Daily Archives: September 18, 2013

Some Risks Can’t Be Squashed? Can Co-opetition Help?

Good visibility, planning, and mitigation can go a long way to eliminating, or at least circumventing, a large number of internal and external risks in an organization’s supply chain. It can improve quality, smooth transportation, and minimize production line downtime and stock-outs in situations where the risk – such as product contamination, risky transportation routes (due to piracy), and possible port closings (due to impending strikes) can be recognized in advance. However, even though we know some regions are high risks for natural disasters such as hurricanes, earthquakes, tsunamis, and volcanic eruptions, we are generally unable to predict such events with more than a few days warning at best. These risks will never go away – and in situations where only a few suppliers can supply a given raw material or component – and can’t be easily mitigated.

So what is an organization to do? Well, it should start by making sure it has a good Contingent Business Interruption (CBI) insurance policy in place that covers supply chain interruptions, but that doesn’t solve the problem. It can proceed by making sure it knows every backup source of supply, but if the disruption results in a worldwide market shortage, someone is going without and this doesn’t necessarily solve the problem either. It can do its best to identify alternative designs that can work with different, more easily obtained, raw materials – but if such alternate designs are considerably more expensive or less rugged, this doesn’t help either.

As per the title of this posts, some risks can’t be squashed. So how does an organization maximize its resiliency? Co-opetition, short for cooperative competition, might be the answer. Generally speaking, in most markets with constrained supply, there are only a few big companies that represent most of the demand. Think hard drives – how many hard drive manufacturers are there? Cell phones? Motion sensors for game consoles? And every company in the market knows who the other big companies are. And, at any given time, some of these companies will be overstocked and others will be understocked as the market demand sways from one product to another, in ways that are not always predictable.

What if these companies took a lesson from the BRIC, which just banded together to create a $100 Billion buffer to help protect their economies from shocks when G20 leaders warned that the global recovery is still at risk from volatile capital flows. China is contributing 41 Billion to the fund, Brazil, Russia, and India will provide 18 Billion each, and the new BRICS member, South Africa, is coughing up 5 Billion. The fund — called the Contingent Reserve Arrangement — is being designed to provide member countries with an emergency cushion of cash during times of crisis.

Instead of creating monetary funds, the companies in the co-opetition could create virtual emergency raw material / component pools where member companies affected by a disruption could obtain a limited supply from their competitor or their competitor’s supplier agains the reserve locked up by their competitor. Each of the companies would share in the pain caused by the disruption. And although this means that some companies would, as a result, feel the result worse than they would otherwise as they would be giving up some supply to their competitors, they could take comfort knowing that the next time a disruption hit them severely, they will feel the blow a lot less than they would otherwise as all of the co-opetition members will be sharing the pain. Done properly, each company in the collective could insure that, no matter what, it would be able to keep operating at a baseline and the risk of a severe or catastrophic disruption would be minimized for all members.