Operations

Many companies leave risk management and business continuity to security professionals, business continuity planners or insurance professionals. However, the authors argue, building a resilient enterprise should be a strategic initiative that changes the way a company operates and increases its competitiveness. Reducing vulnerability means both reducing the likelihood of a disruption and increasing resilience. Resilience, in turn, can be achieved by either creating redundancy or increasing flexibility. Redundancy is the familiar concept of keeping some resources in reserve to be used in case of a disruption. The most common forms of redundancy are safety stock, the deliberate use of multiple suppliers even when the secondary suppliers have higher costs, and deliberately low capacity utilization rates. Although necessary to some degree, redundancy represents pure cost with no return except in the eventuality of disruption. The authors contend that significantly more leverage, not to mention operational advantages, can be achieved by making supply chains flexible. Flexibility requires building in organic capabilities that can sense threats and respond to them quickly. Drawing on ongoing research at the MIT Center for Transportation and Logistics involving detailed studies of dozens of cases of corporate disruption and response, the authors describe how resilient companies build flexibility into each of five essential supply chain elements: the supplier, conversion process, distribution channels, control systems and underlying corporate culture. Case examples of Land Rover, Aisin Seiki Co. (a supplier to Toyota), United Parcel Service, Dell, Baxter International, DHL and Nokia, among others, are offered to illustrate how building flexibility in these supply chain elements not only bolsters the resilience of an organization but also creates a competitive advantage in the marketplace.

The practice of pushing product by building inventory in anticipation of demand has fallen out of favor in recent years. Many companies prefer to build product only in response to actual demand. This permits firms to avoid costly supply and demand mismatches. Given how successful product-based firms have been with this approach, it is only natural to wonder how it would apply to service firms. Some argue that services cannot be inventoried. Yet this view relies on an extremely narrow definition of inventory as finished product waiting for customers. In practice, the authors say, inventory also serves as a way to store work that functions as "service inventory." As with physical inventories, service inventories allow firms to buffer their resources from the variability of demand and reap benefits from economies of scale while benefiting customers. By using the correct form of service inventory, companies have the opportunity to offer better quality, faster response times and more competitive pricing. Using examples from the travel, hospitality and insurance industries, the authors discuss how service firms can use inventory as a strategic lever in designing and managing service offerings.

This article contends that companies' traditional approach to purchasing misses the function's significant potential to add value by driving innovation and superior long-term cost performance. As a former senior vice president of technical purchasing for BMW, the author oversaw the transformation of the department's mission from functional to strategic, and he offers insights about the transformation. Strategic purchasing, he says, can only be effective if the purchasing department constantly expands and updates its technical knowledge to preserve credibility with both suppliers and internal departments. Toward that end, BMW's purchasing agents spent up to 20% of their time training -- in everything from foreign languages to technical know-how to contract law. In addition, BMW began to hire industry experts and train them as buyers who had as much in-depth knowledge as the suppliers with whom they would be dealing. The author describes how BMW associates become involved at the early concept stage of product development, often suggesting how certain design features will affect the technical equipment at the factory or the level of investment that will be required to execute the design. They also suggest what types of materials, components and systems best meet end-user requirements.

For companies considering offshoring, there are dangers in taking too narrow a geographical view, say the authors. Every country presents a different mix of strengths and weaknesses. One country may, for instance, have very low labor costs but a high degree of political instability and a small domestic market. Another might offer a wealth of engineering talent but quickly rising labor rates. A third may have robust local markets but intrusive regulatory regimes and a weak transport infrastructure. Currency fluctuations may unexpectedly swell the costs of sourcing from one country, for instance, or a natural disaster may wreak havoc on a critical source of supplies. The authors suggest that offshoring is no different from any investment program that involves choices with widely divergent cost and benefit characteristics in that it makes sense to create a portfolio that balances risk and reward over both the short and long terms. Their research, canvassing 138 manufacturing executives in sectors ranging from automotive to consumer products to technology, confirms the wisdom of a portfolio approach. It reveals that while many companies confine their offshoring efforts to China and India, 96% of cost leaders are active in countries beyond those two, and nearly half of the leaders have offshore activities in three or more additional countries. The authors illustrate their argument with a description of the global outsourcing portfolio strategy of U.S.-based conglomerate Emerson Electric. They conclude with a brief discussion of a number of practical steps executives can take to ensure that their portfolios are constructed successfully.

How a textile manufacturer balances cost cutting with mass customization in its domestic facility.

Utopian visions of frictionless, knowledge-sharing, global supply chains are somewhat overstated.

In an attempt to increase both efficiency and service quality, more and more companies are outsourcing to third-party suppliers some key business processes, such as human resources, information technology and procurement. The universe of potential suppliers is diverse and growing, made up of locally based specialists, offshore providers with comparatively low labor costs, and global suppliers who are able to apply sophisticated management techniques and technology. The challenge for clients is to understand their own requirements and to identify providers whose capabilities and objectives are best aligned with their particular needs. Drawing on extensive research, the authors identify three potentially critical areas of supplier competency: delivery competency, transformation competency and relationship competency. Within that context, they discuss 12 capabilities through examples drawn from the outsourcing experiences of firms such as BAE Systems, Lloyd's of London, Deutsche Bank and Bank of America. By benchmarking supplier capabilities against its strategic and operational intent, a company can work to establish relationships that support its business objectives.

RESEARCH BRIEF: Emerging supply-chain e-technologies provide opportunities for growth "Ò

Leadership and management innovation must drive a comprehensive ethos of excellence.

Companies tend to assume that little can be done to reduce product costs once a design is set. This belief has shaped many cost-management programs across diverse products' life cycles. Because of it, firms will often focus on cost reduction during the design phase and cost containment during manufacturing. But are much of a product's costs truly locked in during design? Recent research suggests otherwise. In an extensive field study at the consumer-products division of Olympus Optical Co. Ltd., the authors found that the company is able to obtain significant cost reductions in manufacturing. Indeed, the research has demonstrated that costs can be aggressively managed throughout the product life cycle. Furthermore, the authors found that Olympus Optical applies various cost-management techniques in an integrated manner with the outputs of some techniques acting as inputs to others, thereby increasing the program's overall effectiveness. The observations suggest that companies competing aggressively on cost might consider adopting some form of an integrated cost-management program that spans the entire product life cycle.