The Resilient Enterprise

The Resilient Enterprise

Overcoming Vulnerability for Competitive Advantage

Yossi Sheffi

The MIT Press

Cambridge, Massachusetts

London, England

Additional material can be found at www.theresiliententerprise.com

©2005 Massachusetts Institute of Technology

All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.

MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email special_sales@mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142.

This book was set in Sabon by SNP Best-set Typesetter Ltd., Hong Kong Printed and bound in the United States of America.

Library of Congress Cataloging-in-Publication Data

Sheffi, Yosef, 1948-

  The resilient enterprise : overcoming vulnerability for competitive advantage / Yossi Sheffi.

      p. cm.

  Includes bibliographical references and index.

  ISBN 0-262-19537-2 (alk. paper)

  1. Business logistics—Management. 2. Strategic planning. 3. Competition. I. Title.

  HD38.5.S547 2005

  658.7—dc22

2005040875

10 9 8 7 6 5 4 3 2 1

d_r0

To Anat

Contents

Preface ix

Acknowledgments xi

I When Things Go Wrong: Disruptions and Vulnerability 1

1 Big Lessons from Small Disruptions 3

2 Understanding Vulnerability 17

3 Anticipating Disruptions and Assessing Their Likelihood 35

4 Effects of Disruptions 57

II Supply Chain Management—A Primer 75

5 Basic Supply Chain Management 77

6 Demand-Responsive Supply Chains 93

III Reducing Vulnerability 113

7 Reducing the Likelihood of Intentional Disruptions 115

8 Collaboration for Security 137

9 Detecting Disruptions 155

10 Resilience through Redundancy 171

IV Building in Flexibility 181

11 Flexibility through Interchangeability 183

12 Postponement for Flexibility 195

13 Strategies for Flexible Supply 209

14 Customer Relations Management 225

15 Building a Culture of Flexibility 243

V Resilience for Competitive Advantage 267

16 Moving Ahead 269

Notes 287

Index 317

Preface

This book examines the ways in which companies can recover from high-impact disruptions. The focus is on the actions they should take to lower their vulnerability and increase their resilience. A notion borrowed from the materials sciences, resilience represents the ability of a material to recover its original shape following a deformation. For companies, it measures their ability to, and the speed at which they can, return to their normal performance level following a high-impact/low-probability disruption.

After 9/11, governments around the world elevated the fight against terrorism to the top of their agendas. The U.S. government reorganized its defense and intelligence agencies and adjusted its foreign policy for that mission. In contrast, the private sector quickly went back to business. The daily pressures to perform—worrying about yields, supplier performance, machine up-time, customer requirements, product launches and market response—quickly overtook most terror worries.

Yet in the United States, and increasingly in Europe, most of the economic infrastructure, such as transportation, energy, retail, manufacturing, and finance, is in the hands of the private sector. In early 2002, a group of researchers and several corporate members of MIT’s Supply Chain Exchange program began a series of discussions to address the rising concerns about terrorist disruptions. It quickly became apparent that there are no clear management guidelines, models, or theories for corporate security and resilience. These discussions spawned a three-year research effort that culminated in this book.

As the research progressed, it became clear that the study needed to expand to include different kinds of disruptions. Many random phenomena, such as earthquakes, floods, and accidents, have just as much impact on a company as a terrorist action. Furthermore, the high frequency of general disruptions provided more data for the research.

Questions raised as part of this research effort include the following:

• How should companies define and prioritize threats?

• What are the common characteristics of all high-impact disruptions?

• Can companies prepare without knowing the type of disruptions they may face?

• How should companies maintain lean operations, which aim to reduce redundancy, without increasing vulnerability?

• Are intentional disruptions fundamentally different from accidents and random phenomena?

• How can disruptions be detected when so many simultaneous events are taking place in the normal course of commerce?

• How can a company build in flexibility so that it can be resilient?

• Should companies always prefer multiple suppliers to singlesourcing?

• What new risks and rewards affect collaboration in this new world?

• What is the role of corporate culture in resilience?

• How can security investments support the main mission of the enterprise? Can they be cost-justified?

