Category Archives: Risk Management

Are You Doing It Wrong?

If you’ve been following the media, you know that we have reached a point were most major business publications are now putting focus on Supply Chain as your top risk and your top opportunity.

You also know that these same publications, and the solution providers that follow, and reference them, have been preaching the following solutions to not only tame the risk but increase the opportunity.

Comprehensive Category Management

Spot buying individual categories at market lows or evening running reverse auctions at opportune times is not category management. And for that matter, neither is an event that covers the entire category. At this point you probably think that the doctor is losing it a little, because how could it not be category management if you are addressing the whole category?

It’s Simple. Category Management isn’t just about grouping all seemingly related items and running an event, it’s grouping items that have related characteristics that allow the items to be sourced effectively under the same strategy. For example, while it might make theoretical sense to group printers, ink, and paper together — because you use them together, from a sourcing point of view, ink and paper often go better with office supplies and printers with hardware. You can probably get them thrown in for free with a server purchase. But that’s just the start. If you source a lot of metal parts, you should probably group them by primary metal, since the price of steel, aluminum, etc. will largely dictate their prices and it might even make sense to not only source all of the parts from the same supplier but even buy the metal on behalf of the supplier with your better negotiating power and/or credit rating.

Supply Chain Risk Monitoring

Natural and Man-Made disasters devastate supply chains when they result in raw material or product unavailability for weeks or months. When a company doesn’t understand their dependence on a single source or the risks that single source is subject too, they can figuratively get caught with their pants down to say the least.

As a result, most leading companies in the Risk Management arena are now tracking and monitoring their tier 1 supply base for not only missed deliveries, but late shipment dates and inquiring immediately when something is late shipping. However, by the time a shipment is late, it’s often too late to go to another source if the reason for the lateness is the lack of an important raw material. So the smarter companies also ask their suppliers to let them know when their suppliers miss a delivery. This is better, but sometimes this is still too late. You need to track the primary sources of the raw material and their ability to produce. Not only the companies, but their locations. All natural and man-made disasters in the region and then evaluated for impact and if the producer of the primary raw material or part is potentially at risk, they make sure, or ask their tier 1 supplier to make sure, that the raw material or product can still be delivered on time and if it can’t, these leading companies immediately seek a secondary source (or lock up available supply pre-emptively) — not two weeks after the tier 1 supplier required the raw material to meet the commit date.

Big Data

The only buzzword on par with big data is cloud. According to the converted, or should I say the diverted, better decision are made with better data — the more data the merrier. This sounds good in theory, but most algorithms predict demand, acquisition cost, projected sales prices, etc. based on trends. But these days the average market life of a CPG product, especially in electronics or fashion, is six months or less, and the reality is that there just isn’t enough data to predict meaningful trends on. Similarly, every disruption impacts the cost, and these disruptions are as unpredictable as future sales predicted using trend models with insufficient data.

You use all of the data available to validate your operations, procurement, and financial situation. Not to blindly predict future sales or prices. An over-reliance on big data is often more dangerous than not having data at all.

Do We Really Need Supply Risk Programs Anyway? (Repost)


This post originally ran on April 21, 2010. However, it is still as relevant today as it was then and, for those of you who did read it before, not too much of a distraction to you as we approach the World Cup Final :-;


Today’s guest post is from Pierre Mitchell, Director, Procurement Research and Advisory for The Hackett Group.

OK, now that I have your attention. Am I being provocative? Yes … and no. If the purpose of supply risk management is to ensure supply that is: available, reliable, high quality, well priced, supporting lowest TCO, ethically sourced, etc. (per the enterprise mission and brand), then we really “just” need to clarify what constitutes the performance of supply and the causal factors which impact it. But, this is a big “just”. It means first translating the performance of supply from the business (i.e., the true ‘risk owners’ who ultimately own the performance of supply) to the inbound supply chain to a commodity to the supplier and even down to the part/spec/site level — and then ensuring that your processes for extended network design, sourcing, and supplier management are addressing the risk factors that can impact that supply performance. That’s a tall order to expect as a bottoms-up outcome.

