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Why American Businesses Are Vulnerable in Japanese Crisis

Beyond the tragedy of the Japanese tragedy, the industrialized world is experiencing a profound philosophical aftershock. Much of our business theology about lean, mean just-in time manufacturing, about re-engineering, outsourcing and globalization is wrong.

Because around the world, businesses are depending on Japanese electronics firms that are now shut, operating part-time or tragically short-staffed. You don't need to be in Japan to feel the impact.

Attenuated Supply Chains
Globalized re-engineering was supposed to make business smarter, cheaper, safer. But one of the reasons why the business impact of the natural disaster is so widely felt is because our supply chains are now so immense. The iPhone alone requires involves nine companies based in six different countries - and that's before it's even connected. This means that the single product is immediately exposed to the political, social or geophysical instability of each of the six nations that produce its parts.

As Gillian Tett writes in the Financial Times, the financial services industry has been widely criticized for its love of complexity - but, in that love affair, it was far from alone. She writes,

Last year, the Business Continuity Institute published a survey of companies which suggested that three-quarters had experienced production hiccups in their supply chain in the previous 12 months, due to unexpected surprises (ranging from weather to health issues to earthquakes). A quarter said that problems were getting worse.
BMW is already worried about the Japanese suppliers-to-their-suppliers. That's because automobiles these days are no so much manufactured as compiled, with Toyota making engines, carpets and instrument panels in the U.S., headlights and brakes in France, steering wheels in Turkey, airbags in the Czech Republic, wheels in Germany, suspension parts in Spain and windshield wipers in Italy. Such attenuated processes fulfill all the much-touted aims of re-engineering: reduced cost, specialized and low-waged labor and maximization of tax breaks.

But they also wildly increase the span of vulnerabilities.

Cutting Costs

Add to this the race to the bottom in which so many companies have, recently, been enthusiastically engaged. As companies move to ever cheaper suppliers, relationships fray and processes rarely have the time to become embedded.

Price competitiveness erodes margins - which includes margins for error. Moreover, outsourcing complexifies all the relationships implicit in manufacturing. Every alteration isn't just a change; it's a new contract. And global outsourcing makes the legal ramifications of any change more complex still.

Cutting People
That is all before you even start to think about the people. Because while global outsourcing has made manufacturing more complex, re-engineering and cost cutting have both reduced the number of people doing increasingly complicated work and put those people further apart from each other, both geographically and culturally. When you reduce the numbers of those people, without simplifying the work, they become progressively more exhausted. Most of the organizations I work with today are full of tired, frightened executives who feel there is no margin for error. That means they feel they have to check details with more people more often - but they don't have any more time or energy. Slimmer margins, higher risks.

Re-engineering acquired a cult-like following not the least because it suggested that companies were machines and if you could plot them on a computer, you could control them. It may now be foundering on the brutally observable truth that companies occupy the natural world and are run by organic human beings.

Early Warning Signs
It should not have needed Japan to alert us to the risks inherent in this kind of complexity. It was there for all to see in 2005 when an explosion at BP's Texas City refinery killed 15 people. Geographical and cultural distance, too many suppliers, too many locations, constant cost cutting, huge communication problems, rapid turnover of executives and exhaustion. When the company sat down to try to analyze what had gone so wrong, it became clear that one of the culprits was the BP leadership's love of complexity for its own sake -- a form of intellectual hubris if there ever was one. Like Daedelus, we build labyrinths of such cunning complexity that we cannot find our own way out.

What we could learn from Japan is that, while we think complexity mitigates risk, it may also hugely amplify it. The love of complexity for its own sake leaves us willfully blind, designing systems and organizations well beyond our capacity to understand or control them.

Do you think this crisis shows the short-comings of business re-engineering?