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 / Spring 2006 / Issue 42(originally published by Booz & Company)


Yossi Sheffi: The Thought Leader Interview

Truly resilient companies treat security as an integral part of their strategy, says MIT’s leading supply chain expert.

Photograph by Steve Edson
Few issues have morphed as dramatically in the last five years as corporate resilience. That phrase once referred to managing risks that were fairly predictable and relatively easy to insure against: fires, strikes, and economic recessions, for example. But all that has changed. A string of catastrophes — beginning with the terrorist attacks on September 11, 2001, and continuing through the bombing of the Madrid railway and the Asian tsunami in 2004, the blast on the London Underground in July 2005, Hurricanes Katrina and Rita in August and September, and the earthquake that devastated Pakistan in October 2005 — has rearranged our concept of disaster preparedness. It’s no longer enough for companies to devise a business continuity plan and file it away somewhere. They now have to figure out how to bounce back from the unthinkable.

The leading proponent of that argument is Yossi Sheffi, a professor of systems engineering at the Sloan School of Management at the Massachusetts Institute of Technology, in Cambridge, Mass. His specialty — the management of logistics and supply chains — has taken on heightened significance in a world that is increasingly globalized, complex, and vulnerable. His new book, The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, published in October 2005 by MIT Press, is burnishing his reputation as a leading expert on corporate durability. “Resilience is not a company issue; it’s a supply chain issue,” he explained over coffee in his office at MIT, “because a company can get disrupted not only if one of its plants is hit, but also if the capacity of a crucial supplier is disrupted, or if a big customer is disrupted.”

According to Dr. Sheffi, the attacks of September 11 provoked him and many of his colleagues to seek a more sober, comprehensive, and probability-conscious view of risk and resilience. “Before that, I thought about it mostly in financial terms — buying insurance against various business risks, buying commodity futures such as oil to hedge against price fluctuations, the use of financial derivatives, et cetera. In the wake of the attacks, I started looking at all kinds of disruptions, and it became clear that there’s a lot more to consider than contingency planning or financial hedging. There are low-probability/high-impact events like terrorist attacks that may cause unplanned exits from important markets or even the demise of the unprepared business.”

How enterprises rebound — or fail to rebound — from those events became the subject of a three-year study that culminated in his book. Dr. Sheffi and his colleagues examined dozens of organizations, from Toyota to UPS to the U.S. Navy, and drew a simple conclusion: A company’s ability to return to business depends more on the decisions it makes before a shock hits than those it makes during or after the event. He explains why, for example, a fire at a Philips chip plant in New Mexico inconvenienced its customer Nokia, the cell phone maker, but staggered Nokia’s longtime rival Ericsson. The key was that Nokia’s culture encouraged constant communication, so the company reacted immediately and was able to source its chips elsewhere. Ericsson, by contrast, responded slowly and was left high and dry. By building flexibility into the entire supply chain, says Dr. Sheffi, companies can tame their risks and gain competitive advantage.

But all that is easier said than done. Dr. Sheffi worries that corporate security has not caught up to the realities of doing business today. The more complex a company’s supply chain, the more vulnerable it is to every kind of threat, from lightning strikes to theft to terrorist attacks. To guard against disruptions of all sorts, companies must approach security “holistically,” as a factor that affects the entire corporation and requires attention up and down the supply chain. In this interview, conducted in October 2005 with strategy+business, he explained how to do so.

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