The fast-spreading COVID-19 pandemic emphasized that global businesses need to be more resilient in their international production structures. Few businesses are prepared to deal with the unexpected, according to a new paper from Florida International University’s College of Business (FIU Business).
Researchers found that strategies that favor redundancies in the configuration of assets across a company’s value chain can provide the much-needed flexibility when a crisis strikes, allowing the overall chain to keep running.
“If you wait until the crisis has hit to figure out what your company can do, it may be too late,” said Curba Morris Lampert, associate professor in the Department of International Business, co-author of the paper. “You become resilient by designing flexibility in your global activities before you need it.”
For example, companies with multiple manufacturing facilities dispersed around the world have more options to play with when a crisis affects one of its facilities.
Lampert’s paper, “Branching and Anchoring: Complementary Asset Configurations in Conditions of Knightian Uncertainty”, was published in the Academy of Management Review with co-authors Minyoung Kim, at the University of Kansas and Francisco Polidoro Jr., at the University of Texas at Austin.
The coronavirus pandemic, Lampert noted, has provided sobering lessons of what can happen when companies get caught lacking resiliency in their global operations.
During the early stages of the pandemic, Apple Inc., which assembles iPhones in China, struggled with manufacturing and distribution when its factories were shut down. Many pharmaceutical companies and medical device manufacturers who rely on China for drug ingredients and to produce medical devices also suffered.
“When you design your operations to optimize economies of scale, you’ve accounted for standard issues that could go wrong,” said Polidoro. “Then an unexpected, nonstandard event occurs, like a pandemic, a trade war, or the closing of national borders. All of a sudden, the decisions that previously optimized your operations may now lead to unprecedented disruptions, bringing your entire organization to a halt.”
Had redundancies been put in place, the researchers explain, these companies would have had more options to deal with these disruptions, significantly preventing financial losses.
Co-author Kim, University of Kansas, explained that achieving resiliency involves a trade-off between efficiency and flexibility. “The trade-off is that the sacrifice in efficiency will help you rebound and survive in the face of uncertainty.”
