Category Archives: Risk Management

Where Is Your Greatest Risk? Not Where You Think It Is.

As per a recent piece by Simchi-Levi, Schmidt, and Wei in the current issue of the Harvard Business Review on managing unpredictable supply chain disruptions, there is little correlation
between how much a firm spends annually on procurement at a particular site and the impact that the site’s disruption would
have on company performance. In reality, the greatest exposures
often lie in unlikely places.

Moreover, in many supply chains, these exposures are typically not realized until a low-probability, high-impact event — such as a Hurricane, Earthquake, SARS outbreak, or other mega-disaster — occurs. In these situations, companies find out that they significantly underestimated the impact and are not adequately prepared because their traditional models for evaluating and preparing supply chain risk break down as there is typically a lack of historical data for low probability, infrequently occurring, high-impact events. (Big companies have to deal with poor supplier performance, forecast errors, and transportation breakdowns everyday and traditional risk models can thus adequately predict, and allow the organization to prepare for, these impacts.)

But, as the authors point out, it doesn’t have to be this way. Companies can not only determine the potential magnitude of a disruption without historical data, but can even do so without even knowing what the disruption is. This is because, at the end of the day, the specifics of a disruption don’t really matter — only its impacts do. Be it flood, famine, or fire — you don’t care why your factory isn’t producing — you only care that it isn’t and you have to find an alternate source of supply. And it is possible to model the impact of a disruption at any point of your supply chain without knowing the event that caused it, as an impact is either going to eliminate or cut off supply or production.

To this end if, as the authors indicate, you develop a mathematical model (that can be computerized) that focuses on the impact of potential failures at points along the supply chain (such as the shuttering of a supplier’s factory or the inaccessibility of a distribution center), rather than the cause of the disruption, you can quantify what the financial and
operational impact would be if a critical supplier’s facility were out of commission for, say, two weeks — whatever the reason. And that’s what you really care about.

In their paper, the authors describe a sophisticated linear optimization model that integrates predicted Time-To-Recovery (TTR) factors for each node (based upon historical recovery times for the supplier or distributor after a disruption) with Bill-of-Material (BoM), operational measures, financial measures, in-transit inventory levels, on-site inventory levels and demand forecasts for each product. When one node is removed at a time from this model, it can be used to find the supply chain response that would minimize the performance impact of the disruption (such as reducing inventory, shifting production, expediting transportation, or reallocating resources) and then calculate the resulting operational performance impact (PI). The node with the largest PI presents the greatest risk and is assigned the largest risk exposure index (REI) of 1.0 (and all other nodes are indexed relative to this value).

While you may need such a model to determine the full impact of a disruption, you don’t need such a complex model to determine the big hidden risks in your supply chain (which are often the result of sole-source supply arrangements somewhere in the supply chain, possibly at tier two or three). All you really need to do is map the full supply chain for every product you produce down to the raw material supply. Then you can quickly identify sole-source supply, single-factory or single location production, bottle-necks in the distribution network, etc. which lead to hidden risks.

And once you have identified the major risks, and collected the data to appropriately access the potential impacts of a disruption, you can build local models to analyze the extent of the risk exposure. And as you build more and more models, you work your way up to the point where you can begin working on the model described by Simchi-Levi, Schmidt, and Wei, incrementally. No big bang modelling approach needed. All you need to do is get underway with a good supply chain visibility solution, such as Resilinc‘s.

Are You Losing 2% of Your Revenue to Fraud? Are You Sure?

Between two thirds and three quarters of organizations experience fraud every year and the average organization affected by fraud loses 2.0% of revenue in the UK and EU and 1.7% in the US. This means that, even if your organization is not aware of fraud, there’s still a 66%, or more, chance that it is being defrauded. And it should know for sure, one way or the other. Because if fraud isn’t detected, dealt with, and discouraged quickly, you end up with headlines like this:

  • Alibaba.com CEO And COO out because of vendor fraud
    involving over 2,000 suppliers and 100 staff members
  • Former Vodafone employee facing fraud charges
    for the fraudulent requisition of €2.3 million of services
  • The great Sainsbury’s potato fraud:
    Jail for vegetable buyer who took £5 million in bribes

