What happens to a company when the unimaginable occurs? When an earthquake hits its primary contract manufacturer? When labour strikes shut down an entire port? When terrorists cripple a transportation system?
Yossi Sheffi, Professor of Engineering at MIT and Director of the MIT Centre for Transportation and Logistics, argues that a company's survival and prosperity depend more on what it does before such a disruption occurs than on the actions it takes as the event unfolds. In The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, Sheffi explores high-impact/ low-probability disruptions, focusing not only on security but on corporate resilience - the ability to bounce back from such disruptions - and how resilience investments can be turned into competitive advantage. This is an excerpt from Sheffi's book.
Between September 18 and October 9, 2001, a series of letters were deposited at a mailbox in New Jersey. Poison-pen letters in a very literal sense, the envelopes contained a fine powder of deadly anthrax spores along with a short handwritten anti-American missive. Addressed to a variety of US government offices and American media companies, the lethal letters created a scare, killed five people, and infected 19 others.
As these letters made their way to their fateful destinations, they left behind a deadly residue. Sent to addresses in New York, Washington, DC, and Florida, the letters entered the United States Postal Service's (USPS) massive network. The fine anthrax dust leaked from the envelopes to contaminate the Brentwood Processing and Distribution Centre in Washington DC, the Trenton Processing and Distribution Centre in New Jersey, and a host of minor mail handling facilities in New Jersey, New York, Washington, and Florida. The Brentwood facility is an imposing 633,000 square-foot [58,808 square-metre] brick building. Inside, 2500 workers work 24 hours a day, seven days a week to handle much of the torrential flow of letters coming to and from the nation's capital. Some three and a half million items pass through Brentwood every day.
On October 21, 2001, two workers at the Brentwood facility were hospitalized with suspected (later confirmed) cases of anthrax. The USPS immediately shut down the facility for a thorough inspection. To their horror, they found anthrax spores on the mail-sorting equipment. The two sickened postal workers died the following day. It took two years to decontaminate and refit the cavernous facility.
In the meantime, the government's mail had to get through; the USPS had to find an alternative to Brentwood's lost capacity. "Neither sleet nor rain nor anthrax will keep these carriers from their appointed rounds," promised Sue Brennan, a spokeswoman for the US Postal Service. The USPS quickly rerouted Brentwood bound flows to two other distribution centres in Capitol Heights and Gaithersburg in Maryland. By most accounts, mail delivery the day after the closure was normal.
The USPS survived the closure of the 633,000 square-foot [58,808 square-metre] Brentwood facility, the 300,000 square-foot [27,871 square-metre] Trenton facility, and other smaller facilities because of the massive overcapacity built into its system. Such redundant capacity was not the result of planning for disaster. Instead, it was the consequence of the reduction in the volume of mail resulting from the increasing use of the Internet to pay bills, write letters, and send greeting cards. Since USPS workers are subject to civil-service employment laws, the USPS cannot adjust its operations quickly for the falling business volume, resulting in massive overcapacity.
Profit-oriented companies can hardly keep massive amounts of capacity idle and just waiting to be used, but some forms of redundancy are used by all businesses.
Inventory for Redundancy
The basic form of redundancy used by all businesses is safety stock. Although the extra inventory of parts and raw material on the one hand and finished product on the other can protect a company against small changes in the demand and supply patterns, it is expensive. Keeping extra supplies of parts and products not only ties up capital but also requires managing this inventory, including warehousing it, maintaining it, and preventing damage or pilferage. In addition, many products can become obsolete while they are stored in inventory, as new, better, and less expensive products are introduced into the market.
Extra inventory is also often the culprit in hidden manufacturing problems. With extra inventory, it is all too easy for production managers to tap the parts' inventory in order to replace a defective part, or to fulfil a customer order from the inventory of finished goods, rather than to investigate the source of the problem. But with little or no extra inventory, each problem causes an unfilled customer order or a stoppage of the production line, requiring immediate management attention leading to a corrective action. As Toyota Motor Corporation has proved, reducing inventory (and using just-in-time discipline) leads to improved quality.
Thus the dilemma: Although inventory can be used to protect against disruptions, it is expensive; more important, it can lead to relaxed manufacturing, procurement, and logistics disciplines at the expense of quality products and delivery.