MIT – The OM Blog by Heizer, Render, & Munson

Good OM Reading: Creating More Resilient Supply Chains

The Japanese earthquake and tsunami created one of the biggest supply chain disruptions in modern history

“Many more companies now find themselves at increasing risk of supply chain disruption,” write Professors Maria Saenz and Elana Revilla in the MIT Sloan Management Review (Summer 2014). They note a recent study by AON Risk Solutions which found that, on average, the percentage of global companies reporting a loss of income due to a supply chain disruption increased from 28% in 2011 to 42% in 2013. At many companies, the resiliency of the supply chain has not kept pace with the continually rising level of logistical complexity. Most supply chain managers have yet to do much about this problem.

A recent MIT study found that even many large companies are unable to create contingency rules and procedures for operations during a complex, high-risk event. In fact, about 60% of the surveyed managers either do not actively work on supply chain risk management or do not consider their company’s risk management practices effective. These managers lack a framework to guide them in the deployment of their risk management practices. Many understand so little about their risks that they don’t even know what kind of framework would fit the particular supply chain dynamics they face.

The example of some companies that have more advanced risk management systems suggests that it doesn’t have to be this way, report the authors. Cisco Systems Inc. is one of a handful of companies — others include Coca-Cola, Whirlpool and Procter & Gamble — that have tried to understand and measure the operational and financial vulnerabilities that could threaten the smooth operation of their supply chains. Supply chain managers at Cisco have learned to integrate supply chain design and supply chain risk management, balancing proactive mitigation capabilities with reactive capabilities in order to keep the company’s supply chain as resilient, efficient and profitable as possible. As John Chambers, CEO of Cisco Systems, comments, “In an increasingly networked world, supply chain risk management is top of mind in global organizations as well as a key differentiator for leading value-chain organizations.”

Good OM Reading: Embracing Digital Technology

Companies routinely invest in technology, and too often feel they get routine results. But a new MIT Sloan Management Review (Oct., 2013) study makes it clear that companies that are aggressively engaged in “digital transformation” tend to perform better. Why? According to the authors, “the current wave of digital innovation is about connecting companies to customers, and companies can’t afford to miss out on opportunities to improve efficiency, service, sales and performance. Companies must succeed in creating transformation through technology, or they’ll face destruction at the hands of their competitors that do.”

Researchers divided companies into 4 categories in terms of their commitment to digital transformation, then tracked the companies’ performance over time. “Digital transformation” refers to overall intensity of the effort to align a company’s operations with its business model through successful uses of digital technologies as a replacement for older processes. The 4 categories of enterprise were:

Digirati: Those companies that have gone all-in on digital transformation. This relatively small percentage of companies outperformed all others across the board.

Conservatives: Companies that have been slower than average to move toward digital transformation. Conservatives performed worst in revenue creation at -10%.

Fashionistas: Companies that publicly say transformation is important to them and may even throw a lot of money at transformation efforts, but whose efforts don’t match their rhetoric. Fashionistas scored worst in profitability at -11%.

Beginners: These performed worst among all the companies in terms of profitability (-24%) and 2nd worst in revenue creation and market valuation.

Results mean, for example, that automating an e-procurement system doesn’t just reduce the amount of paper being shuffled; it also gives a firm more accurate data that can help negotiate lower prices from vendors. Transforming warehouse management doesn’t just reduce headaches for shipping managers; it also can lower the amount of money tied up in inventory. And digital transformation of fleet management not only saves fuel and improve drivers’ efficiency; it also can help a company quickly and cost effectively serve customers and earn more and bigger orders. The bottom line: companies aggressively committed to digital transformation excel.

Good OM Reading: The Sustainability Embracers

Here at the POMS meeting in Reno we see 14 paper sessions just on the hot topic of sustainability. But today’s blog is also influenced by some new material by MIT on sustainability. Earlier this week, I sat in on a live webcast on the subject and then the next day received a copy of the MIT Sloan Management Review research report called “Sustainability: The ‘Embracers” Seize Advantage” (Winter,2011). The webcast featured Peter Grof, SAP’s Chief Sustainability Officer, who was also quoted in the report.

This 27 page study compares two broad categories of companies–those that have embraced sustainability and those that have not (called cautious adopters). Who are the embracers and what practices do they share? As businesses increasingly turn to sustainability for competitive advantage, here are MIT’s 7 conclusions:

1. Embracers tend to be bold, see the importance of being an early mover, and are ready to act even before they have all the answers.

2. They balance their aims with narrowly defined projects in, say, supply chain management, which allow them to produce early, positive bottom-line results.

3. They drive sustainability not only from top down, but also involve employees (who are often much more aware of sustainability challenges and solutions than management).

4. They do not treat sustainability as a separate function, but have a culture in which sustainability is applied to all business processes.

5. They establish baselines and set up assessment methods that can be identified and can measure progress.

6. They value intangibles as meaningful competitive benefits of their strategy.

7. They do not overstate motives or set unrealistic expectations, and they communicate their non-successes as well as their successes. For example, when Nike started producing labor supply chain reports 6 years ago, they announced that they had encountered noncompliance in numerous standards.

This report makes for interesting reading by providing a snapshot of how the future of the management of sustainability will look.