Most valuable asset during supply chain disruptions: Strong leader or great system?

The devastating earthquake and tsunami that ravaged Japan in March provided an important lesson for supply chain managers: we are often one disaster away from a major break in the way we conduct business. How well companies handle these supply chain disruptions is crucial in how quickly they can recover from them, says supply chain professor Thomas Choi. He looked at two competing theories to explain successful handling of supply chain disruptions: does it take a great person to rise to the occasion, or a great system to weather the storm?

The devastating earthquake and tsunami that ravaged Japan in March provided an important lesson for supply chain managers: we are often one disaster away from a major break in the way we conduct business. Given the global, interconnected, and time-sensitive nature of today's supply chains, a disruption in one place can have ripple effects up and down the supply chain, and all the way across the globe.

In the wake of the tsunami, for instance, businesses that rely on Japanese electronics and automotive parts have faced production, distribution, and transportation disruptions and delays — forcing them to scramble to find alternate supply lines and manufacturing partners.

But it's not just large-scale natural disasters that can hamper supply chain functionality. More mundane, everyday events — a small fire at a supplier's plant; late, missing, or damaged parts shipments, etc. — can also have severe consequences, and are a common source of concern for manufacturers and their supply partners.

How well companies handle these supply chain disruptions is crucial in how quickly they can recover from them, says supply chain professor Thomas Choi.

His new research, conducted with W. P. Carey doctoral graduate Arash Azadegan of New Mexico State University, looks at two competing theories to explain successful handling of supply chain disruptions: does it take a great person to rise to the occasion, or a great system to weather the storm?

Dueling Theories

"We wanted to compare the great system (GS) theory versus the great person (GP) theory to see which is more common when supply chain disruptions are handled successfully," Choi explains. Academic research focusing on how companies manage these crises was slim, he adds:

"A lot of the academic work in the risk management area focuses on how to prevent and prepare for risk situations. But businesses can never completely be ready for a risk event, so studying how organizations cope with these events is just as important."

Choi and Azadegan collected data from a subsidiary of a global automaker (SGA), which manufactures trucks and passenger cars in Iran — a place suitable for this study because of the relatively high level of environmental uncertainty facing Iranian manufacturers, Choi notes. The pair analyzed 58 supply chain disruptions that SGA faced and managed successfully to determine whether GS or GP theory was more prevalent.

Using pattern matching, Choi and Azadegan examined the 58 incidents based on their own application of the five dimensions commonly used in academia to characterize disruptions: severity (in this case, the extent that the disruption caused SGA's production line to stop); unfamiliarity (how often the disruption had occurred in the past);

resource limitedness (whether the group had the financial means, personnel skills, and information-sharing ability to respond effectively); complicatedness (whether the disruption impacted single or multiple supply chains); and inter-organizational relationship context (how collaborative and amicable the relationships between the parties involved in the disruption were).

Since Choi is, as he terms it, "an operations guy," he was biased toward system theory, but the researchers found that the successful handling of risk events was due more often to a strong leader guiding a company through the disruption. While systems exist to facilitate activities and provide a framework for people to follow when a disruption occurs, leadership is often necessary to ensure that the system is working properly — and to come up with other options when it is not.

In essence, different disruptions require different approaches. "Take New York City during the September 11 attacks. Rudy Giuliani emerged from that crisis and became the leader the city needed. He provided direction for people in times of uncertainty," says Choi, noting that sometimes leaders emerge based on organizational conditions, and sometimes "they just show up — the situation brings them out."

When Leaders Emerge

The events of September 11th were severe and unfamiliar — two dimensions that Choi and Azadegan found to make a disruption more suited to handling by a person rather than a system. "Personal guidance and direction are needed to respond to events that rank high on severity and unfamiliarity. That signifies the need for a great person," Choi explains.

GPs are also better at leveraging limited resources, and are more suited for addressing disruptions in the face of poor quality inter-organizational relationships, the research shows. Why? Systems cannot foresee everything, and people are more equipped for flexibility and on-the-spot decision making.

"A GP can say, 'OK forget the infrastructure. Our standard operating procedure may say to do X, but this is too severe; we need to do something else,'" Choi explains. By contrast, a great system responds to disruptions by enabling communication, distributed decision-making, and planning — allowing "the infrastructure to kick into action," Choi says.

Great systems are most effective when disruptions are not severe, have occurred before, and can be attacked with plenty of resources. Indeed, the great system theory prevailed over great person theory only when disruptions were highly complicated, where the systems promote "broad awareness," and allow information to be quickly and accurately collected and disseminated, Choi notes.

These complex disruptions require multiple groups to work together, rather than relying on one leader to direct the effort. For instance, SGA faced one high-complication situation where volatile demand and changes in raw material shipments caused a shortage in parts it needed for exhaust assembly.

As a result, four suppliers that complete different process steps on the exhaust assembly experienced production stoppages, which wreaked havoc on SGA's production line. In response, SGA and its suppliers worked together to identify alternative parts and coordinate production scheduling and delivery among the five plants. Crises averted.

The Sum of Two Parts

But not all incidents are cut-and-dried when it comes to identifying the best 'man' for the job. While GPs were found to be more effective at handling supply chain disruptions overall, they cannot operate in a vacuum. "Neither a GS nor a GP is equipped to universally address all forms of supply chain disruptions," Choi explains.

"On the one hand, effective response requires meticulous planning, organization, and readily deployable means of sharing information — which is best achieved through a GS. On the other hand, you also need agility and spontaneity, which are hallmarks of a GP."

Their research revealed that incidents exhibiting three or more of the challenging dimensions required both GP and GS to work in concert in order to successfully address the disruption. The lesson learned? Companies need to "carry both GS and GP in their arsenal to effectively address supply chain disruptions," Choi explains.

Interestingly, the research highlights a key flaw in many organizations' preparations for and responses to supply chain disruptions: depending too much on systems. Most organizations try to get ready for adverse supply chain events by setting up a great system, but in doing so, they may be overlooking the greater resource of their people. "Our findings point out the need for companies to develop individuals who can act as leaders in times of crisis," Choi says.

His research adds to previous academic literature showing that companies may want to consider identifying potential GPs as part of their recruiting and training activities. Organizations would also be wise to create job positions such as chief risk management officer or director of disaster response, alongside their crisis response programs, business continuity plans, and emergency procedures, Choi adds.

"Companies need to create an environment where individuals feel comfortable to come forward and take charge," he says. "It doesn't have to be the CEO — it could be a vice president or a mid-level manager, or anyone really who is prepared to jump into the fray."

Bottom Line:

• Learning more about how companies successfully manage supply chain disruptions is as critical as knowing how they prepare for them.
• Competing theories exist to explain how companies handle supply chain disruptions: does it take a great person to rise to the occasion or a great system to weather the storm?
• A great person is most effective for handling supply chain disruptions that are severe, unfamiliar, high in resource limitedness, and happen within the context of a poor inter-organizational relationship. People are more equipped that systems for the flexibility and on-the-spot decision making required to address these types of scenarios.
• A great system is most effective when supply chain disruptions are complicated, impacting more than one supply chain flow. In these events, systems promote the "broad awareness" needed to address the complicated nature of the problem, and allow information to be quickly and accurately collected and disseminated.
• In preparing for supply chain disruptions, companies have focused too much on building the system and infrastructure that can withstand a crisis. Companies should not overlook the importance of fostering a culture where an employee feels comfortable to emerge and lead the organization through the disruption.