Fresh off a year-plus of supply chain disruptions and irregular operations precipitated by the global pandemic, organizations should make time to rethink resiliency and risk management.
According to a pair of MIT Sloan professors focused on continuous improvement and risk management, the big lesson from COVID-19 is that it’s not enough for organizations to excel at a steady state — they also must build the resilience to respond to irregular operations and conditions.
“Despite the sophisticated risk frameworks we’ve developed for handling large-scale projects, even in operations, we’re still suffering from the consequences of preventable incidents,” saida senior lecturer in system dynamics at MIT Sloan.
“We have to understand how to apply new technology, and we also need to understand our organization so we can act correctly. Otherwise, we’re repeating the same mistakes with better technology,” said Carrier, who recently led an Executive Education webinar entitled Enterprise Resilience and Systemic Level Risk Management, along with professor of operations management
The shortages of personal protective equipment (PPE), electronics components, paper goods, and food items were jarring, but supply chain snafus and product shortages were a reality long before COVID-19. The common thread between events of 2020 and historic disruptions — from the space shuttle Challenger disaster to the Deepwater Horizon explosion and oil spill — is the concept of irregular operations, when fundamental underlying assumptions are challenged.
“There are times when there is a major disruption that suddenly implies what worked so far is not going to work anymore and you need a new playbook,” Levi said. “The disruption could be an epidemic or a technology or regulatory change. It’s all about a shock to the system, not necessarily predicted, that requires a new approach to how you operate your organization and supply chain.”
According to Levi and Carrier, systems thinking is the key that can help organizations in
- Identifying leading risk indicators.
- Formulating strategies for dynamically reducing risk.
- Mitigating potential consequences from unanticipated events.
Levi cited Ericsson and Nokia, both giants in the mobile phone market a decade ago, to illustrate his point. Both organizations discovered overnight that Phillips, their main supplier for critical components, had suffered a fire in its plants, wreaking havoc on the supply chain.
Nokia had the systems in place to evaluate the scope of the disruption and immediately made design changes to source from alternative suppliers. Ericsson, on the other hand, was slow to respond. The result: Nokia soldiered through, but Ericsson erased net $300 million off its market share, eroding its competitive position, Levi said.
To avoid a similar fate, Carrier and Levi recommended that companies consider these four tenets as they apply system thinking to resiliency and risk management challenges:
Assumptions are not gospel. Assumptions are the bedrock of risk models, but they are not infallible. When an irregular event like a fire or pandemic happens, it’s common for companies to look back and question whether their assumptions were wrong or they were instead just unlucky. The truth is more straightforward — perhaps assumptions weren’t known, or more likely, weren’t monitored to ensure they were still valid. “One of the roles of technology is to keep checking assumptions in real time and making adjustments,” Carrier said.
Be aware of the “hidden factory.” In operations in most organizations, there is a system for what should happen and another system for what actually happens, whether that’s in a factory or an office. A significant portion of work is not done by the standard, but rather through workarounds that add up over time.
MIT Sloan Professor Armand Feigenbaum codified this phenomenon into a formal framework called the hidden factory after observing the phenomenon while working at a GE plant in the 1960s. About 30% of the work in that facility was consumed by the hidden factory, which increased risk because the workarounds were not factored into the risk model, Carrier explained.
By monitoring signals, companies can identify and eliminate these hidden factories. “It eliminates the small factors that turn up in the incident chain that were not in the risk model,” Carrier said. “There are some companies that are very good at this, notably Toyota. When they actually have these workarounds that inevitably occur, they make sure they never repeat them.”
Think in terms of system design. Planning is essential for irregular operations, not improvisation. Think about your system of operations and supply chain, and define the dimensions that you can optimize to allow for a more robust and resilient response to disruptions. Consider what kinds of disruptions may emerge and examine each from the context of how long it’s possible to survive and operate under these conditions as well as the time to recovery.
“Understand the boundaries of your operating system and think about what you’re going to do about it,” Levi said. “What design and management changes are you going to inject into your system to reduce time-to-recovery or increase time-to-survive?”
Deploy technology wisely. Technology can help design robust processes and systems but should not be the goal on its own, Levi cautioned. Complex systems are inherently riskier; with that in mind, leverage technology to simplify a scenario rather than overcomplicate it.
With the world facing ever more disruption, it’s crucial that companies imagine the unimaginable before it happens. “Mike Tyson once said that everybody has a plan until they get punched in the mouth,” Levi said. “Irregular operations is that moment when your organization was just punched in the mouth. What will you do then? It’s not something that you will know how to do as an organization without practice.”