For example, if you look at a company’s sourcing and supplier management processes, you might find risk-oriented knockout criteria in an RFI. Or you might find a regulatory compliance driven process in supplier measurement. But for the latter example, do you have an explicit risk score in your supplier scorecard? Most organizations don’t. There is a direct analog to the quality area here in terms of placing emphasis on process capability and managing upstream causal factors. A TCO model that includes quality costs (i.e., a ‘cost of quality’ model) is not only similar, but actually overlapping with the ‘cost of risk’. In other words, you can pay for risk prevention now or pay for external failure later.

This is why, although you should theoretically be able to bake your supply risk management processes systematically into your existing supply management processes (sourcing, SPM/SRM, etc.), the fragmented and reward-biased performance measures don’t encourage this end-state approach. This is why a bottoms-up process usually does not work and it requires that Procurement/SCM not only work with the natural risk owners to build the cost/risk models, but also use that to have the top-down discussion with senior management on how the firm wants to deal with it and what is the cost of doing nothing. To quote the rock band Rush: “If you choose not to decide, you still have made a choice“. (Freewill) And for some organizations, they might be able to tie into an existing enterprise risk management and corporate sustainability governance structure.

Another important strategy is to have a good diagnostic, and some external benchmarking intelligence, as part of this process — especially when trying to justify the effort beyond ‘it is the right thing to do’. Showing where you are vs. other firms and how well you/they are performing in supply risk (and comparing that performance to capabilities) is a good way to support the discussion. And so is having a good ‘cost of risk’ model. But quantification is tricky.  Firms need to arm themselves with some good insight on elevating the conversation. Why? To get more attention, resources, and proper measures/alignment that cascade back down to get baked into the processes. Once they’re baked in, you won’t need a ‘program’ anymore — you’ll have a proper risk-adjusted process.

Thanks, Pierre!

Turbulence, Not Just for Airplanes Anymore!

Turbulence, a flow regime characterized by chaotic property changes, that occurs regularly in the earth’s atmosphere and makes for bumpy air travel when encountered, is not just restricted to air. It’s commonly found in water as well, when the oceanic currents mix, causing rough times for many a seafaring ship.

And when you consider that one of the most common causes is the rapid variation of pressure and velocity in space and time you see that it’s not even restricted to fluid dynamics. The general concept extends to the flow of physical goods and of virtual information when that flow, seemingly regular under normal circumstances, becomes highly irregular with the slightest perturbation.

Turbulence is a hidden risk in every supply chain, and one most organizations are never prepared for because, when a risk assessment is done, it is always focussed on easy-to-identify technological, economic, market, financial, organization, environmental and social risks — not random events that can temporarily interrupt your supply chain and cause temporary disruptions with serious financial or brand consequences. Temporary disruptions which, if regular in nature, can put your organization in real jeopardy and temporary disruptions, which, by their very nature cannot be planned for or even identified in an up-front risk assessment.

For example, when buying product components from China, an experienced risk team is going to identify:

  • Supplier Risk
    Are they financially stable? Will they adequately protect your IP? etc.
  • Factory Risk
    Is the quality acceptable? Are there workplace or safety hazards that could shut it down?
  • Port Risk
    Will the product be safe? Is there any danger of strike or overcapacity? On both sides …
  • Export and Import Risk
    Are all regulations adhered to? RoHS? WEEE? Has all the paperwork been completed and submitted on time?
  • Technology Risk
    Is the real-time product tracking and distribution system reliable? Backed Up? Integrated properly with all parties?
  • Environmental
    Is the product being made or stored in areas subject to regular natural disasters such as hurricanes, typhoons, earthquakes, etc.?
  • Social Responsibility
    Is the product conflict / slave labour free? Are all employees of all partners treated equitably? Is the product, and its production, environmentally friendly or at least environmentally safe? Can the product be safely disposed of?
  • Market
    Will the market still want your product when it is available? Is a competitor going to beat you to the market?
  • Economic
    Will the economy maintain or improve? Or will it worsen, leading to reduced demand across the board? What is the job forecast looking like in target markets – job loss in those areas can weaken consumer demand.

and a few dozen other common risks from the risk identification and management playbook. But it’s not going to identify one-time random events such as:

  • Unlikely Terrorist Attack by a random civilian who goes postal and, when trying to go postal, thanks to a gas leak, accidentally blows up a building due near the docks and causes the port to become unaccessible for 3 days
  • Delayed Delivery due to Paperwork Mix-Up
    One truck is scheduled for delivery of your product to your distribution warehouse, another for mid-term storage at a competitors warehouse on the other side of the continent. And because the small carrier you’re using doesn’t have real-time inventory tracking, and your product is schedule for JIT delivery, the mix-up isn’t detected until the expected delivery date when your product is half-way across the country.
  • False Stock-Out due to Inventory Mis-Key
    The clerk enters 8,000 units instead of 80,000 into the system, stores exactly 8,000 in the proper location in the ware-house, and puts the other 72,000 units of your hottest selling product at the back of the warehouse reserved for discontinued inventory.

