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4. Effects of Disruptions

Published onApr 04, 2020
4. Effects of Disruptions
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Most companies can estimate the range of consequences of highfrequency disruptions based on their own or their industry’s experience. Low-probability/high-impact events, in contrast, generate magnified outcomes, and their rarity means a lack of experience in estimating both their likelihood and their consequences. In many cases, such disruptions are accompanied by public fear that exacerbates the impact of the initial disruption. Government reactions may even aggravate the disruption further. Moreover, highimpact disruptions often have many additional indirect effects, upsetting enterprises more deeply than one may realize.

While it may be difficult to estimate the exact likelihood and impact of such disruptions, it is enough to estimate the relative likelihoods and potential damage in order to prioritize vulnerabilities and planning. Once the relative likelihood and consequences of each potential disruption are estimated, they can be placed on a vulnerability map such as the one dicussed in chapter 2 (figure 2.4), which can be used, in turn, to prioritize planning.

Saving the Farm, Losing the Tourists

A routine inspection of a slaughterhouse in Essex England on February 19, 2001, detected foot and mouth disease (FMD) in 28 pigs. This highly contagious disease afflicts a wide range of livestock, including cows, pigs, sheep, and goats. Although it rarely infects humans, it does kill 60 percent of young farm animals. While many affected animals (especially adults) can recover, the disease leaves them debilitated, thereby ruining the production of milk and meat. Moreover, the virus lingers in adult animals that can then infect other animals the following year.

In response to the Essex inspection, the European Commission quickly banned all exports of British meat, milk, and livestock products. The United States, Ireland, and South Korea followed suit by banning imports of British meat. The British government ordered the slaughter and disposal of the 300 animals at the afflicted abattoir and set up an exclusion zone around the area. “If we can get on top of this and get back to a disease-free status quickly, then hopefully the damage can be minimized,” said Agriculture Secretary Nick Brown.1

Less than two weeks after the first detected case, however, the disease had spread to scattered locations across Britain. “I am absolutely determined to do everything possible to extinguish the disease,” said Secretary Brown.2

On March 15, 2001, British officials took decisive actions, virtually closing the British countryside. Travel in afflicted regions was discouraged as officials closed parks and country footpaths. They also canceled local events to minimize traffic; the Cheltenham National Hunt, for example, which draws 200,000 people every year, was called off. Checkpoint stations used disinfectant on the tires and shoes of those traveling from quarantined areas. In addition, officials ordered the slaughter and burning of all susceptible livestock within 3 kilometers of any infected animal.

The battle to contain the disease took seven months and covered the entire length and breadth of the country. Even though officials found only 2,000 infected animals, 6.5 million cows, pigs, and sheep were slaughtered. The total cost to the agricultural sector approached £2.4 billion.3

With graphic TV footage of high mounds of burning carcasses and the restrictions on movements throughout the country, large numbers of potential tourists avoided Britain. Spending by foreign tourists dropped 17 percent during the depths of the crisis.4 The tourists who did travel to Britain, and Britons on holiday, avoided Britain’s scenic countryside, leading some 1,000 small rural lodges and bed-and-breakfast establishments to close in the wake of the FMD.5

The total impact of the FMD on tourism during the seven months of the crisis reached £3.3 billion.6 The long-term, five-year, impact on tourism was estimated to exceed £4.5 billion.7 It is difficult to know whether the closure of many rural areas slowed the spread of the disease, because the infection followed cattle trade patterns, which had little to do with tourist movement patterns. It certainly dealt, however, a severe blow to the tourism industry.

It seems that the government’s mindset still stressed the importance of agriculture when, in fact, tourism had become a more vital part of Britain’s economy. Consequently, the government’s cancellations and closures caused more economic damage to tourism than the FMD caused to agriculture.

Magnified Disruptions

The British government has no monopoly on over-reaction during crises. The risk-averse culture of politics and the legitimate need to instill public confidence breed a strong predilection toward being visibly “in control” during disruptions.

Following the 9/11 terrorist attack, the U.S. government tightened security at U.S. borders and shut down all flights in and around the United States. The intermittent plant closing by Chrysler in the weeks that followed and the 13 percent reduction of output at Ford Motor Company during the fourth quarter of 2001 were not the direct result of the terrorist attack; they were the result of the shutdown of the Canadian and Mexican borders for truck movements and the resulting delays because of tighter border security. The U.S. government’s reactions disrupted numerous just-in-time manufacturing systems that depended on reliable international shipping.

