Monthly Archives: January 2007

Real Risk (in the Supply Chain)

As evidenced by the considerable number of posts in my Risk Management category, including my posts on Managing Business Risk and Disaster Recovery Planning, Risk is one of my favorite topics since I believe that with innovative thinking, much can be done to reduce risk and prevent significant disruptions regardless of what form they arise in or how unexpected they are.

I’m not alone in this non-revolutionary form of thinking and it was nice to see the onslaught of risk-related articles in the supply chain media in recent months. Three articles in particular that stood out to me were Line 56’s “Managing Global Supply Risk”, ISM’s “Mitigate Risk, Sustain Supply”, and Knowledge @ Wharton’s “Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption”.

The Line 56 article points out that global sourcing needs a different set of management guidelines, metrics, and skill sets that focus on addressing the five key sources for supply risks, which it defines as:

  • longer lead times
  • quality control is different in each country, if there is control at all
  • financial data on global suppliers can be inaccurate or unavailable
  • cultural differences prevail overseas
  • laws and regulations differ significantly from those in the U.S.

The article offers three sound suggestions for managing global supply risk:

Executive-Level visibility into exposure and dependency
If they see the risk, they’re more likely to provide support and budget for the development and implementation of risk mitigation plans.
Continuous Monitoring of all Suppliers
You want to catch wind of a potential disruption BEFORE it occurs, not after!
Complete, Accurate, Forward-Looking Supplier Information
It’s not just the business you plan on doing with your supplier tomorrow that is important, but the business you plan on doing with them next year. Make sure that they have the capability and sustainability to deliver before signing the contract.

The ISM article notes that remaining competitive requires mitigating potential risks by understanding supply chain interdependencies and discovering alternative solutions for areas with high exposure. After all, for the past five years a potentially catastrophic event to an organization’s supply chain has occurred and natural disasters, terrorism, and political unrest is not going away.

The ISM article also points out that the key barrier to addressing risks is the lack of a clear return on investment – executives are not receiving credit for preventing problems, only for leading their organizations to achieve superior financial performance. Senior management needs to understand that superior performance requires plans for sustained financial success, and those plans require both innovation and risk mitigation components. Maybe “amortized expected loss” needs to become part of the annual budget where the loss is the average financial loss experienced by an organization of equivalent size and geographical diversity over the last five years to unforeseen supply chain disruptions and disasters. Then, any plan that can be used to reduce that number could be hailed as a success and managers would be hailed for the risk prevention efforts instead of chastised for not spending more time on sales and marketing or beating up their suppliers for cost concessions (which we all know is a losing strategy in the long term).

The ISM article also has some good advice on how to identify potential supply chain risks and mitigate their potential impacts:

  • evaluate high-margin, high-revenue products to identify which disruptions would have the greatest financial impact
  • modify the strategic sourcing approach to include risk analysis
  • establish leading indicators to help identify emerging problems
  • conduct supply chain process mapping to understand dependencies and potential causes of a supply chain failure cascade
  • use impact modeling to determine (catastrophic) breakage points or single points of failure (and remove them)

This brings us to the Knowledge @ Wharton article which notes that experts from BCG and Wharton generally agree that managing supply chain disruptions revolves around two goals: first, to thoroughly understand the potential of identified risks; and second, to increase the capacity of the supply chain — within reasonable limits — to sustain and absorb disruption without serious impact and that risks fall into three main categories: operational contingencies, abrupt discontinuity of supply, and natural hazards.

In addition to noting that in order to mitigate and manage a disruption risk, you must first understand the vulnerabilities, it presents a multi-step approach to disruption risk management that you can use as an outline to develop your own risk mitigation planning process.

  1. Obtain senior management understanding and approval and set up organizational responsibilities for managing the disruption risk management process.
  2. Identify key processes that are likely to be affected by disruptions and characterize the facilities, assets and human populations that may be affected.
  3. Undertake traditional risk management for each key process to identify vulnerabilities, triggers for these vulnerabilities, likelihood of occurrence, and mitigation and risk transfer activities.
  4. Report on, periodically audit, and conduct management and legal reviews of implementation plans and results on an on-going basis (e.g., of near-miss management and other disruption risks).

