managing their supply chains from source of supply through to the end consumers," says Pat Byrne, global managing partner for supply chain management at Accenture. Stuck in a 1990s Mentality? Accenture conducts annual surveys of chief executives to find out which issues they consider a priority. For five years, Mr. Byrne says, the CEOs' top concern was finding qualified people. But in last year's survey, the top issue shifted to risk mitigation. Even so, "some of the best, most global companies have talked about it but haven't really acted on it," says Mr.Byrne. Part of the problem is that many companies are stuck in a 1990s mentality, according to Greg Cudahy, global managing partner for supply chain strategy at Accenture. Supply chain "integration," then in vogue, meant forging tight links with a handful of leading vendors. But in today's market, such thinking makes it difficult to constantly adjust to new sources of supply or rapidly unplug from legacy relationships that don't meet emerging needs. "Adaptiveness is important. If I have operations that are too tightly tied to a specific set of suppliers—in some cases, even customers—or overly exposed to a host of globalization risks, it's only a matter of time before a significant business interruption becomes a reality. In today's environment, planning is still important, but visibility, adaptiveness and resilience are much more so," says Mr. Cudahy. Another reflexive response grounded in the last century put the search for cheap labor at the fore, hence the spectacular rush to outsource to China. But oil prices were low—around $17 a barrel in 1995 vs. $60 or more today. "Everybody has been trying to do labor arbitrage," Mr. Cudahy says. "But when you also look at commodity logistics, energy, and inventory or obsolescence costs, labor is a shrinking part of the overall costs of goods." Increasing Risk Buying a part that takes three or four weeks to ship from offshore, rather than 48 hours from a nearby vendor, also increases risk. In addition, that lowest-cost provider may very quickly prove not to be such a bargain, particularly in dollar terms. Cheap parts might break, hurting your company's reputation for reliability and possibly also saddling your company with recall costs. "Companies are regularly shooting behind the target in terms of finding the next best supply market, adapting to volatility and accounting for shorter and shorter product life cycles," Mr. Cudahy says. Failure to mitigate risks beyond the supply chain carries an especially high price in certain industries, such as aviation, banking, nuclear power and utilities. How such industries have learned to deal with the unforeseen can help other companies now facing tougher customer expectations. In such industries, resilience often comes through backup or redundant systems. An electric utility facing an outage at one generating station can tap power from other stations. But even backups can fail—witness the 2003 rolling blackout on the East Coast of the United States. And in a world of cost cutting, redundant systems are out of the question for most companies. No Company is an Island "Redundancy is very expensive," says Dr. Sheffi of MIT. Don't think of the airplane where one engine falls off but it's OK because you have others. Instead, think what it would be like if you could grow another one." Redundancy is welcomed, however, in a company's portfolio of suppliers. No company is an island. They all need other companies to survive—whether it's to supply raw materials, electricity, services, transportation, or parts big and small. That means somebody else's problem can quickly become your own. "If I lose a supplier, it doesn't matter," Dr. Sheffi says. "How quickly can I move to a supplier in another part of the world?" That kind of resilience needs to be engineered right from the drawing board. "One has to think holistically, from design to what kind of relationship the company wants with suppliers," he says. "Do you want to design a product that needs something special that comes from only one supplier or design a product that uses commodity components?" Globalization and Market Volatility Globalization means that market volatility is increasing and supply chains are more expansive and riskier than ever. "The risks you face when your supplier is 100 miles away, and you can go see their operations personally on a regular basis, are very different than working with someone 8,000 miles away, with different customs, legal standards, business practices and technology standards, even a different language," says Mr. Cudahy of Accenture. "All those risks have to be quantified and constantly reevaluated as markets change. Chasing low labor costs alone can be an exercise in futility." It isn't just where you buy parts but where you sell products, according to Messrs. Cudahy and Byrne. India and China have been favorite outsourcing spots, but both, especially India, now have rapidly growing consumer markets of their own. "Never