Which all have one thing in common — each of these frauds involved the payment of millions of dollars to fake suppliers. Not over billings, not duplicate billings, fake billings from fake suppliers. A situation that can easily be prevented with a good supplier information management or supplier visibility system that validated the accuracy of the supplier information and the legitimacy of the supplier. If the supplier information management and visibility system cannot validate the existence and legitimacy of the supplier, then AP knows that a detailed manual investigation should be undertaken before the supplier is authorized to submit invoices, and that such authorization should require at least two sign-offs by high-level personnel. This simple process, which is yet another example of the value of supply chain visibility, would prevent fraudulent invoices from non-legitimate suppliers from ever getting in the system and greatly decrease the organization’s exposure to fraud.

And this is only one example of the many types of savings opportunities that good Supply Chain Visibility can bring your organization. For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think, sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.

The Value of Visibility: It’s More Than You Think

When someone mentions supply chain visibility, the first thought that probably jumps into your head is a foundation for resiliency, which it is, as we discussed in our last post on the value of visibility in your supply chain. The potential to prevent a major supply chain disruption that could cost an organization an average of 10% against potential revenue on the affected product lines for two years running and reduce that loss to 2%, or less, is huge. But it’s not the only savings enabled by good supply chain visibility.

In addition to per-event savings associated with disruption avoidance and crisis containment, there are ongoing savings associated with spend under management. Even if your organization employs advanced sourcing methodologies that include spend analysis and decision optimization, the value of multi-tier visibility goes well beyond what traditional advanced sourcing models can deliver.

For example, a 2012 FERMA4 study found that the majority of firms with advanced risk management practices, built on good end-to-end supply chain visibility, had EBITDA growth over 10% and revenue growth over 10%. The EBITDA growth came from lower costs. The lower costs resulted from better sourcing decisions enabled by better multi-tier supply chain visibility and total cost-of-ownership models. That’s a double digit savings! Up until this point, only spend analysis and decision optimization could consistently deliver that level of savings.

The observant among you might be thinking that this study is just one data point and maybe these savings aren’t obtainable by everyone because it’s statistical, but the proof doesn’t end there. In 2011, Haitao Li and Mehdi Amini undertook a comprehensive computational study on a five-tier multi-echelon supply chain for PC assembly that analyzed over 2,000 scenario variations and found that multi-tier visibility drives cost savings of 15% on average. This study, which built in the impacts of potential, and likely, supply chain disruptions at various levels of the supply chain, demonstrated that most optimal awards that only consider the first tier are highly dependent on the input assumptions and extremely susceptible to disruptions, which can increase the cost by up to 60%! Even the tiniest of perturbations was found to increase the total cost by over 5%. But when multiple tiers were considered and awards were made that were disruption resistant, the average cost savings came out to 15%! This is huge! (Especially given that, according to research conducted by IBM referenced in our last post, emergency re-sourcing efforts often increase costs by up to 30% over the optimum solution.)

This means that, even if your organization is lucky enough to be among the 14% that don’t experience a major disruption within the next year, the ROI from better sourcing decisions alone will pay for a supply chain visibility solution many times over. How much will you save? Up to 1.7% of revenue every year. (An average manufacturer will spend 59% of revenue on direct materials and services and 89% of this spend under management. Assuming that at least 1/3rd is sourced annually, and that the savings are only 10%, as per the FERMA4 study, that’s savings opportunity of 0.10 * 0.33 * 0.89 * 0.59 = 0.017 = 1.7%) So, if your organization does 1 B in revenue, it can expect a savings opportunity of up to 17 M a year from disruption-resistant awards to the supply base (which will, by their very nature, minimize the number of small disruptions the organization experiences).

And this is only one aspect of the year-over-year recurring savings that Supply Chain Visibility can bring your organization! For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think (Registration Required), sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.

MAP-21 is in Effect. Are You Compliant? Part II

In Part I, we noted that MAP-21, or the Moving Ahead for Progress in the 21st Century Act (1.3MB PDF), took effect on October 1, outlined some key sections of interest, and asked if your Supply Chain was compliant?

Today we are going to outline some of the key provisions that you should be aware of if you are not already.