When the 1995 Kobe quake injured 30,000 people, many made their way to Kobe’s hospitals. Yet 85 percent of these hospitals suffered damage from the earthquake and sustained a combined loss of one billion dollars.8 Moreover, the lack of running water, gas, and electricity hampered medical care even at the health-care facilities that were not directly damaged by the quake. Naturally, the Japanese government rushed to aid injured people. In order to fill the massive health-care gap, the government established free health clinics to cover the needs of the homeless and injured. Ironically, this aid-giving proved too successful by staying operational for too long—it almost bankrupted most of the area’s private hospitals, which couldn’t compete with free care. Again, a well-intentioned strong government intervention caused unintended secondary damage.

It is easy to criticize government actions surrounding the U.K. FMD outbreak, 9/11 in the United States, or the Kobe earthquake, after the fact. During a crisis, however, the need to instill public confidence and alleviate fears—demonstrating that the government is responding and “in control”—may outweigh the economic damage from what can be seen as an overreaction. Demonstrating that the British government was actively preserving the future of Britain’s food supply, ensuring that no more immediate attacks on the United States were forthcoming, and demonstrating that government cared by providing massive and immediate health support in a time of crisis in Kobe were all important and worthwhile. The unknown consequences of not reacting decisively, even without enough data and time for careful analysis, may well have been worse.

Thus, businesses should assume that governments are likely to “over-react” and take strong measures in case of high-profile public disruptions, such as another terrorist attack, the 2003 Severe Acute Respiratory Syndrome (SARS) epidemic, or other anxiety-producing disruptions.

Anticipating the reaction of governments, however, may still not give companies the complete picture of what high-impact disruptions may entail. Secondand third-order impacts on their businesses may include problems with customers and suppliers who are not directly disrupted, as well as unexpected shifts in demand patterns.

Public reaction to rare, unfamiliar disruptions can significantly affect demand patterns. For example, when British truckers blockaded the entrance to refineries and fuel depots in a 2000 protest against high fuel taxes, consumers hoarded fuel, topping off their tanks at every opportunity. This consumer reaction, which was identical to that of American drivers during the fuel shortages in the 1970s and 1980s, exacerbated the shortages by shifting the limited inventories of fuel from filling stations into automobiles’ gas tanks.

As one may have expected, the 9/11 attacks caused a significant reduction in air travel. What was less expected is that the events of 9/11 brought a sharp increase in the demand for home entertainment systems in the United States, as people opted to stay home rather than travel. October 2001 also saw a boom in new American car sales stimulated by patriotism. And while the FMD virtually shut down rural tourism in the U.K., urban tourism flourished as many Britons chose to visit the cities instead of taking rural holidays.

Lingering Effects of Disruptions—The West Coast Port Lockout of 2002

The summer of 2002 witnessed increasingly acrimonious contract negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), who represents the ports’ users in labor negotiations.9 In September, the union staged a work slowdown at all West Coast ports. In response, the PMA locked the ports on the evening of September 27. The lockout ended 10 days later on October 8, when President George W. Bush intervened, invoking the Taft-Hartley Act of 1947 to force open the ports and push the parties back to the negotiating table.10

The lockout halted the gargantuan flow of containers through the 29 West Coast ports, which are responsible for $320 billion in imports and exports each year. With the ports processing about 30 containers per minute, every hour, 24 hours a day, seven days a week, any disruption was bound to create costly chaos.

Facing frozen port operations, the massive ocean-going freight vessels serving the West Coast had little choice but to wait off the coast. And wait and wait. Canadian and Mexican ports could not handle these huge container ships, and they were too big to pass through the Panama Canal to the East Coast. So the ships created a logjam up and down the West Coast, placing a growing inventory of materials and products within sight but not within reach.

For Wal-Mart, Costco, JCPenney, The Limited, and other retailers, the timing of this labor dispute looked like the perfect storm. With shipments streaming across the Pacific for the 2002 holiday season, the retailers knew that a shutdown of West Coast ports would cripple the holiday sales that make or break a retailer’s year. As a result, these retailers took aggressive steps to minimize the impact of the potential port disruption.