Great companies create supply chains that respond to sudden and unexpected changes by building “Triple-A” supply chains that are agile, adaptable and aligned. Triple-A supply chains satisfy the following Triple-A goals:

  • Agile supply chains respond quickly to sudden changes in supply or demand.
  • Adaptable supply chains adjust supply chain design to accommodate market changes.
  • Aligned supply chains establish incentives for supply chain partners to improve performance of the entire chain.

Also, for more reading on supply risk management, my original weekend series is still up over on e-Sourcing Forum [WayBackMachine]. (Introduction, Risks and the Need for Resilience, Managing Risk, and the bonus SI post WisdomNet’s Point of View.)

(AT&T is) Junking the Jack

Yesterday, CNN reported that AT&T is beginning to extinguish the brand of cellphone operator Cingular and that it will launch a campaign Monday to mark the change.

Furthermore, AT&T’s name and logo will eventually replace Cingular in a process expected to take several months. And I don’t know if I should laugh or cry.

First of all, it shouldn’t take more than a few minutes to cut and paste one logo or name in place of another. Even the great incompetent PHB would realize that a simple change such as this shouldn’t require more time than it takes the magic paper machine to spit out a number of pages equal to the current number of pages with the wrong logo. Updating a TV add with today’s media editors is just a matter of cutting out the old animated logo and splicing in the new one, and making a few tweaks. Maybe a day if your Media PC Guru is a perfectionist.

I know, I know – the real issue here is the brand, and I recently told you Don’t Buck the Brand – but when you get right down to it, that’s exactly what this multi-phase multi-month multi-multi-million dollar effort is doing – bucking the brand. After all, their number one goal is to squash it like a bug. So why spend tens of millions of dollars of advertising a joint brand just to spend tens of millions of dollars again in a few months to advertise a single brand? Why spend millions of dollars on new uniforms just to toss them all into the incinerator in a few months? Why pay outrageous maintenance fees to update all of your software to automatically include two logos on all printed materials just to pay those outrageous maintenance fees again in a few months to print one?

There’s smart procurement, there’s dumb procurement, and then there’s just truly wasteful procurement. And that will likely be the next year at AT&T.

And all for no good reason. Unless they think that either (a) we’re too dense to understand a straightforward announcement that says “We, AT&T, bought Cingular. You are now an AT&T customer. We pledge to give you the same great quality of service. Your bills will now come from AT&T – here’s what the new bill will look like. For questions, see our website or call.” or (b) we’ll leave in despair because we believe that AT&T will not offer us the same quality of service – in which case their multi-month, multi-multi-million dollar effort to convince us AT&T really is Cingular will simply delay the inevitable – since if we really do believe that it’s the bouncing jack logo that symbolizes quality, then we’re still likely to leave when it disappears. Either way, they’ll be wasting hundreds of millions of dollars when all is said and done – hundreds of millions of their customer’s money – and for many of you, your money – since it will be their customers, and maybe you, who will end up paying more for the same service in the end.

So, even though I want to laugh at the idiocracy, all I can do is cry.

Innovation Tips

Recently, Professor Rosabeth Moss Kanter published an article entitled Innovation: The Classic Traps in the Harvard Business Review (subscription or purchase only). A good executive summary can be found on the IACCM site. Since innovation is one of my favorite topics, I’m going to summarize the salient points and expound on their importance.

Existing corporate structures, controls, and incentives work against out-of-the-box thinking.

Innovation springs from creativity, not from stifled mindsets.

The search for new ideas must go broad and deep throughout the organization.
As I’ve indicated in my Purchasing Innovation series over on e-Sourcing Forum [WayBackMachine] and in my Sourcing Innovation series here on Sourcing Innovation, new ideas can come from anywhere, especially from where you least expect. The key is that you open your mind to the possibilities.

Innovators must be kept connected to the mainstream business.

Otherwise, they will be no more effective than their counterparts in the ivory tower. Although all innovation is good, the reality is that you need innovations that you can profit off of on a regular basis to sustain your business and sustain crucial R&D. Moreover, the best research is that which has a visualizable application (even if it will take time to apply).

You should look for small innovations as well as blockbusters.

A consistent stream of small innovations can often be as profitable as a single blockbuster, and when you consider that blockbusters don’t come along everyday …

Make sure you have Processes and Controls.

Although free thinking needs to be encouraged and supported to get the innovation ball rolling, at the appropriate point in time, each idea needs to be evaluated and a go/no go decision made from a business and ROI perspective.

Select the right leadership.

Your leadership needs to inspire your team to new heights, not drive them to the competition. If you don’t know what I mean, then you need to read more Dilbert.

