Daily Archives: September 16, 2009

Dietary Changes to Our Risk Appetite

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.

The cover story of the June 22nd, 2009 issue of Information Week magazine was titled: “What’s Your Appetite For Risk?“. The article was part of the magazine’s annual security survey.

What we initially learn in the article should be of little surprise: the recession is taking its toll on all aspects of company operations, including investments in technology security and compliance, though these two concepts should not be confused with one another. A lot of focus was given to security and compliance within cloud computing.

With budgets stressed and spending trimmed, the appetite for risk has been forced to grow a little larger as priorities are examined in more detail to determine where — and how — limited dollars should be spent. As the article continues, compliance requirements are getting funded to keep (public) companies surviving from one audit to the next, but that doesn’t really mean that risks are being managed properly.

A reader of my blog posts (on Sourcing Innovation) contacted me in early July to tell me about a supply chain risk management success story. Nick Woods is in the public relations department of Red Prairie, a software company that specializes in warehouse management, transportation, and workforce management solutions. Nick shared with me a press release on the implementation of Red Prairie’s warehouse management solution at Sargento Foods who is known for their cheeses, sauces, and snacks.

In the press release, the VP of Logistics at Sargento Foods, Dennis Roehrborn, was quoted as stating: “By upgrading the solution in our Plymouth, Wisconsin distribution center and satellite plants in Kiel and Hilbert, we are better equipped to exceed customer expectations for accurate order fulfillment and on-time delivery.”

While there are many risks to supply chain operations, the failure to meet customer expectations is certainly a critical one. Regardless of how great your product is few customers will tolerate repeated supply chain disruptions that increase operating costs and result in a failure to cost-effectively get the right product on the store shelf when the customer wants to buy it.

Here is a great example of a company who recognized risk and managed it by investing in the necessary technology. Mr. Roehrborn also states that the implementation was minimally disruptive to existing operations and that productivity target goals were exceeded with the new software.

Seems to me like Sargento Foods has such a large appetite for its supply chain relationships, (and probably a good appetite for the quality products they produce too), that they decided to put themselves on a diet when it comes to risk.

The need to exceed customer expectations is even more important in a recessed economy, and companies must proactively assess the risk of losing sales and customers versus the cost of doing nothing. Managing risk doesn’t require taking bigger bites than you can swallow at one time — that would be foolish when tackling most any project. Even if you have to nibble at it a little at a time, chewing carefully and thoughtfully, make the investments necessary to little-by-little reduce risk and improve performance.

And don’t forget to brush regularly and floss daily.

Norman Katz, Katzscan

e-Leaders Speak: Kevin Cornish of Aravo on how “Managing Supplier Risk Helps You Thwart Zombies, Mavericks, and Other Threats in the Supply Chain”

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Today’s post is from Kevin Cornish of Aravo.

Once the economy begins to rebound, some companies may start to scale back their risk management efforts.

Don’t be one of them.

If we’ve learned anything from this recession it’s that in today’s volatile global economy, businesses need to pay more attention to risk, not less. And, while there have been signs that the world economy is beginning to heal (Bloomberg), Federal Reserve Chairman Ben S. Bernanke and others have cautioned that the recovery is likely to be both muted and prolonged.

In other words, now is not the time to ease up on scrutiny of the financial scorecards of your critical suppliers. Why? Because we’re not out of the woods yet, and because you don’t want to unexpectedly find yourself relying on a “zombie” supplier, a business that is so undercapitalized and overleveraged that it’s essentially dead. A zombie supplier won’t be able to raise the money required to get itself back online — and that means it won’t be able to deliver the parts you need to your door.

Of course, fine-tuning your supplier risk management strategies can have other benefits, as well. For instance, as we’re digging out from the worst recession since Word War II, it will continue to be critically important to keep an eye on costs, and getting your supplier house in order can go a long way to reducing another sourcing threat that’s too often ignored: maverick spend.

Maverick spending may be costing you more than you think — not only in terms of per unit price, but with regard to leverage lost in future negotiations, as well. What’s more, it’s probably happening more frequently than you realize. In one study, over half of the employees surveyed (57%) considered it acceptable to make off-contract arrangements if they can get a better deal.

Earlier this year, a procurement trends report co-sponsored by OfficeMax and Purchasing magazine revealed some intriguing statistics regarding office spend. Take a look:

Percent of office spend under management by procurement
0-20%   :   9%
31-60%   : 21%
61-90%   : 36%
91%+: 34%
Average contract compliance rates
0-20%   : 16%
31-60%   : 12%
61-90%   : 41%
91%+: 31%

That data tells me that most businesses have plenty of room for improvement when it comes to optimizing purchasing power, improving compliance, and achieving total cost management — all of which stems from knowing, and managing, supplier information with diligence, transparency, and risk awareness.

A year ago, businesses were pre-occupied with supply risk. Then, concern shifted to supplier solvency risk. Now we’re back to keeping one eye on commodity prices, even while we’re on the lookout for zombies, mavericks, and a variety of other supply chain threats (compliance, environmental regulations, sustainability concerns, etc.). Without a doubt, the lens of risk is constantly changing. However, successful companies don’t just throw out the eyepiece when it no longer works. Instead, they repeatedly readjust their focus so that they can better respond to both the threats and the opportunities in today’s business environment.

Thanks, Kevin!