“Back in June, we began to plan ahead and talked to vendors about getting early shipments. On products like Christmas lighting, we had them send our full order, or as much as they could get to us, by September,” said Costco executive vice president Richard Galanti.11 Wal-Mart made similar preparations: “We were able to clear port on most of our Christmas items before the shutdown began,” said Wal-Mart spokesman Tom Williams. “We had a contingency plan and it worked.”12

Despite forewarning, preparations, and the relatively short duration of the disruption, many of the same retailers were forced to announce reduced sales expectations in the aftermath of the lockout. Mattel executives complained that even three weeks after the lockout ended, the company had merchandise worth about $75 million to $100 million at wholesale value stuck on the water.13 The toy manufacturer worried that retailers might cancel orders if goods didn’t arrive on time, and it began to ship certain toys by air, significantly increasing its costs. Mattel and others suffered from the lingering effect of the disruption; even after the lockout was over, it took months for the ports to work through the logjam of incoming traffic and clear all the queues.

Manufacturing plants dependent on parts from Asia recognized that they were vulnerable to the lockout. New United Motor Manufacturing Inc. (NUMMI), the joint venture between Toyota and GM, knew that it was at risk since it used just-in-time inventory management. With only four to six hours’ worth of parts on hand at any given time, a lengthy disruption of material flow would halt production very quickly.

Just before the lockout, NUMMI took some precautions. “We did pull more parts as a contingency, but five-to-seven days is the maximum you’re going to be able to pull,” said the spokesman at the beginning of the strike.14

Four days into the lockout, the Fremont, California, plant had to shut down and idle its 5,500 workers. Seven days into the lockout and with no end in sight, NUMMI chartered several Boeing 747s to bring parts from Japan, increasing the cost of every car produced with air-freighted parts by $300 to $600.

In the aftermath, NUMMI was able to increase its output and offset the lost production caused by the delays; it ended up making a record number of cars in 2002. Its costs, however, increased substantially during that period, because of the expensive airfreight, added storage and handling costs, and substantial worker overtime.

Whereas manufacturers and retailers could arrange for early shipment of needed goods, farmers have less control over when their agricultural goods are ready for shipment, which makes them especially susceptible to disruptions. The September 29 lockout hit during the peak of the table grape harvest, with nearly $400 million in grapes ready to ship out through West Coast ports.15 The perishable nature of these goods meant high levels of spoilage for fruits and vegetables stuck in hot dock-side containers around the stricken ports.16

The delay in unloading ships even affected the World Series.17 As part of a “Memorable Moments” promotion, MasterCard had planned to hand out 57,000 disposable cameras to fans at Game Four in San Francisco on October 23. The cameras, shipped from Hong Kong, were in a container on a ship that arrived at the Port of Los Angeles on October 15. Because of the backlog after the lockout, the small company that ordered the cameras was told the ship wouldn’t be unloaded until November 1, long after the fans had come and gone.

For service businesses such as airlines, restaurants, or movie theaters, the lost business may be gone forever. Service businesses have no mechanism for creating inventory of their product to be used later or to “catch up” after the fact; if a seat on the 5:00 P.M. flight to Detroit flies empty, there is no opportunity to resell it at a later date.

Indirect Effects Lead to Slow Recovery

The lockout affected more than just the businesses whose goods sat at the port. Across the nation, U.S. railroads ran into problems as freight cars loaded with goods were locked in at the port. Union Pacific, for example, had 23,000 containers stacked up at the California ports of Los Angeles and Long Beach alone.18 Westbound rail traffic backed up as coastal rail-yards filled to capacity, spreading the clog eastward.

On the other side of the Pacific, ocean freight vessel operators in Shanghai faced the opposite problem: Too many ships and containers were stuck stateside. Shanghai ceased all shipments to the United States until after the lockout was over and ships and containers could start coming back to China.

After the lockout ended, shippers and carriers faced a very slow return to normalcy. Continued labor tensions at the port, clogged docks and rail yards, and a shortage of containers and freight cars all stymied a quick recovery.

Even a full month after the lockout ended, operations had only started to return to normal. Although the ports had cleared much of the backlog, 140 ships still awaited unloading. Delays of seven to nine days meant that incoming ships still queued in the waters off the West Coast. Some analysts predicted that it would take nearly three months to recover fully from the effects of the 10-day lockout.

