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Reducing The Risk of a Laterally Integrated Organization Published: Sunday, May 8, 2011 8:00 am By: Rafael Ríos, Executive Vice President

During the 80’s the ideal competitive company was one that, amongst other things, had  discovered the medicinal  effects of total quality, had recognized the value adding importance of having  an  empowered team of employees, had understood the importance of cost leadership, had understood the role of differentiation as a sword to achieve competitive advantage  and had  efficiently become vertically integrated.  

In the last 25 years various revolutions have occurred.  The realities of external and internal competitive pressures have made organizations rethink and redesign their business models. Manufacturers have become final assemblers and packagers, outsourcing significant production content in order to lower labor costs, remain price competitive, and focus instead on higher-value activities. For example, Nike specializes in marketing and design here at home but outsources shoe production.

The second revolution is an unprecedented globalization of the industrial supply chain, the emergence of the laterally integrated organization. Advances in technology and growth in free trade have resulted in global economic specialization that lowers costs, raises global income and takes advantage on highly skilled workforces. For example Taiwan now dominates semi-conductors.  China’s Gross Domestic Product (per capita) increased 156% (i.e., way more than doubled) between 2000 and 2010.

Some may argue that what we have today is a global system of production that has created economies that are totally dependent; they lost knowledge, skills, and capacity to produce goods domestically. The reward? Significantly lower consumer prices and record corporate earnings. The price? Much more risk.

This risk has been magnified by the tragic events that occurred in Japan two months ago.

The ripple effects from the massive earthquake and tsunami that slammed the Japanese coastline on March 11th are being felt across the world. Toyota announced that it would temporarily shutter all of its U.S. car plants due to parts shortages from damaged Japanese manufacturers. General Motors Co. is halting some production in many of its plants.

The effect has been felt in many companies, Honda, Boeing, Medical Device companies etc.

Supply chain gurus, Boeing and GM have already assessed the impact of Japan’s recent natural disasters and are scrambling for parts. Less astute companies will discover over the next six months that their supply chains are more dependent on Japan than manufacturing managers ever understood.

We have collectively created a specialized, highly efficient global supply chain lacking redundancy — and therefore resiliency — in the face of disruptions. A natural disaster or political uprising   will easily and quickly stop the flow of repair parts into hospitals, petroleum to feed our gas stations, chemical products to be used by our pharmaceutical, garments for our retail stores and so on.

The risk is avoidable. For example, nations formally collaborate to ensure no single disruption will collapse financial and energy market systems. And financial services companies created duplicate record centers following 9/11. Will it take a repeat economic crash to ensure manufacturers reduce supply chain risk through geographic diversification? Or will the power of short term cost reduction and corporate profits have an impact on the long term competitive position of the laterally integrated organization.

Martin Landau presented the need for organizations and administrative systems to introduce redundancy to minimize the probability of system failure.  We believe this theory can be applied to laterally integration system also. His theory states that the more complex a system, the higher the probability some pat of the system will fail. The design of a complex global organization prescribes the need for a counterbalance that ensures redundancy in key risk points. In attempting to apply such a norm, an optimization balancing act must be achieved to ensure competitiveness. One must design equilibrium between lateral integration for optimization and redundancy for the risk that is created by a complex design. The key point that we can extract from his teachings is that the probability that the system will fail decreases significantly as redundancy factors are increased.

Finally I would like to conclude by bringing redundancy to the reality of today, May 7, 2011. The day that we honor the Mothers of the world, the great designers of redundancy.  Where would we be today without their nurturing voice, their guidance and their support when assuming the redundant roles of doctor, teacher, coach, mentor, friend, lawyer, wife, chef, housekeeper…? When they are around the system does not fail.

Thank you mothers of the world for being there.


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