Category Archives: Norman Katz

Managing Military Supply Chain Risk

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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 archive.

To highlight the importance — and invasiveness — of the concept of the supply chain, take a look at Section 254 of the Duncan Hunter National Defense Authorization Act For Fiscal Year 2009.

As stated in this section: “The Secretary of Defense shall conduct an assessment of selected covered acquisition programs to identify vulnerabilities in the supply chain of each program’s electronics and information processing systems that potentially compromise the level of trust in the systems.”

The assessment includes identification and prioritization of vulnerabilities, recommending ways of managing supply chain risk, and identifying lead Department of Defense personnel for developing an integrated strategy for the management of risk throughout the supply chain.

Of critical importance in the military supply chain is the acquisition of electronic components. The goal is to ensure full operational readiness of US military forces. With the heavy reliance on technology to support the US military, the failure of an electronic component could be costly, not just in terms of tax dollars but also in terms of human life.

Repeated through this section is the word “trust“. In fact, it is repeated eight times not including the definitions of the terms “trust” and “trusted” in the last two paragraphs or the title of the section, Trusted Defense Systems.

I think Section 254 can be summarized as follows: Trust, and verify.

And it’s not just the electronic components that require verifiable trust, it’s also the verifiable trust in the “information processing systems” used in the supply chain. (It sounds to me like they’re talking about the computer systems and communication networks.) Verifiable trust needs to also exist in the design and fabrication processes, packaging, assembly, and quality assurance testing.

So, how should verifiable trust in supply chain relationships work? Perhaps true collaboration between trading partners who monitor each other and (immediately) report discrepancies, especially when the necessary goal is 100% accuracy.

This reminds me of a slide in my supply chain fraud presentation, which simply states: “You can outsource manufacturing, but you can’t outsource responsibility.” As opposed to verifiable trust, it would seem that for too long some supply chains have been operating under the concept of blind trust.

Retailers have been establishing their own quality assurance departments to verify that children’s toys are lead free. Verifiable trust could have helped avoid the deaths from tainted pet food. Tainted peanut-based foods may have never made it to the store shelves with just trust that no supplier would purposefully want to damage their reputation by harming the consumers who buy their products. Shouldn’t retailers and grocery stores be able to trust their suppliers to manufacture quality products that, when eaten or used accordingly, will not cause injury or death?

An argument is that this would come at a cost that consumers who must be willing to bear higher prices, or that companies must be willing to accept in terms of higher operating costs that will reduce profit margins, upsetting financial analysts and thus lowering stock prices which will then upset stockholders, especially if it results in lower dividends. But isn’t this a responsibility that a company manufacturing a product should be willing to — if not expected to — bear? Shouldn’t a company be valued more on the quality of its products then the quantity of its profit margin?

Maybe the government got this one right, folks. Maybe we need more verifiable trust in our supply chain relationships, especially the ones involving the products we purchase as consumers. It’s okay to trust, but verify too.

Norman Katz, Katzscan

Assessing Risk

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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 archive.

I live in South Florida, and for one half of each year we worry about hurricanes. Actually, we start worrying about one month before our six-month hurricane season begins on June 1st; hurricane season officially ends just after Thanksgiving on November 30th.

(At least with hurricanes we’ve got some warning which we’re very grateful for; earthquakes and twisters provide little advance notice, if at all.)

I use life in a hurricane zone when discussing risk analysis.

Let’s take a look at a risk analysis for hurricane season in South Florida based on some risk characteristics:

  • Occurrence: Hurricane season is guaranteed to happen once per year (frequency), though the likelihood of a hurricane strike is unknown.
  • Control: We can’t control the weather, but we can control other things that create risk.
  • Severity: We cannot mitigate the strength of a hurricane but we may be able to reduce the impact it has to our lives and businesses through various preparations.
  • Interruption: Can we continue through a hurricane strike or will we be forced to recover after a period of downtime?

Once the characteristics of a risk are determined, risks can be plotted on a chart or given a numerical ranking, allowing us to determine which risks should be addressed in an order of priority. This analysis can also be used to determine the cost of the risk versus the value of addressing it.

The exercise of performing a risk analysis has the benefit of uncovering risks to your organization that you may have previously not considered. The Risk Assessment is part of the COSO framework used for Sarbanes-Oxley compliance, so for public companies this is a requirement.