Because of the expanding effects of events from the port disruption, the impact on the U.S. economy grew with each passing day.19 In the early days, the disruption cost $1 billion per day in damages to the U.S economy. But as the disruption extended into its second week, the impact grew to $2 billion per day.20 If the disruption had gone past two weeks, estimates were that the damage from lost economic activity in the United States would have reached $3 billion per day—nearly 10 percent of the U.S. GDP. The longer the disruption, the more goods spoil or become dated, and more retail sales are lost, leading to cost cutting and layoffs by retailers and their products’ suppliers. In addition, more factories shut down for lack of parts, idling parts and material suppliers, laying off workers, and hurting all the services that depend on them. Overall, this labor dispute involving 10,500 longshoremen imperiled the jobs of some 4 million U.S. workers21

Profile of a Disruption

Disruptions go through several characteristic stages, even though their severity and duration vary from case to case. Figure 4.1 illustrates the profile of a hypothetical disruption. It depicts the performance of a company (which can be sales, production level, profits, customer service, or another relevant metric) plotted over time. The nature of the disruption and the dynamics of the company’s response can be characterized by the following eight phases.

1. Preparation In some cases, a company can foresee and prepare for disruption to minimize its effects. Such warnings range from the 30-minute tornado alert GM had in Oklahoma to the several months of watching the deteriorating labor nego tiations at the West Coast ports. In other cases, such as the 9/11 attack or the Philips fire, there is little or no immediate warning.

<p><strong>Figure 4.1</strong><br>Disruption Profile</p>

Figure 4.1
Disruption Profile


2. The Disruptive Event This is the time when the tornado hits, the accident occurs, the bomb explodes, a supplier goes out of business, the union goes on a wildcat strike, or any other high impact/low-probability disruption takes place.

3. First Response Once the disruptive event takes place, the first period in the case of physical disruption is the domain of first responders (police, firefighters, first aid workers) who have to attend to an initial damage, if any. The duration of this period is anywhere from the time required to put out a fire to the months it took to dismantle and clean “Ground Zero” at the World Trade Center. Corporate resources can also participate in the first response, as Philips did when it put out its own fire or when security personnel in the World Trade Center led evac uation efforts on 9/11.

In cases of other disruptions, such as job actions or information technology disruptions, the first response is aimed at avoiding physical damage and bodily injuries. This may involve shutting down processes to make sure that even without employees or information systems there is no danger of physical harm to plant, equipment, or personnel.

4. Delayed Impact The full impact of some disruptions is felt immediately. Other disruptions can take time to affect a company, depending on factors such as the magnitude of the disruption, the preparation undertaken, and the inherent resilience of the organization and its supply chain. NUMMI’s just-in-time inventory system meant that, under normal cir cumstances, it would have been disrupted within hours of the West Coast port lockout. The parts inventory NUMMI accu mulated in preparation kept the plant operational for another four days before it was shut down. In the aftermath of the unanticipated 9/11 attacks, car makers felt the impact of border delays and halted airfreight within days.

5. Full Impact Once the full impact hits, performance often drops precipitously. When inventories of critical parts ran out after the West Coast port lockout began, NUMMI halted pro duction. Apple tried to ship slower computers in response to the 1999 Taiwan earthquake that disrupted memory chip sup plies, only to be rebuffed by customers. Retailers are often unprepared for an increase in demand during panic buying. Examples include gas hoarding during fuel shortage periods, stockpiling food items before a snow storm, and buying lumber for boarding windows in anticipation of hurricanes.

In some cases, when the disruption hits a company facility directly, the full impact is immediate. For example, the Union Carbide facility in Bhopal was off-line immediately after the accident; GM’s Oklahoma City automobile assembly plant came off-line immediately after it was hit by a tornado; and Wall Street firms stopped trading exactly when the 9/11 attack occurred.

6. Recovery preparations Preparations for recovery typically start in parallel with the first response or shortly after they com mence. They involve qualifying other suppliers and redirecting suppliers’ resources, as Nokia did in the aftermath of the 2000 Philips fire; finding alternative transportation modes as NUMMI did when it used airfreight to get parts during the 2002 West Coast port lockout; and determining what parts are available and selling products built from those parts, as did Dell after the 1999 Taiwan earthquake.