This book sheds light on all these questions and more. It is a call for action based on the experience of many companies—those who did well in the face of disruptions and those who faltered. Furthermore, a company is typically a citizen of its supply chain. Thus, the book answers many of these questions with emphasis on the extended enterprise—the web of suppliers, manufacturers, distributors, retailers, transportation carriers, and the other participants in the process of bringing products to markets.

Acknowledgments

This book is a product of a research project conducted between 2002 and 2005 at the Center for Transportation and Logistics (CTL) at the Massachusetts Institute of Technology (MIT). The project was funded, in part, by the U.K. government through the Cambridge-MIT Institute (CMI) to study the impacts of disruptions on supply chain operations. In addition, the following companies have contributed funds through the Integrated Supply Chain Management Program at the CTL: Avaya, Helix, Intel, Lucent, Monsanto, Proctor & Gamble, and Texas Instruments.

The project was directed by Jim Rice of the CTL. Jim contributed with leadership, vision, and able day-to-day management of the project. He also managed the interviews and the interaction with the many of the companies and executives who contributed to the research effort and to the book. In addition, he edited, commented and pushed. Without him this book would not have been written.

Dan Dolgin offered ideas, comments and editing throughout the project. Andrea and Dana Meyer organized the material, added many examples, and put on paper many of the early drafts. Scott Campbell edited various versions of the text and made invaluable suggestions. Nicole Blizek collected and checked references. Yali, my brother, was very generous with his time, providing unique access to senior Israeli executives.

Many students participated in the project and the fruits of their labor show up in many parts of the book. They include Abby Benson of the 2005 class of the Master of Engineering in Logistics (MLOG) at MIT, Deena Disraelly (MLOG 2004), Chris Picket (MLOG 2003), Reshma Lensing (MLOG 2003), Chris Hamel (MLOG 2003), Sophi Pochard of the 2004 Technology and Policy Program at MIT, and David Opolon of Ecole Nationale Supérieure des Mines de Paris and Federico Caniato of the Politecnico di Milano, who were visiting students at MIT at the time.

The interactions with Dr. Helen Peck and Professor Martin Christopher of Cranfield University were informative and useful.

Several of my colleagues at MIT participated in the various conferences conducted as part of this study. They include Professors Richard DeNeufville, John Deutch, Dan Hastings, Dan Roos, Joe Sussman, and Steve van Evera.

Many corporate executives have contributed significant time and ideas to the research effort. In particular, Steve Lund of Intel, Dr. Debra Elkins of General Motors and Phil Spayd of the U.S. Customs and Border Protection were actively involved in various stages of the project. Additionally, many members of the UPS organization shared their experience with the research team generously and willingly.

