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Supply Chains Adapt to Disruptions When There is No Time for a Huddle

June 2005

STANFORD GRADUATE SCHOOL OF BUSINESS — Supply chains move millions of computer parts and thousands of tons of raw materials across borders, yet these networks of manufacturing plants, transportation systems, and central design operations are extremely delicate.

An increasingly global business climate means that more and more companies face potentially devastating disruptions to their operations as a result of natural disasters or local health epidemics like SARS. Manmade events like terrorist attacks, strikes, and bankruptcies also have the power to halt production and shipments. A fire at a manufacturing plant somewhere in Southeast Asia can halt laptop deliveries to individuals in Southern California, hurting not only a company's revenue but the goodwill it has worked to establish with customers.

Sixteen years ago, the Stanford Graduate School of Business organized an informal gathering of students, academics, and local businesses including Sun Microsystems and Apple Computer to explore ways to strengthen supply chains. The discussion turned into a regular event and in 1995 the Stanford Global Supply Chain Management Forum was officially set up to develop and teach better supply chain practices for an increasingly global business environment.

"We were the first group of its kind," said Seungjin Whang, codirector of the forum. "Without our leadership, this focus on supply chain practices may never have happened." In early June, the group held its 10th annual symposium and hosted presentations on the latest supply chain practices from 13 global businesses including Intuit, Amazon.com, and The Gap.

"Initially much of the focus was on product design and how you could design a product to optimize its performance through the whole supply chain," Whang, the Jagdeep and Roshni Singh Professor of Operations, Information, and Technology at the Graduate School of Business, said of the group 10 years ago. Whang is a founder of the forum and serves as codirector with Hau Lee, the Thoma Professor of Operations, Information, and Technology at the Business School, and Kosuke Ishii, professor in the Design Division of the Department of Mechanical Engineering at the Stanford School of Engineering. Ishii's role on the forum is a nod to the importance of product design in effective supply chains.

Over the past 20 years many businesses have adjusted product designs to make them more flexible in responding to disruptions in supply or demand. Computer maker Hewlett-Packard, for example, has gradually shifted from building customized computers for different countries to adopting a common design that minimizes the number of country-specific features, like the power unit, so that there are only a few unique pieces, which can be added in the final manufacturing stage. That way, if the German market experiences a shortage, machines from France can easily be shipped in to fill the gap. This concept of "last-point differentiation" has been one of the keys to computer maker Dell's success.

In recent years, however, the issue of effective supply chain practices has become more critical to the success of businesses than even the forum's founding members could have known. Globalization has made companies far more dependent on foreign markets for goods and services as well as for customers. And, the rise in the Internet as a business tool also has forced managers to spend more time honing their supply chain strategies. Technology enabled by the Internet can magnify the impact of a health scare in Asia or a strike in Central America so that it is felt all over the world. But it also can offer ways to navigate these unforeseen events.

One speaker at the June symposium was Mark Roenigk, vice president of supply chain operations at tax preparation software maker Intuit, who stressed the importance of making instant adjustments when an unanticipated event cuts off a key supplier. "You have to adopt a no-huddle mindset," Roenigk said. "Being prepared, disciplined, aligned, adaptable, and agile all adds up to more points—and fewer penalties."

Because supply chains are so influenced by surprise events, Roenigk said Intuit has come to rely less on market forecasts for its business planning and more on technologies that will make its manufacturing faster and more flexible.

"We finally realized that even our most detailed forecasts were only accurate about 50 percent of the time," he said. "We could also flip a coin and get accuracy 50 percent of the time. What we really needed to do was reduce our dependence on forecasting."

Intuit has shifted some of its focus from detailed forecasts to shorter production times. This year it is working toward driving production time for all products down to five days from as many as 22. Other companies, including most airlines and some computer makers like Dell, have honed their promotion and incentive programs to ratchet consumer demand up or down in response to changes in supply.

But as Christopher Tang, a professor of business administration at the UCLA Anderson School, noted at the symposium, many businesses are still learning. Tang cited a 2004 survey from Computer Sciences Corp. that posed the question to large corporations: Is your supply chain robust?

The largest portion of respondents—some 42 percent—replied "no," compared with 38 percent who said "yes" and 20 percent who answered "not sure." A "no," or even a "not sure" response, could easily translate into millions of dollars in lost revenue, he said.

Five years ago, for example, a fire at a Royal Philips Electronics semiconductor manufacturing plant in New Mexico halted shipments to a number of major mobile phone makers overseas including Nokia and Ericsson and threatened to bring manufacturing to a halt. Nokia immediately asked Philips to ramp up production in other plants and was able to offset the loss.

But Ericsson dragged its feet. By the time that firm made the same request of Philips, there was no additional capacity left with which to accommodate it. "There are costs for implementing these proactive strategies, but over time they help companies retain their customers," said Tang.

—Andrea Orr

Related Links

Stanford Global Supply Chain Management Forum

Supply Chain Research