7. Recovery Restarting production, distributing restored supplies, repairing damaged infrastructure, or reconnecting damaged IT systems can take significant time. In the aftermath of the Kobe earthquake, many companies recovered slowly because of lack of utilities and employee absenteeism (as employees picked up the pieces of their own disrupted lives). Serious structural damage in the port of Kobe took two years to rebuild.

To get back to normal operations levels, many companies make up for lost production by running at higher-than-normal utilization using overtime and suppliers’ and customers’ resources. After the West Coast port lockout, NUMMI made up for its one-week plant closure and posted record sales by year’s end, despite the work stoppage. Cantor Fitzgerald, the bond trading house, lost hundreds of employees and all its systems in the World Trade Center on 9/11. It was back to trading when the stock exchange opened for business on September 17, 2001, and it was back to its pre-9/11 level of bond trading within two months.

8. Long-Term Impact It typically takes time to recover from dis ruptions, but if customer relationships are damaged, the impact can be long-lasting and difficult to recover from. For example, Kobe’s network of small-time shoe makers, responsible for some 34 million pairs of shoes a year, lost 90 percent of their business as buyers shifted to Chinese factories in the wake of the quake, and most buyers never came back. Other examples discussed earlier include Ericsson’s exit from cellphone manufacturing following the Philips fire and the bankruptcy of many rural English hotels and motels in the wake of the FMD. In some cases, the delayed impacts are indirect. For example, during the three months that followed 9/11, many people who would have normally flown took to the roads instead. One result was that 353 more people died in automobile crashes than the average for that time of year.22

During the West Coast port lockout, Dell, P&G, and Intel were disappointed by the attitudes of some suppliers, who saw the labor troubles as an “act of God,” for which the supplier was “sorry,” that “everyone is stuck in the same boat,” and that “nothing can be done until it is over.” Dell, P&G, and Intel felt that suppliers should have anticipated the strike and could have done more to reroute stuck traffic, expedite shipments, and ensure faster resumption of the flow of goods. Dell attributed suppliers’ inaction to cultural differences, with Dell having a much higher sense of urgency. For some of these suppliers, the disruption did not end with the resumption of port activities. Both Dell and P&G fired unresponsive suppliers.

Totaling the Potential Damage

Many companies can recover quickly from disruptions, even largescale ones, if they are prepared and know what to expect. When assessing the possible impacts of low-probability disruptions, two somewhat less obvious potential effects should be taken into account. First are the various potential cascading effects that may result from governments’ (or other institutions’) responses. Understanding such reverberations requires understanding the structure of the supply chain. The second effect is rooted in the competitive positioning of the company; if it is in a highly contested commodity market, it may have less time to react than if it has a unique product that its customers must have.

Causes Spread to Effects and Effects and Effects

The fire in Philips’s Albuquerque plant affected its customer, Ericsson, far worse than it affected Philips itself. Moreover, the impact of the Philips fire spread beyond Philips’s customers. Ericsson’s disrupted production and loss of market share meant cutbacks in purchasing from all of its suppliers.

Anadigics, another chip-making supplier to Ericsson, suffered a 33 percent decline in revenues late in 2000, months after the actual fire.23 Ericsson canceled large volumes of orders for Anadigics’ chips in the final quarter because of the lost market share following the disruption. Thus, a fire at one chip maker led to the disruption of another chip maker by disrupting a mutual customer.

In the case of the West Coast port lockout, the effects spread from the ports to suppliers and customers on both sides of the Pacific. Both of these examples demonstrate the cascading of disruptions across the globe.

The FMD provides another example of unexpected cascading effects. Although the disease does not taint the meat, consumers in many regions avoided beef nonetheless. McDonald’s saw a yearover-year $300 million decline in European (5 percent) and Asian (6 percent) sales in the first quarter of 2001.24 British leather production plummeted by 50 percent as millions of potentially infected cattle were slaughtered. This disrupted the flow of raw material to leather suppliers who provided material to manufacturers such as Nike (shoes), Louis Vuitton (handbags), and Jaguar (car seats). These manufacturers were forced to look for new sources of leather supply. With the loss of many of its customers, U.K. leather producers have never recovered to pre-FMD levels.

Competition and Resilience

A crucial factor in the potential long-term damage from a disruption is the time it takes for a company to get back to normal versus the “grace period” that the market would give it. The time to recovery is a function of the company’s resilience, while the grace period is a function of its market position.