Other executives, researchers and government officials devoted time and provided insights. They include Dave Grubb and Mike Princi of Accenture, Bob Scholtz of Agilent Technologies, Steve Anderson of Anderson Risk Analysis, Earl Agron and Chris Corrado of APL, Dean Harper of Avaya, Paul Tagliamonte of Bose, Phil Licari of Boston Scientific, Tim Boden, Ian Hamilton, Dennis Luckett, and Frank Stone of BT, Robert Gecielewski of C. H. Robinson Worldwide, Jamie MacIntosh of the Civil Contingencies Secretariat in the U.K. Cabinet Office, David Lacey of Consignia, Steve Potter of CSX, Con O’Sullivan of Cummins, Bruce Riggs, and Stuart Smith of Dell, Ofer Lichevski of Egged, Nissim Malki of El Al Airlines, Shlomo Sherf of Electra, Dave Hempen of Energizer, Douglas Witt of FedEx, Mark Everson of Ford Motor, John Dinsmore of GE Aircraft Engines, Rick Dufour, and Datta Kulkarni of General Motors, Tom Cummings, Jim Hutton and Don Patch of Gillette, Rob Fantini of Hasbro, Charles Chappel and Janet Rosa of Helix Technology, Tony Gentilucci, Patrick Scholler and Fred Smith of Hewlett Packard, Glen Gracia of Hill and Knowlton, Bob Byrne of IBM, Jay Hopman, Jim Kellso, Mary Murphy-Hoye, and Dan Purtell of Intel, Mike DiLorenzo of Jabil Circuit, Peter Gartman of Limited Brands, Vince Freeman of the London Metropolitan Police, Joe Bellefeuille, Kapil Bansal, Rob Draver, Dan Fischer, Hector Lozano, Sita Nathan, and Steve Sherman of Lucent Technologies, Tim Cracknell of Marsh McLennan, Cleo Pointer of Masterfoods, Steve Wooley of Nike, Mike Wolfe of North River Consulting Group, Rich Widup of Pfizer, Larry Curran of Pinkerton Consulting and Investigations, Bill Castle of Procter and Gamble, Joe DeLuca and Rob Shepard of Reebok, Scott Dedic of Seagate Technology, Mike Lech of Shaw’s Supermarkets, Alan Fletcher and Bill Tenney of Target Stores, Amit Wohl of Taro Pharmaceutical Industries, Keith Hodnett, Ann Lister, Rod McPherson and Tom Shields of Texas Instruments, Bob Bergman, Jordan Colletta, Tom Flynn, Daniel Franz, Dick Germer, Chris Holt, Joe Liana, Dan McMackin, Debbie Meisel, Dan Silva, Dan Silvernale, Marty Stamps, Ken Sternad and Albert Wright of United Parcel Service, Vice Admiral Vivien S. Crea of the U.S. Coast Guard, Charlie McCarthy of Volpe National Transportation Center (U.S. Department of Transportation), and Dee Biggs of Welch’s.

While I was writing this book, my colleagues and the staff at the MIT Center for Transportation and Logistics held the fort ably, demonstrating that the best assets of any organization are its good people. Thanks go to Chris Caplice, Joe Coughlin, Ken Cottrill, Jarrod Goentzel, Larry Lapide, and David Riquier. I am particularly grateful to the capable administrative staff at CTL, led by the resourceful Mary Gibson with Lisa Emmerich, Will Garre, Kim Mann, Paula Magliozzi, Nancy Martin, Becky Schneck-Allen, and Karen van Nederpelt.

My wife, Anat, provided encouragement, editorial comments, daily shipments of coffee from Dunkin’ Donuts, and loving support throughout.

My sincere thanks to them all.

Naturally, all information provided and views expressed here are my sole responsibility.

I

When Things Go Wrong: Disruptions and Vulnerability

1

Big Lessons from Small Disruptions

On Friday night, March 17, 2000, a line of thunderstorms rolled through the desert city of Albuquerque, New Mexico. When lightning lit up the desert sky, one bolt struck an industrial building that housed a distant outpost of Philips NV, the Dutch electronics conglomerate. The furnace in Fabricator No. 22 caught fire. Immediately, alarms sounded inside the Philips plant and at the local fire station. Sprinklers went off and Philips-trained staffers rushed into action. In less than 10 minutes, the fire was out.

By the time the firefighters from Albuquerque Fire Station 15 arrived, they had nothing to do. All we did was walk in and check it out, said firefighter Ray Deloa. It was fully extinguished by their staff.¹ After the standard safety check, local firefighters agreed that the situation was under control. So the firefighters filled out their paperwork and left the scene.

A routine investigation showed that the fire had been minor. Nobody was hurt and the damage seemed superficial. The blaze did not make headlines in Europe, did not appear on CNN, and did not even appear in the Albuquerque newspapers. The fire had been extinguished, but the real drama was yet to begin; few would have imagined that it would affect the future of two Scandinavian companies.

The Spreading Impact of an Extinguished Fire

To the firefighters’ experienced eyes, the damage seemed minor. Compared to the devastation created by a full-scale fire, this small blaze was hardly worth the firefighters’ trip to the plant. What the firefighters did not realize, however, was that the blaze’s location had once been one of the cleanest places on earth.