Motor Vehicle and Highway Safety Improvement Act: Subtitle B

  • 31206
    Amends Chapter 327 of title 49 of the United States Code to increase the penalty amounts by a factor of 5 to 10, depending on the offence.
  • 31207
    A person
    may not sell, offer for sale, introduce or deliver for introduction
    in interstate commerce, or import into the United States any motor
    vehicle or motor vehicle equipment if the vehicle or equipment
    contains a defect related to motor vehicle safety about which notice
    was given.
  • 31208
    manufacturer (including an
    importer) offering a motor vehicle or motor vehicle equipment for
    import shall provide, upon request, such information that is necessary
    to identify and track the products, including (1) the product name and manufacturer address and (2) each retailer or distributor to which the manufacturer directly supplied motor vehicles or motor vehicle equipment.
  • 31209
    Amends section 30166(c) of title 49 of the United States Code to require entry into a memorandum of understanding with
    the Secretary of Homeland Security for inspections and sampling
    of motor vehicle equipment being offered for import to
    determine compliance with this chapter or a regulation or order
    issued under this chapter    .

Motor Vehicle and Highway Safety Improvement Act: Subtitle C

  • 31307
    No motor vehicle manufacturer,
    part supplier, or dealership may discharge an employee or
    otherwise discriminate against an employee with respect to compensation,
    terms, conditions, or privileges of employment because the employee (or any person acting pursuant to a request of the
    employee) —

    1. provided, caused to be provided, or is about to provide
      (with any knowledge of the employer) or cause to be provided
      to the employer or the Secretary of Transportation information
      relating to any motor vehicle defect, noncompliance, or any
      violation or alleged violation of any notification or reporting
      requirement of this chapter;
    2. has filed, caused to be filed, or is about to file (with
      any knowledge of the employer) or cause to be filed a proceeding
      relating to any violation or alleged violation of any motor vehicle
      defect, noncompliance, or any violation or alleged violation of
      any notification or reporting requirement of this chapter;
    3. testified or is about to testify in such a proceeding;
    4. assisted or participated or is about to assist or participate
      in such a proceeding; or
    5. objected to, or refused to participate in, any activity
      that the employee reasonably believed to be in violation of
      any provision of chapter 301 of this title, or any order, rule,
      regulation, standard, or ban under such provision.

Commercial Motor Vehicle Safety Enhancement Act: Subtitle A

  • 32107
    The Secretary shall require a registrant
    to update its registration under this section not later than
    30 days after a change in the registrant’s address, other contact
    information, officers, process agent, or other essential information,
    as determined by the Secretary    .
  • 32109
    The Secretary
    shall revoke the registration of a motor carrier if the Secretary
    finds that the carrier is or was conducting unsafe operations
    that are or were an imminent hazard to public health or property    .
  • 32110
    The Secretary may withhold, suspend, amend, or revoke any
    part of the registration of a person required to register under
    chapter 139 for failing to obey a subpoena or requirement of the Secretary under this chapter to appear and testify or produce
    records    .

Commercial Motor Vehicle Safety Enhancement Act: Subtitle B

  • 32203
    The State shall report a conviction of a foreign
    commercial driver by that State to the Federal Convictions
    and Withdrawal Database    .
  • 32204
    Updates section 31310 to state that a foreign commercial
    driver shall be subject to disqualification under this section    .

Commercial Motor Vehicle Safety Enhancement Act: Subtitle C

  • 32302
    The Secretary has one year to establish a national registry of medical examiners in accordance with section 31149(d)(1)
    of title 49, United States Code and develop requirements for a medical examiner to be
    listed in the national registry.
  • 32304
    The Secretary has one year to issue final regulations minimum entry-level training requirements for an individual
    operating a commercial motor vehicle.

Commercial Motor Vehicle Safety Enhancement Act: Subtitle E

  • 32504
    The Secretary may enforce an imminent hazard out-of-service order by towing and impounding a commercial motor vehicle until the order is rescinded.
  • 32505
    Penalties are increased by a factor of 3.5 to 20, depending on the penalty.