The company’s market position with regard to its competition determines how much latitude it has with its customers and how fast the supply chain must get back to pre-disruption levels before customers defect. In commodity market situations, in which the company’s customers can switch suppliers with little difficulty, the company has little time to recover before it starts losing customers. Consequently, a firm selling to a commodity market—in which there are many other suppliers and firms compete on the basis of price and customer service—is vulnerable if it cannot respond quickly to a disruption.

This is the most dangerous scenario. It is, for instance, the situation that many of the world’s older hub-and-spoke airlines are in today. Their market has been disrupted with the entry of discount carriers, offering a virtually identical product, causing the hub-and-spoke airlines to lose pricing power. Shackled by inflexible union work rules, they are unable to respond and seem destined to lose in the long term. To a somewhat lesser extent, U.S. automobile manufacturers are also in this unenviable position. They are facing stiff competition, yet they are unable for historical reasons (such as restrictive long-term labor agreements and entrenched bureaucracy) to respond quickly and adequately to competitive disruptions.

High resilience in a competitive market offers the potential for positive long-term effects—creating market share gains in the face of a disruption. Nokia did just that, gaining the market share that its less resilient competitor, Ericsson, lost. Thus, the long-term performance of Nokia a year after the Philips plant fire was actually above the pre-disruption level of sales.

For companies that have market power through unique product offerings, or an otherwise monopolistic position, the effects of disruption are still dependent on how fast the company recovers. To the extent that customers cannot or do not defer their purchases during a disruption, the company will lose sales if it does not respond quickly. Although not fatal, this can be costly, given the high profit margins enjoyed by companies in this situation. For example, pharmaceutical companies enjoy gross margins of 90 percent or more on patent-protected products. Consequently, they ensure that their retailers and warehouses are always stocked with enough inventory so they can withstand most disruptions, since the cost of a lost sale is so high. Moreover, if a monopolist does not respond to customers’ needs during a disruption, customers might seek regulatory remedies or redesign their businesses in the long run to avoid the monopolist.

Winning from Disruptions

In many cases, one company’s problem is another company’s opportunity. When a competitor stumbles, quick response can lead to increased market share when new customers try the company’s products or services and stay with them.

The Northridge, California, earthquake in January 1994 knocked out four freeways and destroyed highway overpasses and parking structures, in addition to damaging numerous buildings and other infrastructure components. One of the expressways that closed, the Santa Monica Freeway, connects Los Angeles to its international airport and carries 300,000 cars a day. The earthquake made Los Angeles’s already-congested highways considerably worse.25

The disrupted traffic created an opportunity for Metrolink, the L.A. regional rail system, and for the Metropolitan Transit Authority (MTA) for Los Angeles County. Immediately after the quake, Metrolink ridership increased by a factor of twenty.26

Rather than simply enjoy the extra revenue, the two transit authorities cooperated to enhance the service, using the boost in ridership to introduce and market the service to potential longterm customers. Authorities added parking lots at commuter rail stations and enhanced the schedules. Metrolink (commuter rail) and MTA (intracity buses) collaborated to improve connectivity and coordination between their two systems and introduced a connecting shuttle service. The two authorities also made changes to accommodate bicyclists. Metrolink relaxed its rules, letting riders bring bicycles on the train so that riders could bike the short distances to and from the train stations. Similarly, MTA added bike racks to its buses.27

Many of the new riders stayed after the roads were repaired. Three years after the quake, transit ridership in the quake-affected regions remained more than four times the pre-quake levels. When Metrolink celebrated its 35 millionth rider, the winner was, appropriately, a woman who began riding the train because of the quake.28

Gaining new business when a competitor is disrupted involves seizing the moment and allowing new customers to experience the product or service. The 1997 strike at UPS was an opportunity for FedEx to demonstrate its service to several new customers. Unfortunately, the FedEx network was overwhelmed by the volume diverted to it, and FedEx had to implement several restrictions to its service in order to maintain the reliability of its operation. It was able, however, to pick up several new customers, such as Unique Photo Inc., in Florham Park, New Jersey, whose CEO was impressed enough with the service he got during the UPS strike to give testimonials in FedEx press releases.29

Similarly, Dell’s agility during the 1999 Taiwan earthquake allowed it to manage the demand for its computer systems by adjusting the component prices. Such adjustments allowed it to sell what it had and not have to disappoint customers. Apple at the same time was locked into long-term agreements and prior orders that it could not fulfill. Apple lost market share while Dell gained share.