Philips’s plant, a semiconductor fabrication plant, or fab, tolerates no dirt. Every surface has to be completely clean, said Paul Morrison, spokesman for Philips.² The smallest spec of dandruff, lint, hair, or soot can ruin the delicate microscopic circuits that dominate the insides of modern electronics. Specialized air filters, cleanroom coveralls, and painstaking procedures ensure that no particle larger than half a micron³ gets either inside the cleanroom or into the delicate machinery or silicon wafers.

But on the night of the 17th, the fire resulted in very different cleanrooms. Inside the damaged furnace, eight trays of wafers were immediately ruined. With hundreds of chips per eight-inch diameter wafer, each tray of wafers represented thousands of cellphones worth of production.

Worse, the effects weren’t confined to Fabricator No. 22. Smoke had spread throughout the facility—further than Philips realized. As staffers rushed to deal with the blaze and as firefighters tramped through the facility on their inspection, their shoes tracked in dirt. The smoke, the soot, and the tramping of staffers and firefighters left the cleanroom facilities anything but clean. The contamination ruined wafers in almost every stage of production, destroying millions of cellphones’ worth of chips in those few minutes.

Even worse than the loss of valuable chips was the damage to the cleanrooms themselves. It’s as if the devil were playing with us, said one senior Philips manager who was involved in the clean-up. Between the sprinklers and the smoke, everything that could go wrong did.⁴ Two of Philips’s four fabricators in Albuquerque were contaminated that night. Water and smoke creates about as messy an environment as you can imagine. Everything has to be completely sanitized, said Philips spokesperson Paul Morrison.⁵

Returning the cleanrooms to their prior pristine state quickly would be a big job. Nervous executives in Amsterdam joked about showing up in Albuquerque with toothbrushes to help scrub the fabricator themselves. We thought we would be back up after a week, said Ralph Tuckwell, a spokesman for Philips semiconductors.⁶

The first order of business was to communicate with the plant’s 30-some customers, and in particular its two most important ones—the Scandinavian cellphone giants Nokia and LM Ericsson AB—which accounted for 40 percent of the affected orders at the Albuquerque plant.

Nokia Responds to Potential Disruption

Meanwhile, 5,300 miles away in Espoo, Finland, some puzzling numbers were appearing on the computer screens at Nokia’s headquarters. Shipments of some Philips chips seemed delayed.⁷ On Monday, March 20, Philips called Tapio Markki, Nokia’s chief component-purchasing manager, to explain the delay.⁸ The Philips account representative explained the evolving situation, the fire, the lost wafers, and the expected one-week delay.

Mr. Markki was not overly concerned after that first call on the Monday after the fire. One-week delays happen in all global supply chains. Downed machinery, material shortages, production schedule errors, quality issues, shipping delays, and minor industrial accidents (like the Philips fire) can all create short delays. Such events require prompt actions, but manufacturers usually keep safety stock—inventory of parts and finished goods—so that production schedules and customer service are not disrupted. Consequently, such routine disruptions create only faint numerical burbles in the smooth global flow of goods, but they don’t usually cause shortages for customers. Nokia could easily cover a short delay with existing parts inventory and shipments from other suppliers.

Although he did not see it as a major issue, Mr. Markki communicated the news to others inside Nokia, including Pertti Korhonen, Nokia’s top troubleshooter. We encourage bad news to travel fast, said Mr. Korhonen, who has worked at Nokia for 15 years. We don’t want to hide problems.⁹ Mr. Korhonen decided that the situation needed closer scrutiny, even though it was not yet perceived to be a crisis. He placed the affected parts on a special watch list. Five types of chips from the Albuquerque plant would receive more intensive scrutiny. Nokia would make daily calls to Philips to check the status of the evolving situation.

Mr. Korhonen also initiated a process of collaborating with Philips on recovery efforts. He suggested that two Nokia engineers in Dallas, Texas, could hop over to Albuquerque to help Philips. Philips feared that the outsiders would only add to the confusion in the disrupted plant and declined Nokia’s offer.

Nokia’s fears were justified when Philips called Mr. Markki two weeks after the fire to explain the full scope of the disruption. Philips now realized that it would take weeks to restore the cleanrooms and restart production. All told, it might take months to catch up on the production schedule.