The failure to identify risks is a risk in-and-of itself. I would submit that knowing about a risk and knowing that something could be done about it is pretty much just as bad as not bothering to identify risks in the first place.

Norman Katz, Katzscan

Are Your Customer Support Services Creating Risk?

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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 archive.

Outsourced supply chain services are very common these days. Freight forwarders, logistics providers, warehouse services, data integrators (especially those involved in Electronic Data Interchange), and the like all provide valuable skills in their respective specialty areas.

And they’ve all got to handle customer support communications (calls and e-mails) from their clients.

Whether or not it’s the nature of customer support personnel to be friendly and helpful, it’s certainly a (big) part of their job function. But when the desire to provide assistance crosses the line of expertise, the customer support person — and the company they represent or work for — can place the client at risk.

Often the role of the customer support person is one of objective knowledge, such as how to use a software application from a functional standpoint or to provide information about how their company’s products and services are utilized.

But when customer support advice crosses the line to be subjective, this is where trouble can occur.

Interpretation of a trading partner’s vendor compliance guidelines, knowledge of import/export laws, etc. are not typically areas of expertise that a customer support person is qualified to address. The passing along of bad advice can cause vendor compliance chargebacks or regulatory fines (if not worse) for their customers.

It’s very important that service-related companies educate and train their customer support personnel on exactly what questions they can and cannot field, and what answers they can and cannot provide. Front-line customer support personnel must also be informed that the kind refusal to answer questions not directly related to their company’s core products and services might evoke a harsh attitude from the calling customer, and in these cases the call should be transferred to a supervisor or manager.

Service providers would also do well to educate their customers as to realm of areas of information their customer service support staff are qualified to answer. Proactively informing customers in the sales contract and on the company web site what information the service provider is (and even is not) responsible for should help to mitigate calls in the first place.

It’s important to try and remove the burden of being forced to provide an answer from the shoulders of the front-line customer support personnel; these people should not feel pressured by an irate customer to provide unqualified answers, nor should they be made to feel or believe that they are not providing quality professional services by kindly refusing to answer questions outside their realm of expertise.

By educating their customers, the service provider is able to lower operating costs of customer support by reducing incidences of customer support calls outside of the knowledge area. This reduces the time customer support people spend on non-value-added phone calls and e-mails, and, if the service provider has a toll-free help line, reduces the phone bill by decreasing the number and length of calls they are paying for. The same level of customer support staff is now able to provide a higher-level of qualified service to customers in both faster response time and being able to stay with the customer longer to ensure their questions have been answered.

The desire to be helpful should not come at the price of increased risk for the service provider or the customer. Knowing where certain lines are drawn, and ensuring those lines are not crossed, helps mitigate risk for all parties involved.

Norman Katz, Katzscan

A Perspective on Global Risk Management and the Supply Chain

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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 archive.

Aon has released their 2009 Global Risk Management Survey which lists, in order of priority, the top ten global risks, which are:

  1. Economic slowdown
  2. Regulatory/legislative changes
  3. Business interruption
  4. Increasing competition
  5. Commodity price risk
  6. Damage to reputation
  7. Cash flow/liquidity risk
  8. Distribution or supply chain failure
  9. Third-party liability
  10. Failure to attract or retain top talent

Aon reportedly surveyed 551 companies around the world in a variety of sectors; the respondents included government agencies, private enterprises, and public companies.

I don’t want to quibble about what should or should not be on the list, but I think I take a little issue with the order of things, namely that supply chain failure is ranked so low when the report recognizes that supply chain failure is linked to higher-ranked risks. Granted, I’m quite partial to supply chain issues, but that’s because I also recognize that the holistic (internal/external) supply chain touches so very much of an enterprise’s operations, and I often wonder if executives and other professionals consider the internal nature of their supply chains when they look at their operations, whether local or global.

So, what are the impacts to supply chain failures in regards to other higher-ranked risks?

