Daily Archives: July 7, 2010

By The Time You Detect Financial Risk …

… it’s too late. As per this article on the quality and performance connection of supply risk, indicators of financial risk are usually preceded by a slow decline in quality or performance that is difficult to detect from delivery to delivery as suppliers, looking to survive, begin to cut corners that they hope will go unnoticed but which often compound the farther up the supply chain you go.

As the author, Jim Lawton of D&B notes, you need to consider supplier performance metrics to be the best leading indicator of overall supplier financial viability. This means that you need to define a process to monitor quality and performance from a risk perspective. Do this by:

  • identifying which areas of supply where quality, performance, and/or financial risk factors are likely to be most pronounced;
  • defining a way to track and measure performance using delivery, performance, and other system data;
  • aggregating the data regularly for analysis;
  • creating corrective action plans to be implemented as soon as elevated risk is development; and
  • creating a closed-loop process that continually monitors and assesses risk information to insure that risks are detected early enough to permit the corrective action plans to be undertaken successfully.

And maybe you won’t be the one that finds out about an impending supplier bankruptcy after it’s too late!

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How to Build a Bat House (Repost)

Once upon a time, there was a beautiful old wooden hotel in the North Country. The owner had coaxed an award-winning chef with a new family away from the hurry-scurry of the big city, so the food was fabulous. The staff were locals imbued with the history of the region and an encyclopedic knowledge of hiking trails, scenic vistas, off-the-beaten-track cross-country trails, and so on. The cleaning staff took pride in ensuring that floors and woodwork were polished, the rooms were well-equipped, and bathrooms were spotless. The fixtures and furniture were old but functional, and the atmosphere was charming, down to the homemade quilts on the beds, each one individually selected.

Eventually the owner, beset with health problems, sold the business to a bright young entrepreneur. Several years later, there was an economic downturn, and revenues fell off. The new owner seized the opportunity to cut costs. He replaced the chef with the sous-chef, at a much lower salary. He revised the menu to remove the most costly items. He instituted a retirement buy-out for the original staff, replacing them with rent-a-clerks and teenagers. He replaced the maids with a commercial cleaning service, and traded the difficult-to-clean quilts for store-bought linens and coverlets. He was able to decrease the room rates by 25%.

To the new owner’s dismay, revenues continued to fall. Former customers were turning up at the local Best Western and Holiday Inn franchises, whose newer buildings and minimalist rooms consistently undercut his prices, no matter how much he lowered them. He was forced to close one wing of the old hotel, then another, and more of the staff were let go. Finally, he had to shut the business entirely. After a while, windows blew out and bats moved in, hence the title of this story.

About six months later, the young man met the old owner for dinner. “I’m sorry about what happened to the old place,” he said. “The economy tanked, and no matter what I did to cut costs and lower prices, we just couldn’t recover.” The former owner stared into his wine glass for a while. Then he shrugged, looked up, and asked, “What reason did people have to stay in your hotel? The food was mediocre; the rooms had lost their charm; you fired everyone who cared about the guests, or who could help them enjoy their visit; and poorly-paid commercial cleaners will do the bare minimum, if that.” The young man asked, “What should I have done?” The old man shook his head. “Who knows,” he said. “But people always need vacations, and when times are tough they want an extra-special place to stay. I’d have made it more special, not less special; and I might even have increased my rates and my advertising. Heck, if someone is paying $200 a night for a room, $220 isn’t much of a sacrifice.”

The young man smiled tolerantly. “Yes, but this downturn is different. Everyone’s in trouble. Businesses are failing left and right.” The old man refilled his glass. “I’m sure you’re right,” he said. “Who can say whether my strategy would have worked?” The two men began applying themselves to their meals. Between forkfuls, the young man asked, “So, what are you doing with yourself these days?” “Oh, ” said the old man, “nothing special. The doctors eventually figured out what was wrong with me and fixed it, so I got restless and bought an old ski lodge about a year ago. We renovated the rooms, brought in a French chef, put in an outdoor 4-season pool, and recruited a bunch of savvy locals to run the place.”

How are you doing?

“We’re booked solid.”

Editor’s Note: This post, contibuted by Anonymous, originally ran on March 31, 2009. It is being reposted because too many businesses are still building bat houses. If this trend continues, it’s likely that there will be no avoiding a double dip recession that everyone is so fearful of. Just like Marketing is NOT optional, neither is forward advancement. There is no holding pattern in business. There is victory or death. Choose one.

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