COVID-19: Will We Learn the Lessons or Make the Same Mistakes?

Our research shows that past disasters can reveal much about the importance of scenario planning.

US-based cell phone company Vaxxon has suffered a 45% drop in its stock price, is facing costly legal action from suppliers and customers and looks set to miss a make-or-break opportunity to revive its fortunes with the launch of a new phone. The company’s problems began when the outbreak of a deadly virus in China crippled suppliers in that country. As fears of a pandemic swept through global markets, Vaxxon failed to implement an effective response.

Will Vaxxon survive the crisis?

The answer is no — because the company does not exist.

The above scenario was created in 2006 by the MIT Center for Transportation & Logistics as part of a simulation exercise that involved executives from a real-life company who took on the roles of Vaxxon’s fictitious emergency response team.*

View and download the simulation slides here.

View the simulation news segments below.

It is based on an actual outbreak of Asian bird flu virus, which at the time was as terrifying as COVID-19 is today.

We revisited the 2006 simulation — which was used as a powerful teaching aid — to underline that while crises of this type are by no means new, companies often fail to heed the lessons they provide. MIT CTL research indicates that some enterprises do adopt meaningful practices in the aftermath of a large-scale disruption — but most don’t take the opportunity to build supply chain resilience.

Will the same thing happen after the COVID-19 pandemic subsides?

Lessons we have heeded…or not

It is financially unsupportable for most businesses that make physical products to achieve 100% resilience, i.e., to develop and maintain the ability to recreate full production capacity immediately after a crisis occurs. The challenge is how to invest in ways to make the organization sufficiently resilient in the recovery phase of a disruption and beyond.

The need for an emergency operations center or EOC is one example. Although many enterprises have established an EOC, MIT CTL research suggests that they tend to be corporate or business unit entities that lack the depth of coverage, proper structure, and detailed processes required to manage a full-scale disruption.

Here are some other areas where companies often fail to absorb the lessons from past disruptions.

Who are your upstream suppliers?

In each of the major disruptions over the past 20 years including the September 11 terrorist attacks, Hurricane Katrina (2005), Hurricane Rita (2005), Thai Floods (2011), and the Sendai earthquake disaster (2011), companies learned that they are very much dependent on the viability of their upstream suppliers (and sometimes sub-tier upstream suppliers located far away). More importantly, these disruptions showed how firms knew relatively little about their upstream supply chain.

This shortfall became most evident in the aftermath of the Sendai disaster. After the tsunami that triggered the fateful series of events, most companies had to wait for nearly two weeks before they knew how exposed they were to the loss of production capacity. They needed to identify how many upstream suppliers and operations were located in the affected area, and how the loss of these suppliers impacted other vendors. Even then, some companies discovered dependencies only when outages rippled downstream.

Knowing the locations of suppliers, what each enterprise supplies, and their production vulnerabilities, in as much detail as possible, is critically important when a crisis hits. Once this happens, there is a race against the clock — and other companies competing to secure the remaining capacity. Companies that are unsure of their needs will be relegated to the end of the line.

The importance of scenario planning

Our 2006 exercise illustrated the utility of using scenario planning to simulate the outcomes of disruption — especially outcomes that may not be obvious.

The simulation featured several plot turns that at the moment seemed surprising, but as the simulation progressed, turned out to be quite realistic and feasible. Several such developments have surfaced in the COVID-19 crisis.

For example, in 2006 we imagined that a virus outbreak would give rise to a pandemic, which would trigger panic and business closures. We also envisaged shortcomings in the quality of information flows. Throughout our scenario, there were numerous information bulletins, but many contained inaccurate or out-of-date updates. It became clear that in such situations, companies must consider the information sources they are using and triangulate multiple sources to try and piece together a more accurate assessment. The Avian flu virus in our scenario was suspected of having an extended lifespan on inert surfaces, further accelerating the likely spread. This fear is surfacing today in the COVID-19 outbreak. Human resource availability played a key role in our Avian flu scenario, as factories suffered production declines due to a lack of people being available or willing to work in unsafe conditions. And our scenario wrapped up with the specter of pro sports teams suspending and canceling their seasons — again, a familiar outcome today.

Our research shows that past disasters can reveal much about the importance of scenario planning. For instance, such an exercise could have predicted the storm surge that created the majority of the damage when Hurricane Sandy hit the New York metro area in 2012. Scenario planning would have identified the personnel shortages that occurred after the Sendai and Hurricane Katrina disasters.

Companies such as Cisco and Intel regularly use scenario planning to outline the possible dynamics of a crisis. They then modify their emergency response plans and supply chains in preparation for potential disruptions.

In summary, the key takeaways from scenario planning are:

• Potential resource requirements can be identified in the context of unfolding scenarios.
• Be skeptical about information that emerges in the “fog of disruption” and seek multiple sources to validate the information. Question the information that you are receiving — it will not always be accurate.
• Recognize that human resource resilience is critical, and plan for protecting, supporting, and deploying personnel in flexible work assignments

Importantly, a well-designed scenario will immerse the participants in the disruption and provide a palpable sense of the event that enables them to identify logical next step possibilities. These steps would not have been imaginable without actually walking through the scenario and dealing with all the factors.

