FALL 2005

VOL.47 NO.1

Yossi Sheffi and James B. Rice Jr.

A Supply Chain View of
the Resilient Enterprise

Please note that gray areas reflect artwork that has
been intentionally removed. The substantive content
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REPRINT NUMBER 47110

A Supply Chain View of the

Resilient Enterprise
A

An organization’s ability to
recover from disruption quickly
can be improved by building
redundancy and flexibility into
its supply chain. While investing
in redundancy represents a
pure cost increase, investing in
flexibility yields many
additional benefits for day-today operations.
Yossi Sheffi
and James B. Rice Jr.

Illustration: © Gordon Studer

fter the September 11, 2001, terrorist attacks, the U.S. government closed the country’s borders and shut down all incoming and outgoing flights. The impact on many supply lines was immediate. Ford Motor Co. had to idle several assembly lines intermittently as trucks loaded with components were delayed coming in from Canada and Mexico. Ford’s fourth-quarter output in 2001 was down 13% compared with its production plan.1 And Toyota Motors Corp., also adhering to just-in-time inventory discipline, came within hours of halting production at its plant in Indiana as it held out for assemblies from a key supplier awaiting steering sensors that usually came by air from Germany.2 Managers experience risk on many levels, but its primary

source is uncertainty in the demand for products — uncertainty that has increased dramatically in recent years due to several interdependent trends such as increased customer expectations, more global competition, longer and more complex supply

chains and greater product variety with shorter product life cycles. In addition, managers still must cope with the conventional disruptions of supply variability, capacity constraints, parts quality problems and manufacturing yields. Now, on top of all that, they have to cope with the ongoing unease resulting from the war on terror and the likelihood of further attacks following the March 11, 2004, train bombings in Madrid and the two July 2005 bombings of London’s transportation system.

The problem is that many companies leave risk management and business continuity to security professionals, business continuity planners or insurance professionals. However, building a resilient enterprise should be a strategic initiative that changes the way a company operates and that increases its competitiveness. Reducing vulnerability means reducing the likelihood of a disruption and increasing resilience — the ability to bounce back from a disruption. Resilience, in turn, can be achieved by either creating redundancy or increasing flexibility. While some redundancy is part of every resiliency strategy, it represents sheer cost with limited benefit unless it is needed due to a disruption. Flexibility, on the other hand, can create a competitive advantage in day-to-day operations. Investments in flexibility thus can be justified on the basis of normal business results without even taking into account the benefits of risk mitigation and cost avoidance. (See “About the Research,” p. 42.) Yossi Sheffi is a professor of engineering systems at Massachusetts Institute of Technology, director of the MIT Center for Transportation and Logistics and founding director of the MIT Master of Engineering in Logistics program. He is the author of The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage (MIT Press, 2005). James B. Rice Jr. is director of the Integrated Supply Chain Management Program at the MIT Center for Transportation and Logistics. Contact them at [email protected] and [email protected]

FALL 2005

MIT SLOAN MANAGEMENT REVIEW

41

Stages of Disruption
Any significant disruption will have a typical
profile in terms of its effect on company performance, whether that performance is measured by sales, production level, profits, customer service or another relevant metric.
The nature of the disruption and the dynamics
of the company’s response can be characterized
by the following eight phases. (See “The Disruption Profile.”)

The Disruption Profile
Any serious disruption will affect the performance of a company in predictable ways. A plotting of any relevant performance metric over time will reveal eight distinct phases.

Performance

8. Long-term
impact

1. Preparation

1. Preparation In some cases, a company can
foresee and prepare for disruption, minimizing
its effects. Warnings range from the 30-minute
tornado alert General Motors Corp. received in
Oklahoma on May 8, 2003, to the several
months of deteriorating labor negotiations at
West Coast ports that preceded the October
2002 lockout. In other cases, such as 9/11, there
is little or no warning.

4. Initial
impact

6. Preparation
for recovery
7. Recovery

3. First
response

2. Disruptive
event

2. The Disruptive Event The tornado hits, the bomb explodes, a supplier goes out of business or the union begins a wildcat strike. 3. First Response Whether there’s a physical disruption, a job action or an information technology disruption, first response is aimed at controlling the situation, saving or protecting lives, shutting down affected systems and preventing further damage.

4. Initial Impact The full impact of some disruptions is felt immediately. Union Carbide Corp.’s chemical plant in Bhopal, India, went off-line immediately after the gas leak disaster in December

Time

5. Time of
full impact

1984. Other disruptions can take time to affect a company,
depending on factors such as the magnitude of the disruption, the available redundancy, and the inherent resilience of the organization and its supply chain. When inventories of critical parts ran out during the 2002 West Coast port lockout, it took New United Motor Manufacturing Inc., the joint venture of General Motors and Toyota, four days to halt production. During the time between the disruptive event and the full impact, performance usually starts to deteriorate.

5. Full Impact Whether immediate or delayed, once the full impact hits, performance often drops precipitously.

About the Research
This paper draws on work on supply
chain disruption that has been ongoing
at the MIT Center for Transportation and
Logistics since 2002 as part of the MITCambridge Institute, which is funded by the U.K. government. The project, which
was motivated by 9/11, has looked at
numerous cases of disruption, discovering the common traits between corporations and supply chains that performed well and distinguishing them from those
that did not. It involved detailed studies
of many dozens of companies and follow-ups with managers who were

42

MIT SLOAN MANAGEMENT REVIEW

FALL 2005

involved with disrupted operations.
The companies studied fell into two
groups. The first group included 35 members of the MIT Center for Transportation and Logistics’ Supply Chain Exchange
Program, with which the Center’s
researchers have ongoing interactions.
The research team examined their security and resilience strategy. The second group included companies that had actually experienced disruptions. They were chosen based on leads received from the
first group, media reports of disruptions
and contacts that the research team had

with the insurance industry and supplychain management professionals. Not all these companies agreed to interviews on
the record due to the sensitive nature of
the subject. In some of these cases, the
research team relied upon secondary
research and public-domain sources.
In addition to telephone surveys and
in-depth interviews, the research drew
upon six conferences, three at MIT and
three in the United Kingdom, in which
many companies shared their security,
resilience and disruption experiences
with the MIT research team.

6. Recovery Preparations Preparations for recovery typically start in parallel with the first response and sometimes even prior to the disruption, if it has been anticipated. They involve qualifying other suppliers and redirecting suppliers’ resources (as Nokia Corp. did in the aftermath of the 2000 fire in a Royal Philips Electonics NV manufacturing...

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