  • Any supply chain failure will result in a business interruption at any point in the supply chain. The severity of the interruption will depend on the seriousness of the failure.
  • Supply chain failures can enable competitors to gain footholds with your customers. The failure to deliver first-quality products on-time in the needed quantity to the right destination can have your customers looking elsewhere to supply them the goods you’re selling.
  • Buyers may not have as much control over the prices of the goods they are buying, but through better forecasting and planning, contracts that lock in commodity prices can be secured and create a hedge against price fluctuations. This requires detailed knowledge of the supply chain from sales back through purchasing, and must balance sales forecasts with manufacturing & distribution throughput, and inventory storage capabilities and carrying costs.
  • The failure to perform quality checks through the supply chain can result in injury or death to those who consume or otherwise use your products, causing reputation damage and possibly allowing a competitor to gain a foothold against you with a customer. Why would a company pay for substandard raw material or components, and why would a company want to distribute similarly other-than-first-quality goods?
  • Cash flow can be severely constrained by holding too much raw material or finished goods inventories, especially when they go obsolete. Here again, detailed knowledge of the supply chain, from sales forecasting back through purchasing, can prevent excessive purchases and wasteful assembly or manufacturing efforts.

The supply chain is not just a homogeneous area of an enterprise, separate and distinct from the others. Whether looking at risk, fraud, or efficiencies, start with the supply chain and examine it in detail for what it is: a holistic overview of an enterprise comprised of interconnected links, where interruptions can travel and manifest themselves into something far worse than what they started out to be.

Norman Katz, Katzscan

Fixing Prices Causes Broken Supply Chains

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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 archive.

In the May 2009 edition of World Trade magazine, I read that three more global air carriers were found guilty of price fixing by the U.S. Department of Justice. For approximately six years, it looks like a total of 21 rival companies met with each other and conspired to set service pricing. The total fines exceed $1.8 billion, and three executives have been sent to jail.

Ouch … and shame on all of you.

As these air cargo companies were fixing prices they were also robbing their customers of competitive leverage in choosing an air cargo carrier. Price fixing is fraud and is illegal. In the United States, the Sherman Anti-Trust Act and the RICO (Racketeer Influenced Corrupt Organizations) Act can be used to prosecute against organizations that conspire to fix prices.

But the problem goes deeper, because with the price fixing supply chain performance metrics would have been skewed, also robbing the customers of the ability to accurately assess price-for-performance in air cargo shipping. By affecting this – and other – related metrics, customers could not accurately perform analysis to select the best air cargo carrier even while a current carrier was failing to meet performance requirements.

When service companies conspire to set prices, there may no longer the pressure to perform for competitive purposes. So what if performance slips a little? Without competitive prices, a customer may not likely jump from one company to another as long as performance is still within “tolerable” limits.

But here is where the greater problem can lie: As performance slips disruption to the supply chain grows, and costs through the supply chain increase. From empty spaces on store shelves to empty inventory positions, supply chains – whether regional, national, or global – rely more and more on tight timeframes. The impact of a few percentage point slippage in performance can mean lost sales and idle manufacturing shop floors. Compounding these costs, if coverage for poor performance causes buyers to increase stock levels – whether for raw materials or finished goods – this then forces these customer companies to hold higher levels of inventory which decreases cash reserves, robbing the companies of usable cash for other needs.

Expedited shipping to deliver goods to their final destination may now have to be incurred, and while this benefits those particular carriers – who may not have been involved in the price fixed conspiracy – here again the customer companies are forced to utilize cash to cover for the disruption due to fraud.

Higher operating costs increase a product’s Cost Of Goods Sold, which can ultimately be reflected in the higher price the consumer will pay for those goods, unless the company is willing to absorb those costs. However, the company’s profit margins are reduced, which, for public companies, can impact shareholder dividends and stock prices, so there may be reluctance for the company to absorb such higher operating costs because of the negative effect to financial performance.

This fraud is an excellent example of the cascading effect a disruption in one supply chain link can have across the entire length of the supply chain, and even beyond. Fraudsters don’t often consider the negative impacts of their crimes and the number of people that can truly be affected by their actions. Lots of honest employees at a few very large corporations had their lives adversely affected when the unethical and illegal actions of a few senior executives sent these companies crashing down like a toppled house of cards.

Isaac Newton’s Third Law of Motion states that “for every action there is an equal and opposite reaction.” Hmmmmm … I’ll bet Newton never considered how the damage wrought by so few could affect so many, and he might have amended his third law of motion if he had known about supply chains.

Norman Katz, Katzscan