Dell used a similar strategy during the West Coast port lockout. All through that period it worked with LCD flat screen monitor manufacturers to reduce their price by increasing Dell’s volume of purchase of these monitors. In comparison to the bulky CRT monitors, LCD monitors take much less room and can therefore be economically flown rather than shipped by ocean. The result was increased demand for systems with LCD monitors and reduction in demand for systems equipped with the old CRT monitor, a trend that continued after the lockout ended. Most important for Dell, overall system sales continued to grow even during the lockout.

Missing the Opportunity

Some suppliers miss such opportunities. With the recall of millions of Firestone tires, and the massive media coverage surrounding roll-over accidents with Ford Explorers, sales of Firestone tires in the United States dropped more than 15 percent. Moreover, Ford severed its 100-year relationship with the supplier. Major tire makers such as Goodyear, Michelin, and BF Goodrich rushed to woo newly safety-conscious tire buyers. “The recent unfortunate events will remind consumers of the importance of brand and quality,” said Michelin’s chief executive Edouard Michelin.30

At the top of the list of potential beneficiaries was Goodyear, since Ford announced that Explorer owners could go to any of the Goodyear’s 5,000 dealers for free replacement tires underwritten by Ford. In response, Goodyear boosted production at seven plants. But executives at the Akron, Ohio, tire company also believed that the quality of their tires could command a premium and boosted prices by 7 percent in January 2001 and again in June 2001 to profit from the demand surge. “We expect it to be profitable. It has to be,” said Goodyear spokesman Chris Aked.31

At the same time, with hot sales of new automobiles and the replacement of Firestone tires, Goodyear failed to satisfy dealers’ orders in a timely manner. Goodyear did not give dealer orders priority, even though the tire replacement market is significantly larger than the new car tire market (a car gets one new tire set at the factory yet several replacement sets during its lifetime). Consequently, dealers suffered a high rate of stock-outs32 and started to rebel, looking for other brands to sell.

Even more important, once the Firestone recall fell out of the headlines, drivers replacing tires on their cars reverted to the behavior that now characterizes most markets—buying at a discount what is on sale. In other words, they reverted to treating tires as commodities that can be differentiated mainly based on price and availability. The public simply did not think that Goodyear tires were better than other tires, regardless of what executives in Akron believed. By the first part of 2002, Goodyear had lost the entire market share it had gained during the crisis, and more.33 In the summer of 2002, Goodyear started to reduce prices on several models to restore their competitiveness, leading to some recovery in sales.

Disruption Consequences

This chapter highlighted several important characteristics of disruptions: the seemingly unrelated consequences and vulnerabilities stemming from global connectivity; the fear and related government actions and overreaction that may intensify the impacts of low-probability/high-impact disruptions; and the stages that the various disruptions typically go through.

Disruptions affect supply chain performance both immediately following the event and over the long term. A 2000 study of 861 public companies34 found that with the announcement of a supply chain malfunction such as production or shipment delays, the company’s stock price tumbled nearly 9 percent on average. Furthermore, that stock lost 20 percent of its value within six months of the announcement.

A survey of 20 leading companies conducted by MIT’s Center for Transportation and Logistics in 2002 and 2003 analyzed companies’ supply chain response to terrorism. Part of this survey examined how companies assessed their vulnerabilities in terms of measuring the possible impact of supply chain disruptions.35 Although few companies had developed systematic methods of assessing vulnerability at the time, several companies described quantitative and financial estimates for the consequences of supply chain disruptions, albeit not tied to a specific type of disruption. General Motors estimated that each day of a supply network disruption costs $50 to $100 million; Masterfoods Inc. claimed that an ill-timed disruption could cause the firm to “lose the franchise” with customers, or miss a critical retail promotion point (e.g., “back to school”); and Boston Scientific determined that a significant disruption to the manufacturing of a few key products could precipitate a cash-flow crisis leading to insolvency.

To further explain how supply chains are affected by disruptions, chapter 5 provides a short primer on supply chains and their management, the relationships between trading partners, and the ways in which supply chains are vulnerable.

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