Each of these events can happen, and each can cause a real, unexpected, and unpredictable turbulent impact to your supply chain. Are you ready for it? Can you react and adapt when it does?

What are the Retail Keys to Success?

Retail is hard. Really hard. Razor thin margins. Demanding customers. Unpredictable trends. Unreliable carriers. Financially unstable suppliers. The list goes on. But there are steps a retailer can take to make sure their odds are better than their competitors. Specifically, they can take steps to strengthen their supply chain — and a recent article over on Supply Chain Digital on untangling the retail supply chain with real-time analytics outlines four steps a retailer can take to strengthen their supply chain.

1. Obtain an end-to-end transparent view of the supply chain across both traditional and online business units.

You can’t run brick-and-mortar and online stores as separate business units. They are one brand and your customer expects one experience. If it’s in the warehouse, it needs to be available to customers who frequent your store as well as to customers who visit your online storefront. Moreover, pricing needs to be comparable. If you charge significantly less online than in the store for the same product, then why should your customer come to your store? Especially if you’re offering free shipping to build your online presence?

2. Implement the capability to identify bottlenecks and problems in real-time and the agility to take corrective action before the customer experience is impacted.

Your end-to-end view needs to go beyond simply identifying inventory levels across the organization, but expected delivery dates, ship dates, and late shipments / deliveries that will increase stock-outs and impact your ability to serve your customers.

3. Integrate once diverse and siloed sources of data across the business units to offer coordinated and quality service levels for the omni-channel shopper.

You need to not only offer superior service, but service your online customers in your stores and your store customers online, because, online or offline, you’re one organization, one brand, and you need to offer one consistent quality of service to maintain that brand.

4. Leverage historical data to set baselines and then analyze data against those baselines on a regular basis to make more reliable and timely predictions and better manage the business.

Past purchase patterns are just that — past purchase patterns. As tastes and trends change, so do purchase patterns — and the sooner new patterns are detected, the sooner inventory levels can be modified to prevent stock-outs of popular items and expensive over-stocks of items in disfavour.

It’s not a complete list of actions retailers can take, but it is a good starting list.

Ocean Freight Capacity is On the Rise … But the Consequences Are Unclear

South Korean shipyards are busy churning out Maersk’s “Triple-E” class, which at 400 meters in length are the world’s biggest Super Post-Panamax ULCV (ultra-large container vessel) container ships; new Super Post-Panamax ship-to-share cranes that can lift up to 65 tons (or more) are being installed at ports around the world; the Panama Canal Capacity is doubling its capacity in 2015 (and the average vessel calling on the US East Coast is expected to double in capacity from 4,500 TEUs to 9,000 TEUs); and North American Eastern ports are expanding up and down the coast.

This means that the capacity to do more global trade, both across the Atlantic and the Pacific, will soon be here. If trade doesn’t increase as fast as the big ocean carriers are predicting, even though fuel costs are rising, it’s likely that costs will remain stable, or even decrease slightly, despite inflation, as carriers compete to keep their holds full. If trade increases at the predicted rate, it is likely that costs will continue to rise at a steady rate. And if trade increases faster than expected, it will only be a few years until the major ports are again congested and growth potential flat (unless you take advantage of ports like Halifax).

What will come to pass, it’s hard to say, but not being aware of the potential for anything to happen where ocean freight is concerned is a risk. But it’s not the only risk to the viability, and cost, of your supply chain in 2014. It’s just one in dozens. There are a number of other significant risks that your supply chain could be facing in 2014, each with its own cost impact. If you would like some insight into what 13 other risks are, and what you can do about them, download SI’s latest white paper on the Top Ten Transitions To Tackle in 2014 to Tame the Tolls, sponsored by BravoSolution. (Registration Required) The follow up to last year’s Top Ten Things to Do in 2013 to Control Costs, this white paper looks at the state of the market one year later and provides you the foundations you need to attack the forthcoming challenges of 2014 head-on.