In our last post, we discussed the top three environmental risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a geopolitical perspective.
Corruption can take many forms — bid rigging, bribery, collusion, fraud, embezzlement, organized crime, price fixing, and thievery just to name a few. Each of these can be devastating to your supply chain. Bid rigging, collusion, and price fixing can significantly increase your costs. Bribery and thievery can result in a loss of your IP and product plans which could negate years and tens of millions to hundreds of millions of research and development. Embezzlement and fraud could drain your organization of necessary operating capital and organized crime could result in an entire warehouse of inventory disappearing overnight. This is one risk that’s never going away.
Terrorism is on the rise, and terrorists are getting their hands on more powerful and destructive weapons by the day. And it’s not just religious extremists that you have to be afraid of. There’s also anti-establishment extremists, new-age radical groups, and anarchists. Each of these groups could decide that your goods or services are against god, pro-establishment, anti-progress, or too orderly and decide that your corporation needs to be taken down here and now. One well planned strike and your factory, or headquarters, is a smouldering crater.
01: Geopolitical Conflict
Civil unrest can often quickly escalate into civil war and civil war can quickly result in cities, counties, and even provinces becoming inaccessible and if the conflict escalates, entire borders will close. Once a border closes, nothing gets in our out. Your factories become cut off from the rest of the world, and all of your inventory, tying up all of your capital, becomes inaccessible for an indeterminate amount of time. And your supply management organization, like the goods in your cut-off factory, is at risk of total destruction.
In our last post, we discussed the top three societal risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from an environmental perspective.
03: Climate Change
Climate change may not seem like a big risk, but it can have drastic consequences on your operations. Not only can it increase the likelihood of (tropical) storms, floods, blizzards, and ice storms, which can destroy your factories, wash away your delivery trucks, trap your workers in the factory for a week, and take down entire power grids, but it can wreak havoc on your operations. For example, if you want to drill for oil in the oil sands, you need the ground partially frozen. If six months are required to extract a year’s worth of oil but by the time the ground freezes there will be less than four months of drilling time, problem. And if the risk of flooding is significantly increased, so are the chances of your supply chain being brought to a grinding halt.
02: Earthquakes & Volcanic Eruptions
The 9.0 magnitude earthquake in Japan back in March demonstrated the devastation that earthquakes could have on global supply chains. The earthquake and resulting tsunamis not only damaged or destroyed thousands of homes and hundreds of factories, which resulted in almost 20,000 deaths, but also resulted in the immediate declaration of a state of emergency at a nuclear power plant when dangerous levels of radiation escaped the Fukushima No. 1 (Daiichi) plant. In addition, it triggered the immediate shut down of 15 of Japan’s nuclear power stations and a crisis at the Tokai No. 2 Power station was narrowly averted.
However, this earthquake is nothing compared to what a well placed major volcanic eruption can accomplish. Not only can a major eruption near the edge of a tectonic plate trigger an earthquake, but it could launch enough ash into the air to make air travel through a region impossible for months. The recent volcanic explosions in Iceland are nothing compared to some of the eruptions that have happened in the last few thousands years. Not even the eruption of Mount St Helens in 1980 was very big. It only erupted 1 cubic km of lava. The largest eruption, in terms of java discharged, in the last 99 years was Pinatubo in the Phillipines in 1991. A whole 10 cubic kms of lava was released. The 1912 eruption of Katmai in Alaska released 12 cubic kms. And this is nothing compared to the 1815 eruption of Tambora in Indonesia that released 100 cubic kms of lava. And students of history are aware of how Mount Vesuvius buried Pompei under 4 to 6 m of ash and pumice. The eruption of Krakatoa in 1883, which was heard across the world, released so much ash into the air that it caused a volcanic winter. Temperatures worldwide dropped an average of 1.2° C for the next 5 years as a result of ash that was ejected 20,000 ft high. If this happened today, air travel would be interrupted for at least six months in the region. The interruptions in air travel as a result of the Icelandic explosions would be minor in comparison.
The recent floods in Thailand are a perfect example of the significant impact that floods can have on global supply chains. With insurance losses expected to reach 20 Billion (Insurance Insight) with over 10,000 factories impacted to various extents, a single flood can cause so much damage that it could literally bankrupt an operation. The automotive sectors and electronic sectors were impacted the hardest — more than 400 Japanese companies in these sectors suspended operations or lowered output as a result of the floods.
