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Consider General Motors and the 2011 earthqua in Japan . At first glance , the automaker determined that only 390 of the more than 30,000 parts that go into each car were at risk . That sounds like a round- ing error , but supply chain forecasting also showed that a persistent shortage of just a few of those 390 could shut GM ’ s entire production down by month- end . The company dodged that worstcase scenario , but by mid-April , the number of affected parts had risen to 5,329 . This story has a happy ending for the company : GM ultimately had to idle production only of Chevy Colorado small trucks in Shreveport , La ., for one week . Consum- ers probably didn ’ t even notice the slight and temporary reduction in the range of vehicles available .
Other stories don ’ t end so well . In early 2007 , a shortage at a paint supplier of toymaker Mattel resulted in the company having to use a backup supplier that insisted its product was safe . It was not , and Mattel ended up recalling some 2 million toys and paying a fine of $ 2.3 million for violating a federal ban on lead paint .
Sheffi outlines the many things you want to have in place before a disrup- tion , starting with a crisis communications protocol . Before Hurricane Katrina hit land , for example , Procter & Gamble had plans in place to ensure continuity of pay , interest-free loans , and even counseling for its employees in the storm ’ s expected aftermath . Cisco employs an in-house Resiliency Index to score and then monitor all product introductions . The company also has at least 14 supply chain incident management playbooks , and four levels of alert : L0 (“ watching ”), L1 (“ minor impact expected ”), L2 (“$ 100 million impact expected ”), and L3 (“$ 1 billion impact expected ”). The Hershey Company keeps six months ’ inven- tory of milk chocolate in a secret refrigerated warehouse . If you ’ re in the market for a thoughtful howto detailing others ’ handling of a crisis you yourself may just see one day , this is it .
Quantifying Risk
Sheffi ’ s book is a master class on the need for business strategists to reimagine com- plex networks and use human intelligence , insight , and experience to find ways to plan for risks proactively . But what if it is possible for number crunching to do this task ? What if we can turn over the risk-assessing strategy to a computer ? That , in effect , is the argument Robert Salomon makes in Global Vision : How Companies Can Overcome the Pitfalls of Globalization .
Salomon , an associate professor of international management at New York University ’ s Stern School of Business , approaches the challenge from a perspec- tive that is similar to the one Sheffi uses . Business is getting ever more global , but risk increases when you do business outside your home turf . It ’ s a phenome- non described in the field as the “ liability of foreignness .”
The liability arises thanks to differences among countries in consumer tastes , business practices , and legal systems . British supermarket giant Tesco , we are told , “ learned the hard way that it is important to understand the local consumer culture ” when it lost nearly $ 2 billion on its disastrous U . S . rollout of its small grocery stores , “ Tesco ’ s Fresh & Easy .” The brand occupied the mid- dle ground between convenience stores and supermar- kets , only to realize that few customers were looking for a third way .
Likewise IKEA , whose 15-year struggle in Rus- sia provides a “ hard lesson ” about the fact that in some countries , your power supplier might back out of a contract , be sued by you , and then win a judgment in its favor . In other words , some countries might say all the right things about foreign investment , but when push comes to shove , local in- terests will take precedence , even if the law says otherwise .
Instead of looking to the best practices of the Fortune 500 , Salomon seeks salvation in data . The ease or difficulty of doing business in another country isn ’ t determined only by the norms and culture of that country ; it ’ s also deter- mined by the ease or difficulty of doing business that you ’ re accustomed to in your home country . Salomon believes it is possible to measure and express as a number such differences as the “ institutional distance .” And , he continues , “ studies show a positive correlation between institutional distance and the level of risk in doing business across countries .” When crafting a global strategy , he argues , executives would be well advised to calculate that distance .
The next step is to factor that knowledge and information into investment decisions . Salomon has developed an institutional risk pricing algorithm , Global Acumen , that helps quantify and value the risk of operating outside a company ’ s home market . In short , when discounting the future cash flows of a project , the cost of capital ( aka
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