before have firms been forced into thinking and acting globally from both the supply and demand perspectives," says Mr. Byrne. "While emerging markets have traditionally been viewed as low-cost supply sources, they are now seen as revenue growth opportunities, essentially necessities for multinationals that are high performers." It's the rate and unpredictability of this change that is challenging high performance businesses. If companies had been told "15 years ago that they would shut assembly plants in Mexico to move to China, they would have said that's crazy,"Mr. Cudahy says. "If we would have said five years ago that they would leave China to move back to Mexico, they would have said that's crazy, too." The Hemispheric Supply Market But that's the next big trend: the hemispheric supply market. Rather than ship iron ore from Brazil to China to turn it into products to ship back around the world to the U.S., companies could just use labor in Brazil or Mexico and avoid significant transportation costs and reduce inventories, according to Mr. Cudahy. The trend is being shaped by three factors: volatile oil and commodity prices, and hence rising transportation costs; the time lost in transport, particularly in the case of products which may have a short life cycle; and the emergence of qualified labor pools in countries previously seen more as raw-material providers, such as Brazil. As labor becomes a smaller component of the cost of goods, speed, design and the ability to adapt become much more important. One strategy is "postponement"—products get customized for a certain market at the last minute. So, says MIT's Dr. Sheffi, you get an order for your widgets and you put on the plugs for the right country, the manuals with the right language, and so on, at the very last moment. That way, if there's a strike in France, you aren't stuck with a bunch of French widgets in your warehouse—you can customize them for, say, a U.K. client and ship them. In the resilient world, everything and everyone is interchangeable. A part for one product can work for another, employees can fill in for each other and can cope with a changing cast of vendors of varying nationalities, and one supplier can replace another. Finding Your Company's "Point of Entry" to Resilience Resilience also depends on the kinds of risks and threats a company faces, something that differs for each company and industry. Each needs to find its own "point of entry" to resilience, according to Mr. Hofmeister of Accenture. For a chemical firm, it may be using rail tracking to demonstrate a superior ability to manage the risks of transporting hazardous materials. For a food processor, the point of entry may be "food defense" that helps prevent the contamination of raw materials, then expands to direct-to-store protection. For retailers, the resilience point of entry may be the threat of a pandemic that requires not only the orderly evacuation of store activity in concert with local authorities, but helping meet emergency community needs for bedding, clothing and other essentials. "Disaster recovery tends to concentrate on the worst case," says Mr. Hofmeister. "But for most companies, the worst case doesn't happen very often. Instead, non-catastrophic disruptions occur much more frequently but can deal a severe blow to a company that hasn't evolved flexibility into its corporate nervous system," he says. But just listing all possible risks, great and small, can be overwhelming for a company. Add to that the gargantuan task of, say, finding all possible suppliers around the world and calculating their relative advantages—from cost to reliability to speed of delivery, and more—it's no wonder that so many companies fly without a net. Accenture's business resilience services use a Web-based tool to help companies sort out the risks and solutions and then to monitor the business to automate responses to some problems and pre-empt others. "Once a company has access to this capability, they can track responses and create a method for continuous improvement," Mr. Hofmeister says. Rather than resort to damage control, companies can stay a step ahead of trouble—and the competition. "Risk management and continuity planning are no longer looked at as a cost of doing business but as a method and a tool for expanding business," Mr. Hofmeister says. "In a globally competitive market, resilience is an essential business advantage for global operators seeking to achieve high performance." Sidebar: Wal-Mart: A Model of Efficiency in an Emergency Situation Wal-Mart Stores Inc., the world's largest retailer by sales, is the rare nimble giant, able to turn on a dime to respond to consumer whims. It was this type of everyday quick reaction that helped the Bentonville, Ark., company outshine the Federal Emergency Management Agency in delivering relief supplies during Hurricane Katrina in 2005. Wal-Mart has an emergency structure to react to all kinds of problems, says Jason Jackson, director of emergency