Welcome to the second installment of Supply Chain Spotlight, Elementum’s interview series. We speak with the most influential people in today’s global supply chain. Each interview is a conversation about the most important topics and tasks facing supply chain professionals all over the world.
Dr. Yossi Sheffi is a professor at the Massachusetts Institute of Technology, where he serves as Director of the MIT Center for Transportation & Logistics (MIT CTL). He is an expert in systems optimization, risk analysis, and supply chain management, which are the subjects he teaches and researches at MIT.
His latest book, The Power of Resilience: How the Best Companies Manage the Unexpected, was released this month.
Professor Yossi Sheffi was on a sabbatical in the UK in 2002, when the world was still reeling from the 9/11 attacks. On a blustery English afternoon, he was called to the UK Home Office to meet with members of the British government. They wanted to know what would happen were another terrorist attack to target an economic hub—a port or a refinery, for example. As most infrastructure in both the US and UK is owned and operated by the private sector, the government wanted to know if companies were prepared and what their recovery plans entailed. It turned out that nobody knew.
“The government funded my research—and that became my first book,” said Sheffi. He published Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage in 2005, which focused on preparing supply chains for catastrophic events. “Now, ten years later, executives in the companies I interviewed for the first book came to me saying two things are changing: the dangers are higher and the risks are more pronounced—but at the same time, we’re getting better at planning and responding. So, I started to research, collected a team of students and researchers, and the result was my second book, The Power of Resilience: How the Best Companies Manage the Unexpected.”
“The dangers are higher and the risks are more pronounced—but at the same time, we’re getting better at planning and responding.”
Sheffi has made a career out of researching supply chain risk management. By closely following the state of global supply chains, he has become an expert on how to manage the unmanageable. His new book focuses on the changes we’ve seen in the past few years, and highlights companies that have managed to keep up with the changing times, successfully managing their supply chains in times of chaos or unexpected disruptions. I asked Sheffi what changes he has seen in the past decade that companies must learn to deal with.
The Shifting Supply Chain
“Globalization has accelerated,” said Sheffi. “Supply chains grew longer; there are more suppliers, more service providers, and they’re crossing more borders. There are a lot more players involved in the supply chain—which means a lot more room for mistakes, disasters, what have you.” But supply chains are not only longer, they are more dynamic and complex. Operations managers now must be more discerning. Consider manufacturing companies: “It used to be—go to China for products, parts, and material. Now, though, we might go to China for some things, but for assembly we might go to Vietnam, Malaysia, or more recently, an African country. Supply chain management is becoming a lot more sophisticated.”
Supply chains have grown deeper, too. “There are many more tiers. Companies know who they’re buying from—their Tier 1 suppliers. By the time you get deep into the supply chain, no one knows who they’re depending on.” Another issue? More natural disasters. “All this highlights companies who were able to withstand these issues and respond fast and efficiently.”
“What’s important is not visibility, but the decisions you make based on your information.”
But as the global supply chain gets more complex, customers are demanding more transparency and visibility. I asked Sheffi how visibility had changed. “Visibility is a big word. You can define visibility as knowing who your deep tier suppliers are – this is becoming a little better but not by much. Some companies demand that their Tier 1 suppliers will reveal who their suppliers are, but there is resistance by the suppliers. On the other hand, in-transit visibility is getting better. But the most important thing is not visibility itself but the decision you make based on that information.”
Unprecedented events like the 2011 earthquake and tsunami in Japan rattled global trade and left companies in trouble.
How to Build Agility
In preparation for high-probability/high-likelihood disruptions, many companies have developed response plans which can be drilled and updated continuously. “Response processes are the essence of preparation. Of course, that’s easier said than done,” said Sheffi, who has analyzed a number of these processes across the world. “There are two types of high-impact supply chain disruption. One has happened before—for example, having critical suppliers in an earthquake area means companies will have a playbook and plans for earthquakes, and they’ll train people to respond.”
But there’s another type of disruption—“black swans,” (a term coined by Nassim Nicholas Taleb)—that have never happened before. These are the high impact/low probability disruptions.
Operations centers allow not only for a better disaster response but also improved corporate image.
“Think about 9/11, or the SARS epidemic, or the Japan earthquake and tsunami. These types of disruptions were not imagined ahead of time and companies did not have processes for dealing with them—“and it shows in the response.” So, how can companies prepare for something they, by definition, can’t prepare for? According to Sheffi, it’s about developing the right team, the right communications infrastructure, and the right decision-making protocols.
“You have to have an emergency operations center with all available communications. Know who should be the people to start operations. You need engineers who have a deep and wide knowledge of the product line and logisticians who have a deep knowledge of the supply operation; all these people must be able to work long hours for a long time.” Sheffi believes that these operations centers, which companies like Walmart utilize successfully, allow not only for a better disaster response, but also improved corporate image and even increased sales of items people in the area would buy before and after a disaster. It’s one solution to a huge supply chain problem: building better communication across global networks.
Looking to the Holidays
FedEx announced recently that it plans to ship a record number of boxes this winter—317 million in total. It’s expectation of a 12.4 percent increase in traffic during the holiday season coincides with the predicted increase in e-commerce sales: 6-8 percent. Shippers often face the most stress when it comes to holiday shopping, as the last-mile logistics can be held up by under-capacity or bad weather. I spoke to Professor Sheffi about his experiences with shippers.
Learning from the Past
In 2013, major logistics carriers like UPS and FedEx came under fire for leaving countless consumers without packages on Christmas Day. Professor Sheffi said that a successful holiday season comes down to logistics companies drawing the line. “I was talking to friends who were involved with the big flop and they said to me, ‘Don’t talk about it! It still hurts!’” He said, reflecting on the anguish felt that season by providers who couldn’t meet customer demand. “Retailers were promising things ordered on the 24th to arrive on the 25th. But in some sense, it was the fault of the carriers because they didn’t lay down the law.”
“None of this is going to work if, at the last minute, carriers can’t hold up or start promising what they can’t deliver.”
How will companies deal with the expected spike in traffic this year? “Now, they are raising prices, putting in constraints, and they are hiring a lot more warehouse workers and putting more trucks on the road. But none of it is going to work if, at the last minute, they can’t hold up or start promising what they can’t deliver.” But Sheffi believes that, overall, companies are aware of this and are working to forecast realistic delivery times and stay within their boundaries.
I asked Sheffi if he believes that 2015 will be smoother. He laughed. “It’s hard to predict. Who knows? If the carriers stay disciplined, it will work. If, in the heat of competition, they try to get last-minute market share—then it’s hard to tell.”