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End of the Line

End of the Line

Stretched to the Limit

Mention globalization and outsourcing and many people's thoughts turn to job losses or cheap clothing. Lynn argues the impact is more marked.

Our global corporations are stretched to the limit and vulnerable to the slightest disturbances in their global networks. What is worse, determined to cut costs, companies have gone beyond lean and become anorexic, he says.

Globalization really means that many nations share the same means of production. Outsourcing means many firms share the same source of supply. Having two competing suppliers in the same overseas country is really just another form of single sourcing. Put them all together and you get a "world-spanning" system of production that is highly efficient, and extremely fragile. A war, even a regional conflict, could bring the whole house of cards down.

"For individual firms there is a bet going on that there is not going to be conflict, but we have entered an entirely new global production system. We've never run the system at speed before, and we've certainly never run it through a crisis before, and if you look at it carefully you'll see that it won't survive a crisis," he says.

"Now the good thing for the CEO is that basically every single player is in the same boat. There's been such a radical reorganization of the system that every single firm faces pretty much the same risk. If China goes down, if there's a war in Korea for instance, if there is a humungous earthquake in Taiwan, a revolution in South India, every firm pretty much gets hit equally. So in a certain sense in terms of the way firms look at competitive risk, there is no risk. Now to the rest of the society, however, the risk has been hugely increased.

"With increasing frequency, deliveries of oil, computer chips and vital components suffer costly interruptions. A collaborative spirit probably will become the grease that keeps a creaky system from grinding to a halt," he says. "And we will be measuring the value of companies by the resiliency they show in the midst of breakdowns."

Factor in the way the outsourcing revolution has transformed both the hierarchy of power and the capacity of certain firms to keep track of production systems. Stir in the way just-in-time production has erased inventory, led to systematic single sourcing and further aggravated outsourcing. The result is a very different system from how it has operated in the past. The new way of working may be more efficient, but it is also extremely fragile. That fragility would be a problem even in a purely domestic proper context, but globalization, Lynn says, aggravates every fault in the system.

"Time and again, human beings have learned to build buffers into complex systems. We design compartments into our ships, circuit breakers into our electrical networks and minimum reserve requirements for our banks. Yet since the cold war era, we have done the exact opposite with our industrial system," Lynn wrote last year in the Financial Times. "Rather than conceive market-friendly methods to distribute risk and dampen shocks, we devoted ourselves to eliminating the bulkheads that have traditionally existed between nations and between ­companies. To evoke a more raw analogy, in our production system, we bulldozed all the levees flat."

Global corporations rely too much on single-source suppliers and run inventories too lean to be prepared for supplier interruptions. It is this interdependence, once heralded by the drafters of free trade deals as peace inspiring and stabilizing, that threatens the current economic system, Lynn says.

He fears too few organizations have any idea of the extent of their vulnerability. It shocked Dell to learn that key parts of its computers depended on a single supplier in Taiwan, Lynn says. Yet he argues the surprise of Dell executives was in itself hardly surprising. There are now so many layers between an organization and its original suppliers that no one understands the supply chain from the inside out any more.

CIOs to the Rescue

Now, Lynn says, CIOs - viewed as heroes a decade ago - have a chance to regain their former status. "[CIOs] are the ones that can figure out how to make the company really smart in terms of its supply chains," he says. "One thing the CIOs can do is help - in fact it is their duty to help - their firms understand and keep track of all their sourcing in real time. This is the value the CIOs can bring. If they have the ability to do this they should be pushing for it because it's something that no one else necessarily has the ability to bring about."

CIOs also understand networks. They understand how networks operate and the need for redundancies and multiple pathways for information. They routinely deal with systems that have failed because of a failure somewhere in the system. As long as they can get their heads around the real differences between physical and virtual networks, Lynn says, they can make an invaluable contribution. Physical systems are in some ways more fragile than information systems because there are fewer redundancies at the cost level, he says. That is particularly true with the new network models of production that have replaced the old assembly line model.

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