management for Wal-Mart. He emphasizes that it's a "structure, which is different from a plan. A good structure is like a high-performance sports car, fast and agile. It allows us to deal with things along the way." With operations around the world, Wal-Mart faces a steady stream of disruptions, from natural disasters like the 2004 tsunami to blizzards, strikes and fires, among others. "There wasn't a Southeast Asian tsunami plan," Mr. Jackson says. "You have to be flexible to deal with unpredictable situations. Every disaster is different." Wal-Mart sets three priorities for disasters: people—are they safe?; operations—are its facilities OK?; community—how can the company help? In the case of Katrina, "what worked in our favor was the model of efficiency the company aspires to," Mr. Jackson says. "Keeping costs down for the customer is accomplished through logistics systems and information-technology systems. So if you take it out of a store application and move it to an emergency application, you can get supplies from point A to B very quickly." Store general managers have a high degree of autonomy, he adds, with the authority to make decisions daily for their community. In Katrina, a co-manager of a supercenter in Waveland, Miss., went into her nearly demolished store and hauled all nonperishable items, such as shoes, out to the parking lot for people to take. She got unspoiled pharmaceuticals to the nearest hospital. "And she did it before the main office could get involved," Mr. Jackson says. The emergency operations center is open around the clock, with a staff of about 40 representing departments from across the company. But when a big problem is brewing, the company taps its key people in logistics, supplies, legal matters and so on. It also brings in representatives from relief groups like the Red Cross and the Salvation Army. "It looks like one of those movie war rooms, with all these key people who can deal with each other face to face," Mr. Jackson says. "When the Red Cross says we need water at this location, we have the Red Cross representative there, the replenishment officer who can say whether we have the supplies, the corporate giving officer to see whether we donate it, the transportation officer who can say we can get it on the truck in an hour and it will be there in four hours." The emergency room can add annexes with other operations. During Katrina, Wal-Mart scaled up to the magnitude of the disaster by adding five annexes of emergency operations, with more than 200 people at the Bentonville headquarters, according to Mr. Jackson. More than 1,000 employees in the field supplied support. As for the resilience of its main business, retailing, about 170 Wal-Mart facilities were affected by Katrina, whether shut by power outages or curfews or completely flooded. Within 48 hours, more than 66 percent had recovered. Within seven days, 93 percent had reopened, according to Mr. Jackson. Wal-Mart offers valuable lessons for companies everywhere about going beyond surviving a disaster to being resilient. Some of the main points: Drive decision making down: "When a disruption happens, there's no time. If you start to worry about hierarchy and whom to call first, you lose time," says Yossi Sheffi, professor of engineering at the Massachusetts Institute of Technology. "It's important to have a culture of people at the lowest level, close to the action, taking decisions." Surf the supply market: As Wal-Mart looked at its various warehouses to get water to the right place during Katrina, so other companies can look around at possible suppliers. "Speed and adaptiveness are key to winning in today's market," says Greg Cudahy, global managing partner for supply chain strategy at Accenture. Prioritize your operations: "Frequently, people are worried about just 'how do I make sure it gets there as fast as it can,' not 'how do I allocate it to the hottest parts of my business,'" Mr. Cudahy says. Have a structure, not just a plan: "Everybody has a plan—until they're hit," says Doug Hofmeister, managing director of business resilience services at Accenture, quoting boxer Mike Tyson. Mr. Cudahy sees it as the evolution from the Information Age into the Execution Age. "You can't anticipate everything or forecast better," he says. "Things change too rapidly on both supply and demand. Planning is important, but more important is to respond quickly." Catherine Bolgar spent 12 years as an editor at The Wall Street Journal. She spent six of those years at the Journal's European edition in Brussels, where she was deputy managing editor. Since leaving the Journal two years ago to move to the South of France with her family, Bolgar has been a freelance writer whose work has appeared in numerous publications. This is the 10th in a series of articles about Accenture's research into High Performance Business published in The Wall Street Journal. See the other articles in the series. See more High Performance Business Research & Conclusions. To Top |