At that juncture, Mr. Korhonen realized that the disrupted supplies would prevent the production of some four million handsets. Nokia was about to roll out a new generation of cellphones that depended on the chips from the infirm Philips fab. More than 5 percent of the company’s annual production might be disrupted during a time of booming cellphone sales. Messrs. Korhonen and Markki quickly assembled a team of supply chain managers, chip designers, and senior managers from across Nokia to attack the problem. In all, 30 Nokia officials fanned out over Europe, Asia, and the United States to patch together a solution.¹⁰

The team quickly ascertained the availability of alternative sources for the parts. Three of the five parts could be purchased elsewhere. Japanese and American suppliers each could provide a million chips. Because Nokia was already an important customer of these two suppliers, the suppliers agreed to the additional orders with only five days’ lead time. Expedited deliveries would help Nokia maintain production.

But two of the parts came only from Philips or a Philips subcontractor. This was a big, big problem, Mr. Korhonen remembered realizing.¹¹ Nokia held meetings at the highest levels with Philips to convey the importance of the issue. When Messrs. Korhonen and Markki went to visit Philips headquarters, Mr. Jorma Ollila, Nokia’s chairman and chief executive, diverted his return flight home from the United States to drop in on the meeting. They spoke directly with Philips’s CEO, Cor Boonstra, and the head of the company’s semiconductor division, Arthur van der Poel.

Nokia was incredibly demanding, according to Mr. Korhonen.¹² They demanded to know details about other Philips plants. Mr. Korhonen said that they told Philips We can’t accept the current status. It’s absolutely essential we turn over every stone looking for a solution.¹³

The Nokia team dug into the capacity of all Philips factories and insisted on rerouting that capacity. The goal was simple: For a little period of time, Philips and Nokia would operate as one company regarding these components.¹⁴ The Finns’ earnestness got results.

A Philips factory in Eindhoven, the Netherlands, would provide 10 million chips to Nokia. A Philips factory in Shanghai worked to free up more capacity for Nokia’s needs. Nokia engineers developed new ways to boost production at the Albuquerque plant, creating an additional two million chips when that plant came back on line.

Through its extraordinary efforts and intensive collaboration with its suppliers, Nokia was able to avoid disrupting its customers. Handsets ultimately kept rolling off Nokia’s assembly lines, onto store shelves, and into the hands of consumers.

Ericsson Waits for Parts

Across the Baltic Sea, Nokia’s arch rival, Ericsson, also bought a sizable number of Philips’s chips for its cellphones. The two companies have a long-time rivalry. Not only do Ericsson and Nokia compete in building cellphones and cellular networks, Ericsson and Nokia are each a source of national pride for Sweden and Finland, respectively. Because Sweden controlled Finland from the early sixteenth to the early nineteenth century, the two countries have an intense, ongoing rivalry.

As a major customer of Philips, Ericsson received the same phone call that Nokia did on the Monday after the fire. Yet Ericsson’s reaction was very different. It reflected the more consensual and laid-back nature of Swedish culture, while Nokia had the more individualistic, aggressive culture of the Finns. Ericsson is more passive. Friendlier, too, but not as fast, said one official who dealt with both companies in the fire’s aftermath.¹⁵

Ericsson treated the call from Philips on March 20 as one technician talking to another, according to Roland Klein, head of investor relations for the company.¹⁶ Ericsson was content to allow the one-week delay to take its course. The company assumed that Philips would ship the chips after a short delay, that the fire was minor, and that everything would work out. Lower-level staffers at Ericsson neither bothered their bosses with news of this minor glitch nor delved further into the magnitude of the disruption.¹⁷ Even when it was clear that the much-needed chips were significantly delayed, lower-level employees at Ericsson still did not communicate the news to their bosses. The head of the consumer electronics division (which oversaw mobile phone production), Jan Wareby, did not learn of the problem until several weeks after the fire. It was hard to assess what was going on, he said. We found out only slowly.¹⁸