And with global warming, which is causing many of the ice flows in the arctic to break up, the risk of flooding is greatly increasing. Many of the worst floods in history were ice-jam floods resulting from “breakup jams” which force ponding upstream and a rapid release of water when the ice dams breach. This is what happened in (April) 1952 on the Missouri River in (Bismarck) North Dakota where an eroding ice dam resulted in flow increasing from about 2,100 m3/s to more than 14,000 m3/s in less than 24 hours. The river rose 5 feet in less than 2 hours and submerged nearly everything south of US Highway 10. Fortunately, this was not a densely populated area, otherwise, instead of 200 houses being destroyed, there would have been 20,000 houses destroyed and likely thousands of deaths. If this happened near your factory, it would be wiped out almost instantaneously.
In our last post, we discussed the top three technology risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a societal perspective.
03: Economic Disparity
Economic disparity, also known as economic inequality, refers to the disparity in the distribution of economic assets and income. Economic disparity can negatively impact a Supply Management organization in a number of ways. An obvious impact is if the majority of the target population in the geographic regions in which the parent organization operates, and wishes to sell the product, cannot afford the goods or services being offered, than Supply Management will be stressed to lower the price point or risk serious resource cutbacks as the organization faces reduced revenues and operating resources. A less obvious impact is that economically disadvantaged groups may also have restricted access to food and water. This in turn increases the severity of the top two societal risks to your supply chain.
02: Food Security
People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada this year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants. Try ensuring supply with no distribution mechanisms for raw materials, no working production lines, and no warehouses to store anything.
01: Water Security
Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water (as per the Water Energy Nexus). For example, in the USA, about 2 US gallons of water evaporates to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute. No water, no goods, no components, and no energy. And if water gets too scarce, so is food. And a vicious downward societal cycle will begin.
I’m sure you expect us to say this but it’s worth repeating: Succession Planning has to be part of an overall Competency Based Talent Management (“CBTM”) strategy. We start with the basic premise of Succession Planning which is ensuring that you have sufficient qualified bench strength for key roles in the future. This means that you need to know what your key roles are and the competencies you need so you can determine if you have qualified candidates. By the way, those competencies need to be defined for the future, not today. All of this requires a CBTM strategy to ensure that you have managed the significant risk of not having the right talent when you need it. To further illustrate this point, your Succession Planning process will need to be tightly integrated with your recruiting process to ensure that the right types of competencies are being used to select potential candidates.
If you truly believe that your people are at least one of your critical assets, then why would you not manage your risk of replacing those critical assets, especially when these assets can walk away at will and there really is no expected life of that asset for you to plan around? It would seem to me that the risk of replacing these assets is far greater than any other asset in your organization? Yet we continue to absorb that risk without any mitigation plan? And this is not a risk that you should pass on to your HR partners to manage on your behalf. You should lead this just as you would your overall CBTM strategy and actively use your HR partners as consultants. Please do manage your expectations in dealing with your HR department as most of them are not geared up for this kind of work yet. You actually will be leading them in some cases and become the test bed, and leader, for the rest of the company
Successful Succession Planning necessarily starts with an understanding of what your future competency needs are for key roles and then designs a strategy that encompasses both an internal and external sourcing process. While some of the “high potential” programs do an adequate job of at least identifying some of the replacement candidates, even fewer have a pro-active process in place for their success. “High potentials” cannot be a replacement for a Succession Planning strategy within the context of CBTM. A comprehensive understanding of your company’s long term business strategy is critical to knowing what your future competency needs are going to be. If your company is going to be much more active in the global market than it is today, then your Succession Planning strategy of replacing Joe, who is your most critical employee today with Joe’s competencies, will expose you to significant risk. And if those competencies are not present in your organization, then you will have to start developing them internally and acquire them externally to manage your overall risk.
Let me try and conclude the conversation with some quick summary thoughts on a very complex issue. Succession Planning:
- must be part of an overall CBTM strategy – the core of this process and the first step is a competency model for the future that is tightly integrated with your company’s long term strategy
- must be approached as the management of a significant risk of a critical asset and therefore must be sponsored at the highest levels and directly led by you, not HR
- cannot be replaced by a “high potential” program
- must incorporate both internal and external sourcing strategies
- is not a periodic event but an integrated, pro-active, ongoing process
- has a retention programs as a key component
A successful Succession Plan as part of an overall CBTM strategy is key to sustainable value creation. It will also position you as an innovative leader in your company and position your organization as adding value beyond the confines of a narrow functional definition. Your organization will also be looked at as a leadership factory where other executives come to pluck the best candidates to seed their organizations.
If you are interested in getting involved or would like to follow this topic further, here are a series of critical activities coming up:
- Release of the results of the Executive Forum we just facilitated at the IACCM Global Forum for Contracting & Commercial Excellence on Talent Management.
- A major research project to not identify the problem one more time but to identify Next Practices to solve the problems.
- A webinar with IACCM on CBTM.
- A White Paper to focus on Next Practices in CBTM.
Please contact Crystal Jones at crystalj <at> thempowergroup <dot> com for more information.