Catching up with Aberdeen

When I was in Boston, I took the time to visit with some of the Supply Space Focussed Aberdeen folks to talk about the sourcing & procurement space and what the year ahead had in store for us. (Since I have been told by ex-analysts that their CEO despises us blogger types, even those who generally say good things about the quality of content coming out of Aberdeen, I will not give names, dates, or conversation specifics to protect the innocent, but simply say they are really great, smart, people.) If you’re interested in the nitty-gritty, you can always start by downloading their research agenda, but I can tell you that their plans go well beyond that.

First of all, they plan to continue the aggressive research schedule institutionalized by The Great Sudy in his short tenure (who averaged close to one major study a month) across each of the channels that they address. Secondly, they plan to augment those major benchmark studies with a significant number of shorter insight and thought pieces focussing on specific issues and / or best practices that you can use to improve your overall supply chain operations. (Apparently their goal is 10/month. Wow!) Thirdly, they plan to delve into a number of the insights that came out of the CPO conference in November and break ground in the relatively untouched areas of supply chain finance, next-generation supplier performance management (SPM), and non-traditional industry verticals. All I can say is that if they do all this, AMR will have some serious work to do keeping up.

Now I know that some prominent individuals have questioned Aberdeen’s relevance in the mid-market at one time or another, and some have even had some valid points, but the following truths hold: (a) if its good for big business, then some elements will certainly be good for medium-sized businesses, since it is essentially impossible for a business with poor practices to get large or stay large in today’s ultra-competitive market and (b) the data is based on your responses and any survey with a large number of respondents is going to contain a relatively significant number of responses from the mid-market. Yes, you might need to take some of the results with a grain of salt, or, more appropriately, with some good consulting advice from those companies that have helped similar companies undertake similar initiatives, but it’s much better to have valid data and supported conclusions to start with then to start with no data at all. So I say: Go Aberdeen Go! and continue to break ground in the analyst space. Right now, the issues need all the attention they can get – and given that the current talent pool, although not as well known, is more talented than they are being given credit for, one can be sure the research is only going to get better and better.

So participate in their surveys, get your free research, and make informed decisions. Furthermore, if you have ever attempted advanced sourcing, be sure to take their Advanced Sourcing Survey. Their last benchmark study in this area found that companies employing advanced sourcing techniques saved on average 12% more than their competitors who did not. This study is going to delve deeper into the issue and help you determine which technique will help you</> the most. It’s worth your time.

Don’t Buck the Brand

A few months ago, CPO Agenda published an article entitled Backing the Brand that stated aligning procurement and supply strategy with brand building and marketing is vital for long term success. A couple of weeks ago, the Frasers/PMAC Newsletter published the article Wising up to Marketing Costs that stated that marketing seems to be one of the final frontiers in strategic sourcing and that some companies are using sound strategies to save millions of dollars on marketing, without missing deadlines or diluting the creative intent. In other words, not only can the logic work with the magic, as outlined in my Magic & Logic Posts (Part I and Part II), but that Procurement can Back the Brand profitably.

Backing the Brand states that a successful brand can

  • differentiate a product or service
  • enhance a product’s competitiveness
  • influence the price-elasticity of demand
  • ease the introduction of new products and services
  • create customer recognition and loyalty
  • enhance leverage over upstream and downstream supply chain partners
  • create long term shareholder value

In addition, it states that even though procurement and supply chain may not always dictate a successful advantage on their own, it is clear that differentiation and customer retention might be impaired if they are not aligned with marketing and brand strategies and that only those organizations that can institutionalize continuous cross-functional implementation of a linked brand and sourcing strategy are likely to be successful in the future.

The article then goes on to offer five steps to successful alignment, as well as three case studies of organizations that have succeeded in successfully linking procurement and marketing and three organizations that have failed, but like other articles extolling the virtues of a procurement and marketing partnership, it skips over the simple first steps to success.

That’s where the article Wising up to Marketing Costs comes into play. It describes how your procurement department can make use of a category specialist model for buying and outsource acquisition of marketing categories such as print management that not only costs large organizations millions of dollars annually, but often costs those same organizations in excess of a million dollars of unnecessary spend. It also describes how the deployment of eProcurement solutions can save you money while giving Marketing the speed and flexibility they require.

So Back the Brand – and be the only department in your organization to have a double impact on the balance sheet. Make Charles proud.