By the time Ericsson realized the magnitude of the problem, it was too late. When it finally asked Philips for help, Philips couldn’t provide it because Nokia had already commandeered all of Philips’s spare capacity. Ericsson then turned to other chip makers for parts. But, unlike Nokia, the company didn’t have alternative suppliers available for the chips that had come from the stricken Albuquerque plant.¹⁹ With semiconductor sales running hot in the spring of 2000 and Nokia’s lock on all spare capacity, Ericsson failed to obtain needed parts from other sources. We did not have a Plan B, conceded Jan Ahrenbring, Ericsson’s marketing director for consumer goods.²⁰

End Result

Philips’s lost sales of the high-margin, high-tech chips resulting from the fire were on the order of US$40 million.²¹ Lost sales amounted to the majority of the financial hit that Philips took from the blaze. Direct damage to the plant was offset by a 39 million Euro insurance settlement.²²

For that reason, the direct impact to Philips was relatively minor. The lost sales amounted to less than 0.6 percent of the US$6.8 billion in semiconductors made by Philips in 2000. And, more important, the impact to Philips was minuscule compared to the impact on Philips’s customers.

Ericsson bore the brunt of the disruption because it was unable to obtain secondary supplies of the disrupted parts. These were pretty necessary components, said Kathy Egan of Ericsson.²³ In the end, Ericsson came up millions of chips short of what it needed for a key new generation of cellphone products.²⁴ That shortage of millions of chips meant a shortage of millions of high-end handsets. Without the high-end handsets, Ericsson had the wrong product mix for the fast-moving cellphone market. At the end of the first disruption-affected quarter, Ericsson reported losses of between three and four billion Swedish Kroner (between US$430 and US$570 million) before taxes owing to a lack of parts.²⁵ This immediate loss, by itself, exceeded Philips’s losses by a factor of more than ten.

The after-effects of the disruption lingered for two more quarters beyond March 2000, including the critical (summer production) holiday 2000 quarter, which is ordinarily a time of high production and profitability. That’s definitely some market share that they’re missing out on, said Mary Olsson, principal analyst with Dataquest.²⁶

The total impact of the shutdown of the Philips plant took more than nine months to resolve. At the end of 2000, Ericsson

announced a staggering 16.2 billion kronor (US$2.34 billion) loss in the company’s mobile phone division. The company blamed the loss on a slew of component shortages (including the Philips parts disruption), an incorrect product mix, and marketing problems.²⁷

The disruption was more than just a temporary hit to Ericsson’s financial growth curves. About a year after the fire, the fallout from the New Mexico fire and other problems (with components, marketing, and design) reached a climax for Ericsson, when the company announced plans to retreat from the phone handset production market. In April 2001, Ericsson signed a deal with Sony to create a joint venture to design, manufacture, and market handsets. Sony-Ericsson would be owned 50-50 by the two companies.²⁸

The fire’s impact on Nokia was very different. Ericsson’s inability to ship quantities of its high-end models removed one of Nokia’s major competitors from the marketplace. Within six months of the fire Nokia’s year-over-year share of handset market increased from 27 to 30 percent, while Ericsson’s dropped from 12 to 9 percent.²⁹

Although both Ericsson and Nokia were hit by the same disruption, one recovered while the other exited significant parts of the business. This example illustrates many of the concepts that are the focus of this book. The fortunes of Nokia and Ericsson were set well before the fire hit the cleanrooms in Albuquerque. Ericsson sat idle while Nokia acted. Nokia’s culture encouraged dissemination of bad news; immediate action to monitor the supply of critical parts continuously helped it detect the problem early; deep relationships with its core suppliers helped rally them to fast action; knowledge of supply markets allowed it to procure elsewhere; and modular engineering design enabled the use of chips made by other manufacturers in some of its products.

The Challenge Ahead

Today’s supply chains span the globe and involve many suppliers, contract manufacturers, distributors, logistics providers, original equipment manufacturers (OEM), wholesalers, and retailers. This web of participating players creates complexities, making it difficult to realize where vulnerabilities may lie. It also creates interdependencies that exacerbate these difficulties.

Consider, for example, the globe-trotting involved in manufacturing an Intel Pentium processor that powers a Dell computer.