Commercial Motor Vehicle Safety Enhancement Act: Subtitle I

  • 32915
    A motor carrier
    may not broker transportation services unless the motor carrier
    has registered as a broker under this chapter.
  • 32915
    A motor carrier registered under this chapter may only provide transportation of property with
    (A) self-propelled motor vehicles owned or leased by
    the motor carrier; or
    (B) interchanges under regulations issued by the Secretary
    if the originating carrier
      (i) physically transports the cargo at some point;
    and
      (ii) retains liability for the cargo and for payment
    of interchanged carriers …
  • 32918
    Each broker subject
    to the requirements of this section shall provide financial security
    of $75,000 for purposes of this subsection, regardless of
    the number of branch offices or sales agents of the broker    .
  • 32921
    Requires that a carrier demonstrates, before being registered, through
    successful completion of a proficiency examination established
    by the Secretary, knowledge and intent to comply
    with applicable Federal laws relating to consumer protection,
    estimating, consumers’ rights and responsibilities, and
    options for limitations of liability for loss and damage    .

Hazardous Materials Transportation Safety Improvement Act

  • 33010
    Increases already large civil penalties by 50% to 75%.

Again SI would like to state that this isn’t an exhaustive list of items that you need to be aware of as a broker or carrier, but just a starting one. If you are a freight broker or carrier and someone on your staff hasn’t at least scanned this end-to-end, it would probably be a good idea, especially considering all of the increased penalties for non-compliance.

MAP-21 is in Effect. Are You Compliant? Part I

MAP-21, or the Moving Ahead for Progress in the 21st Century Act (1.3MB PDF), took effect on October 1. Is your Supply Chain compliant?

At 584 pages, this act is a monster. Probably the most relevant to your supply chain and logistics activities is Division C which contains the Transportation Safety and Surface Transportation Policy, which starts on page 328 and ends on page 440, which contains the Motor Vehicle and Highway Safety Improvement Act, the Commercial Motor Vehicle Safety Enhancement Act, the Hazardous Materials Transportation Safety Improvement Act, and the Sport Fish Restoration and Recreational Boating Safety Act of 2012, with the first three being the most relevant.

In these acts, the most obvious sections of interest are 31206 that define increased penalties for odometer fraud, 31207 that extends prohibitions on importing non-compliant vehicles and equipment to defective vehicles and equipment, 31208 on the conditions on importation of vehicles and equipment and 31209 on port inspections in subtitle B of the Motor Vehicle and Highway Safety Improvement Act; 31307 on whistleblower protections of subtitle C of the Motor Vehicle and Highway Safety Improvement Act; 32107 on increased penalties for operating without registration and 32109 and 32110 on revocation of registration for imminent hazards and failure to respond to subpoena of subtitle A of the Commercial Motor Vehicle Safety Enhancement Act; 32203 on state reporting of foreign commercial driver convictions, 32204 on the authority to disqualify foreign commercial drivers, and 32205 on the revocation of foreign motor carrier operating authority for failure to pay civil penalties of subtitle B of the Commercial Motor Vehicle Safety Enhancement Act; 32302 on driver medical qualifications and 32304 on commercial motor vehicle operator training of subtitle C of the Commercial Motor Vehicle Safety Enhancement Act; 32504 on impoundment and immobilization of commercial motor vehicles for imminent hazard and 32505 on increased penalties for evasion of regulations of subtitle E of the Commercial Motor Vehicle Safety Enhancement Act; 32915 on additional motor carrier registration requirements, 32918 on financial security of brokers and freight forwarders, and 32921 on additional registration requirements for household goods motor carriers of subtitle I of the Commercial Motor Vehicle Safety Enhancement Act; and 33010 on civil penalties of the Hazardous Materials Transportation Safety Improvement Act.

This, of course, isn’t an exhaustive list of items that you need to be aware of as a broker or carrier, but just a starting one. For example, in 31105 on National Priority Safety Programs, which amends section 405 of title 23 of the United States Code, there is a section on distracted driving grants that authorizes the secretary to award a grant to any state that prohibits texting while driving and youth cell phone use while driving. This is likely going to result in (additional) cash-strapped states banning texting and (youth) cell phone use while driving. (So you better have a policy in place preventing your drivers from texting behind the wheel if you don’t already!)

So what is relevant in the sections of interest? Stay Tuned for Part II.