Corporations also have to make sure that they don’t protect only against the obvious, or only against things that happened in the past. Have a team of your employees who know your operation try to attack your facilities. The armed forces, of course, do this all the time. They have one tank battalion “fight” another, and they try to learn from this. There are many ways of doing this. I know of a Quaker plant that has monthly contests in which they put a package somewhere. The employee who discovers the package first gets a prize and is celebrated in the company newsletter. There’s another lesson here: Quaker recruits their entire work force to be part of security, creating a “citizen watch.”
S+B: How does globalization affect your thinking?
SHEFFI: The globalization of business introduces its own risks and uncertainties. First of all, lead times grow. So we have to forecast further in advance. And one of the basic truths about forecasting is, the longer the period you have to forecast, the less certain you are about the outcomes.
Second, globalization brings a lot more participants into the supply chain. These include foreign manufacturers and their supplier networks, foreign transportation and port operators, and myriad government regulators. The global network of participants is not always transparent and there are many more opportunities for theft, accidents, use of substandard labor practices, and terror, so you introduce a lot more uncertainty on both the demand and the supply side.
Currently, in some industries, the difference in the cost of labor is such that they have no choice but to outsource to, say, China. But in other industries, the choice is not always so clear. My feeling is that in many cases not all costs in terms of increased risks are taken into account. One of the problems is that we don’t have good metrics for operational risks. If a company engages a supplier in China to do something, there’s no way to quantify that this company went from 0.71 to 0.73 on some sort of risk index or operational risk ratio. The appropriate metrics don’t exist yet.
Some managers have a general awareness of risk. Clearly they know that taking a supplier in Indonesia is not like taking a supplier in Kansas City. It’s easier to keep tabs on what’s going on in Kansas City than in Indonesia. But there’s no way to quantify the difference. So people make the decisions based on what they can quantify, and what they can quantify are labor costs, landed costs, or whatever the knowable cost might be. And since financial analysts also lack the tools to quantify the increased risk, this is not reflected in the stock price. My feeling is that much of the offshoring is done without proper comprehensive analysis of the consequences.
S+B: Is there a role for public–private partnerships?
SHEFFI: Very much so. It happens at all levels. Let me give you a small example at a local level. Intel has a plant in Oregon that sits right on a fault line. If the plant shuts down, Intel stands to lose about half a million dollars for every hour that the fab stands idle. Even though Intel built the plant to withstand a catastrophic earthquake, state regulations prevent Intel employees from returning to the plant until it passes inspection. But the local government isn’t likely to rush its inspectors over to the Intel plant after a quake; they’re going to send them first to schools and hospitals and get those up and running. So Intel trained a team of its employees to be inspectors and got them certified by the state. They have an agreement with the state that in case of an earthquake, this team will inspect the Intel plant first, and then will help the city and inspect the hospitals and the schools. It’s a perfect example of how government and industry can help each other.