The process starts in Japan, where a single crystal is grown into a large ingot of silicon by Toshiba Ceramics. The silicon ingot is then sliced by suppliers, like Toshiba Ceramics or others, into thin wafers that are flown across the Pacific to one of Intel’s semiconductor fabs in either Arizona or Oregon. At the fabs, hundreds of integrated circuits are etched and layered on each wafer, forming individual dies on the wafers. Finished wafers are packaged and then flown back across the Pacific to Intel’s Assembly and Test Operations in Malaysia. The wafers are treated and cut into die, and the dies are finished into sealed ceramic packages. The packages are then placed in substrate trays that are put into Intel boxes and then packed again in blank boxes (to conceal that they are Intel products) for shipment back across the Pacific to Intel warehouses in Arizona. Having traveled across the Pacific three times already, the chips are then shipped to Dell factories in Texas, Tennessee, Ireland, Brazil, Malaysia, and China, or one of its contract manufacturers in Taiwan, to be used as components in Dell computers. The journey ends when the product ships from Dell to the customer’s home or office anywhere in the world, amounting to a fantastic and complex global voyage.

Neither Intel nor Dell is alone in its reliance on a global supply chain. Most modern manufacturers are part of global, interwoven networks of companies involved in getting goods to markets. Responding to cost and efficiency pressures, such networks have achieved unprecedented levels of efficiency in moving information, products, and cash around the globe. Even smaller, less-known manufacturers are employing global supply chains. For example, Griffin Manufacturing of Bedford, Massachusetts, buys the fabric for its patented sports bras in Taiwan, moves the fabric to its Massachusetts plant, cuts the fabric to the required sizes on modern computer-controlled machines, ships the cut fabric pieces to Honduras for sewing, and then ships the final products to a Vermont distribution center to be tagged and distributed as Champion jogging bras to retailers across the United States.

Although responsible for high levels of customer service and low costs, modern supply chains also bear the seeds of vulnerability to high-impact/low-probability events.

The very complexity of global supply networks means that, in most cases, it is difficult to assess a priori vulnerabilities. For example, Ericsson’s vulnerability to the disruption in the Philips plant was not only the result of relying on a single supplier; it was also the result of having another major industry player rely on the same supplier. When Nokia moved fast to secure all of Philips’s capacity as well as the capacity of other global chip suppliers for the needed chips, Ericsson was stuck.

The vulnerability of the connected world to disruption is not limited to supply chain operations; it affects any business that depends on a reliable global communications network. On March 21, 2000, for example, a contractor laying a fiber-optic cable for McLeod Communications in Iowa mistakenly severed a U.S. West Communications cable carrying Internet traffic for Northwest Airlines. Without use of the lines, the airline was grounded—it lost booking and baggage information, along with systems that calculate the amount of weight and fuel-use of each flight and all its web operations.³⁰ Because Northwest Airlines also handled traffic for its code-sharing partner, KLM Royal Dutch Airlines, KLM flights in Singapore and elsewhere could not take off. Very few employees of KLM imagined that their airline operations were subject to the care with which a ditch-digging contractor in Iowa ran its business.

Another factor that increases the vulnerability of many firms is the tougher competitive environment they are in. As developing nations join the world of global commerce—and given the speed with which knowledge moves around the world—it is difficult to maintain a competitive edge based on technology or know-how. Consequently, many products are sold like commodities; because these products have many similar characteristics, buyers base their purchase mainly on the lowest prices. This leads to continuously lower prices as sellers try to capture market share by reducing their prices below the competition. For example, from 1999 to 2004 the average prices of sporting goods were down 4 percent, appliances were down 8 percent, and apparel was down 13 percent.³¹

Tough competition means not only that consumers have better choices, and that firms must work harder, but also that when an enterprise fails for any reason, others are waiting to take its place. Thus, firms have to be more resilient than their competitors. They have to invest in the ability to recover quickly from any disruption and make sure that their customers are only minimally affected.

In response to the need to provide high levels of service at low costs, many firms have attacked their idle inventory with a vengeance. Following the lead of Toyota Motor Corporation in the 1980s, they have introduced just-in-time lean operations that have