The Risks You Can't Foresee
An interesting article from Harvard Business Review on risk management.
Take the case of a small fire in a Philips semiconductor plant in Albuquerque, New Mexico, in March 2000. Triggered by a lightning strike, it was extinguished by the local fire department within minutes. The plant manager dutifully reported the fire to the plant’s customers, telling them that it had caused only minor damage and that production would resume in a week. The purchasing manager at Ericsson, a major customer, checked that his on-hand inventory of the plant’s semiconductors would meet production needs over the next couple of weeks and didn’t escalate the issue.
Unfortunately, the fire’s smoke and soot and the extensive hosing of the facility had contaminated the clean rooms where highly sensitive electronic wafers were fabricated, and production didn’t restart for several months. By the time the Ericsson purchasing manager learned about the delay, all alternative suppliers of several of the plant’s wafers had already been committed to other companies. The component shortages cost Ericsson $400 million in lost revenues from the delayed launch of its next-generation mobile phone and contributed to its exit from this market the following year.
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At Nokia, another large customer of the Philips Albuquerque semiconductor plant, information about any unusual event in a supply chain had to be reported to a senior vice president of operations, logistics, and sourcing. This executive, who had few day-to-day operational responsibilities, served as the company’s top troubleshooter, or—as we like to say—its “chief worry officer.”
This role differs from that of a traditional chief risk officer, whose priorities are to improve the management of known routine risks and to identify new risks that can then be transformed into manageable routine risks. By contrast, the worry officer has to quickly recognize the emergence of any novel risk and mobilize a process for addressing it in real time.
When Nokia’s purchasing manager received the call about the plant fire, he checked that existing inventory levels were adequate and logged it as a routine event, just as his Ericsson counterpart had done. But following protocol, he reported it to the senior VP as a supply chain anomaly. The VP investigated further and learned that parts shortages from the plant could potentially disrupt more than 5% of the company’s annual production.
The VP mobilized a 30-person multifunction team to manage the potential threat. Engineers redesigned some chips so that they could be obtained from alternative sources, and the team quickly purchased most of the remaining chips from other suppliers. But there were two types of chips for which Philips was the only supplier. The VP called the Nokia CEO, reaching him on the corporate plane, briefed him about the situation, and got him to reroute the plane to land in the Netherlands and go meet with Philips’s CEO at Philips headquarters.
After the meeting the two companies agreed that “Philips and Nokia would operate as one company regarding those components,” according to an interview the troubleshooter gave the Wall Street Journal. In effect, Nokia could now use Philips as its captive supplier for the two scarce chips. The relationship allowed Nokia to maintain production of existing phones, launch its next generation of phones on time, and benefit when Ericsson exited the mobile phone market.
Tackling potential threats is something not many people would bother doing. If you were a customer of Philips and heard they had to stop production for a week due to a minor fire incident, you would probably just check your inventory and make sure there's enough at hand. Aren't you lucky that it was only a minor fire and it'll only take Philips a week to get back into production? Suppose there's a parallel universe where the plant manager at Philips reported a major fire incident and it will take them half a year to resume production. What would you do then?
And here's the thing, have you ever considered the possibility of Philips stopping production and the impact it will have? Probably not, and there's probably no one in your team or organization who is supposed to look into it either. It might only be a week but what if it happened again next year? Why isn't there a strategy for addressing it when it happens next time?
Take Nokia, for example, they have a "chief worry officer" who is supposed to look into exactly these types of risks. In this case, the "chief worry officer" launched an investigation and found out that if there was a parts shortage issue, it could potentially disrupt more than 5% of their company's annual production. So they addressed the risk, and sure enough, it paid off handsomely.
As we are currently in the middle of a pandemic, have we ever considered what we will do when the next pandemic hits? Think of Covid as the minor fire incident that was supposed to be fixed in a week but ended up taking months due to the unforeseen risk where the fire's smoke contaminating the clean rooms containing highly sensitive equipment. Aren't we lucky that Covid had such a low death rate compared to the Spanish flu? Suppose there's a parallel universe where Covid is a lot deadlier and kills half or a third of everyone who contacted it. What would we do then?
What the world needs are more "chief worry officers," people who will look seriously into these risks and plan accordingly so that we will be better prepared the next time these risks occur. A pandemic isn't a one-time event, it is something that happens every few years or decades throughout history. After the 2014 Ebola outbreak, Bill Gates has already been warning us that we’re not ready for the next pandemic. And sure enough, we're not ready for Covid. Do we really want to repeat this again when the next pandemic hits?