Business continuity planning falls short

In our 2006 exercise, we highlighted the importance of Business Continuity Planning (BCP). Vaxxon, the fictitious firm at the center of the simulated outbreak, had only recently developed BCPs and was rolling them out.

Sadly, this appears to echo what is happening today amid the COVID-19 crisis. Many companies have some version of BCPs, but these planning efforts tend not to be very thorough.

A few points about BCPs: it is possible to adopt these exercises as contingency plans to maintain operation in response to specific types of disruptions (events). BCPs will provide a game plan for maintaining continuity in particular disruptions such as hurricanes or labor disruptions. However, such plans have limited utility for other types of disruption. A more robust approach is to develop BCPs that focus on the predictable outcomes and not on the specific disruption.

Interestingly, there is a limited number of outcomes that occur as a result of any number of disruptions. These “failure modes” are the loss of one or more types of capacity for some time period. The core capacities are:

• The capacity to communicate
• The human resources available to support company operations
• The available transportation systems
• Financial liquidity (having cash capacity to operate)
• Internal operation capacity
• Availability of supply

All disruptions threaten one or more of these capacities. Therefore, planning for these six outcomes is significantly less complex than attempting to design a continuity plan for every possible disruption. Put simply, regardless of how a specific capacity is lost, the company has to replace it and that is the purpose of the BCP.

BCPs have at least two critical elements. One element is a plan that guides you through a disruption. For example, the plan may direct you to activate an EOC, locate and protect personnel, contact previously established key contacts (at suppliers, government agencies, authorities, financial institutions), and enable secondary or tertiary sources.

Aside from a plan, the other critical element of the BCP is an option that restores lost capacity in some way. As we see in the throes of the COVID-19 pandemic, most companies do not have a backup option to sourcing in China/Asia or offshore, and it is the worst possible time to discover such a vulnerability.

Deterrents to building resilience

Given the disruption management experience described above, why is it so difficult for companies to take the lessons from past disruptions and turn them into resilience-building measures that gird their organizations against future crises?

One reason is that in the aftermath of a crisis, the angst and fear it generated subside, and the disruption quickly moves out of the managerial spotlight. The enterprise reverts to its pre-crisis response mode. Perhaps this type of thinking is understandable to some extent when high-profile disruptions cast as the prelude to Armageddon turn out to be far less damaging, as was the case with the Avian Flu and SARS epidemics.

Also, we have heard stories of leaders who may be reluctant to act because an investment in capabilities necessary to address future potential disruptions take away from current performance bonuses tied to cost containment. Some leaders allegedly estimate the time they have left in their current positions and bet that another large-scale disruption will not occur during their tenure.

A critical factor is that the financial economics of making resilience investments is not well understood, nor does it adequately take into consideration the uncertainties surrounding possible disruptions.

A core problem is that investments in resilience mostly protect against uncertain futures. When disruptions occur, these investments prevent failure. However, one cannot derive an ROI from such an investment because it does not produce a tangible cost reduction or revenue increase. It’s this uncertainty that makes investing in resilience so tricky. Organizations often follow three different paths, none of which is entirely satisfactory:

1. Use an expected value calculation. Companies take the product of the consequences and the probability of a disruption occurring over a specific time frame to identify a resilience investment level. But this assumes that resilience can be ‘purchased’ in annual increments, and it does not deliver the desired resilience until the end of the specific time frame. An added difficulty is estimating the probabilities and consequences. This problem is in evidence with the COVID-19 crisis. Initially, the US government estimated it needed to provide $8 billion in financial support to combat the crisis, but the final stimulus bill is valued at some $ 2 trillion — 250 times the original estimate.
2. Use scenarios to assess potential outcomes. As suggested above, this is a very effective method for identifying possible outcomes and desirable mitigation actions. However, it does not involve a robust method for determining the appropriate financial investment in resilience.
3. Do nothing. The dilemma confounds many companies so they kick the can down the road by electing to focus on today’s business. Small-to-medium-sized enterprises often take this course, not because of short-sightedness but because of a lack of capital required to invest in resilience.

Research underway at MIT CTL is exploring alternate methods for identifying productive resilience investment levels. The work leverages the use of visualizations and some process changes that appear promising in the early stages of the study.

Déjà vu all over again?

The COVID-19 pandemic has already provided some vital lessons, such as the need for some global planning or at least coordination of pandemic responses. However, the bulk of its teachings have yet to be revealed.

As suggested above, our 2006 simulation exercise turned out to be insightful in assessing how a pandemic might unfold and identifying the potential mitigation actions and issues in need of attention. Scenario planning is a productive way to imagine possible futures, and companies will likely learn from developing a robust scenario planning process when developing their BCPs.

Looking at the COVID-19 crisis, we hope that this time we heed the lessons rather than allowing them to fade along with the memory of the disaster. In the words of the great Spanish philosopher and writer George Santayana: “Those who cannot remember the past are condemned to repeat it.”

James B. Rice, Jr. is Deputy Director of the MIT Center for Transportation & Logistics. In this capacity, he oversees all industry outreach programs including the Supply Chain Exchange and MIT CTL’s Executive Education Programs. His primary research has been focused on resilience- and risk-management-related topics: supply chain resilience, port resilience, and supply chain security.

* Ken Cottrill, Editorial Director at the MIT Center for Transportation & Logistics, wrote the script for the 2006 Avian flu simulation. Review videos from the simulation here: