Category Archives: Risk Management

What Risks Lurk in Your Supply Chain?

Do you know what risks are hiding in the dark and dreary basements of your supply chain? Are your suppliers using sweatshops that will ruin your image if they are discovered? Did your primary supplier build the only factory that can provide you that custom make chip on the ring of fire? Do floods threaten to wipe out supply routes over low-land sub-sea level plains? Does civil unrest threaten to close off borders? Is your primary carrier on the verge of financial bankruptcy? Are you sure? Really?

Risks in your supply chain are not like the Ravenous Bugblatter Beast of Traal — they’re worse. They don’t assume that just because you don’t see them coming that they can’t suddenly appear and swallow your organization whole. They are there, and for four out of every five companies, they are going to materialize over the next year and send shockwaves that reverberate and echo through the entire supply chain, causing millions of dollars of loss and damage along the way.

And, even worse, it seems that the risks are multiplying. A quick review of the eighth annual risk report from the World Economic Forum (Global Risks 2013) gives one the impression that, like memes, risks have learned to mate and multiply at a pace more rapid than ever thought possible. (Even LOLCats will soon be left in their wake if risk management continues to be ignored in 2/3rds of organizations.)

You need to be aware of sub-tier risks in your supply chain and, more importantly, you need to know how to assess them. If your supplier of corrugated cardboard goes out of business, that’s no big deal as there are dozens of corrugated cardboard suppliers. But if your custom control chip manufacturer can’t produce your chips because of a rare earth shortage, you need to know well before the shipment doesn’t arrive and you have to shut down an entire automotive production line.

For every relevant risk, you need to be able to get a grip on both the consequence of the materialization of the risk and the potential cost of the disruption it will create. There are likely more risks than you can enumerate, but there are only so many likely to happen, and only so many of those with dire consequence. As long as you can properly identify, assess, and develop mitigation plans for those with dire consequence, you can rest assured that, whatever happens, you will survive the storm. But if you can’t …

So how do you identify and assess sub-tier risks? We’ll get to that in a series of posts on visibility that will begin this summer, but if you want a leg up on your competition, I would suggest that you strongly consider the forthcoming webinar on Assessing Sub-tier Risks by Resilinc, who will be doing a deep dive into a proper process, the benefits it will produce for your organization, and the high cost of doing nothing in today’s global economy.

You can Register for the webinar, which will take place on June 19, 2013 @ 11am PDT / @ 3 pm EDT, at your earliest opportunity.

The webinar will be hosted by Reslinc’s founder, Bindiya Vakil, who has a Master’s of Engineering in Logistics from MIT with a thesis that addressed Design for Logistics, Planned Obsolescence, and Recycling long before Supply Management realized the importance thereof and the need for visibility in order to achieve these goals. (the doctor knows this first-hand as he has been preaching this, mainly on deaf ears, since the beginning of SI — see this early post on Design for Recycle from back in 2007) As a result of this work, and work since, Bindiya has found that visibility is not only key to long term supply chain viability, but also to resiliency in an age of rapid supply chain globalization and the risks that come with it. In this webinar, Bindiya will share what she, and Resilinc, have learned over the last decade about assessing, and managing, risks in your supply chain.

Summer is One Month Away. Is Your Supply Chain Ready?

It should be. Why? The top three challenges you are likely to face this summer are the exact same as the top three challenges you faced four years ago in 2009. Back in 2009, Kelly Thomas, Group Vice President of Global Accounts at JDA and a regular contributor to JDA’s Supply Chain Nation blog published a guest contribution in the Supply Chain Digest on the Top 3 Supply Chain Challenges This Summer, which are also the Top 3 challenges your supply chain is going to face again this summer because, as we all know, the economy is cyclic and some cycles are faster than others.

So what are the challenges?


1. Cost Containment

Costs are soaring again. As SI has stated repeatedly, there are no more savings to be had in this type of inflationary market. The best you can hope for is cost avoidance, and in some categories, containing costs to reasonable year-over-year increases. With staple food reserves still low, burgeoning demand for energy and metals in Asia, and a slowly recovering global market, costs are going up — and can be expected to do so for some time. The time of net zero inflation is over. The best we can hope for is we don’t return to the 80’s. While those of us who have been around for a while may have fond memories of the 80’s as the decade that gave us PCs and Pac Man, we also have not-so-fond memories of rapid inflation at the start of the decade (which we try to forget). Containing costs is going to take your fanciest footwork (so let’s hope your old timer purchasing pros who weathered the storm in the early 80’s are still around to give you some advice) and may not even be possible if you don’t have a good handle on


2. Risk Management

Considering that, as SI has been pointing out for over a year now, at least 80% of organizations are vulnerable to a major supply chain disruption, every company should have someone responsible for managing risk. However, two thirds of company’s don’t. This is one of the reasons risk, and risk management, continues to be high on the challenge list. But I have to be honest. It’s going to be hard to get a good grip on risk if you don’t have a handle on your number one supply chain challenge this summer, which is

Supply Chain Visibility

Let’s be honest. In today’s multi-tier, multi-national supply chain, it’s hard enough to get a handle on this at the best of times. But during the summer, where it’s likely that there won’t be a single day where there isn’t at least one key person vacationing somewhere unreachable and not watching that everything is going as it should, something is going to get missed. Something is going to go wrong. The only question is whether the screw-up is minor, such as shipping 1000 units instead of 1100, or major, such as shipping merchandise intended for the US to Europe instead and having it seized and destroyed because it violated WEEE or some other environmental regulatory act that is stricter than what it is currently in the US.

Considering the complexity of the modern supply chain, the speed at which it is operating, and the costs associated with even a minor mishap, this is one area where you definitely need a software solution to help your organization keep a handle on things. One such solution is that offered by Resilinc, which is covered in these recent posts:

So, How do We Fix the Problems We Created? Part II

As per yesterday’s post, we are the biggest supply chain risk. So, how do we become the biggest supply chain solution? By fixing the problems we created. Then the risks will be minimized, and so will the disruptions. Fortunately, the solutions are easy. Unfortunately, the decisions to implement them aren’t always easy from a business, or should I say, capitalistic, point of view. In the short-term, they can be expensive even though, done right, they pay off considerably (and often in multiples) in the long-term.

Today we will review the other seven problems we overviewed in our post on the biggest supply chain risk and illustrate how they can be solved.

Global Democratization
When you get right down to it, all methods of government have the potential for good as well as evil. A country will flourish under a great monarch and fade into darkness under a poor one. Socialism, implemented without corruption, can create a state of security and well being for all. Democracy only works when the will of the people is implemented by the representation. If the representation caves to lobbyists (and bribes), it’s not much better than a stifling dictatorship. The real issue is social and economic disparity. If great strides in these issues were made in the areas of greatest unrest, the unrest would considerably lessen and that could allow the government to evolve into the appropriate one in an organized, productive manner. (Or not. But it’s important to understand the reason for the unrest and solve the problem before trying to inject a miracle cure.)

Dependence on Information Technology
If you absolutely can’t live without a piece of technology, make sure you have backup systems in place ready to activate at the flip of a switch. Otherwise, it’s game over. And make sure that you have a backup power supply as well. If your data center is in a building on a grid serviced by only one power provider, and your “backup” is an industrial strength UPS that will last thirty minutes, or just enough time to shut all the systems down safely, and you need these systems 24/7, you better get a backup (diesel) generator and be prepared to produce your own power as long as necessary.

Government Financial Crises
Financial crises are avoided with sound financial decisions and policies. Who are often the best at analyzing the (potential) value of a financial decision? Talented, trained, and technologically equipped Supply Managers. We see the big picture, so it’s time to start advising the finance guys of the downstream decisions of their funding and purchasing policies. While this is not a complete solution, injecting more analytics, forward thinking, and common sense into the economy as a whole will go a long way!

Government Social Policies
When you dig in, this is one of the problems we’ve created that is hard to identify a solution for. Everyone has different ideas as to what services the government should provide and as to how to administer those services (so they are administered fairly). the doctor is not going to even attempt to define what a government should provide and how it should administer what it provides. This is one of the few problems that has no obvious solution.

Global Economic System Disruptions
Global economic crises and system disruptions are avoided with sound economic policies and frameworks. However, we rarely understand the full extent of the models we propose or how they will be applied (and manipulated) under real world conditions. There’s no easy answer to this except to say that we need to apply common sense, and if a model doesn’t seem to be working as expected, we need to pause, step back, analyze the data, determine the cause (and not just the correlation), admit our mistake, and try again.

Social Media Threats
The reason for this is the same reason for the push for global democratization — people are not content because of a (perceived) inequality that they feel is an injustice that has to be corrected. So they make threats and, sometimes, take action.

Global Mega Cities
If we stem population migration, we will minimize the need for additional global mega cities.

That’s it. We’re the biggest problem, but we know most of the solutions! Do we have the courage to do them? As Supply Managers, we determine who we buy power from, who we source from, where we source from, how we source, and what we value in our suppliers. We can directly influence the rate of climate change, globalization, and our ability to recover from information technology failures. We can indireclty influence social inequity, gender imbalance, population migration and, thus, also indirectly influence the push for democratization, social media threats, global mega cities, and the treatment of the aging population by adopting values and choosing partners that share those values, hire people in rural areas for jobs that don’t have to be urban, pay fairly, tolerate different people with different views, retain the wisdom of the elders, and push their peers to do the same.

There’s not much we can do directly or indirectly to prevent financial crises, social policies, and economic system disruptions — but we can use our skills to monitor the global market place and predict where, and when, they are most likely to occur and avoid sourcing from those regions at those times to insure the organiation is able to continue its operations uninterrupted. And as for the population explosion issue, that is a truly global problem.

So, How do We Fix the Problems We Created? Part I

As per yesterday’s post, we are the biggest supply chain risk. So, how do we become the biggest supply chain solution? By fixing the problems we created. Then the risks will be minimized, and so will the disruptions. Fortunately, the solutions are easy. Unfortunately, the decisions to implement them aren’t always easy from a business, or should I say, capitalistic, point of view. In the short-term, they can be expensive even though, done right, they pay off considerably (and often in multiples) in the long-term.

Climate Change
We could build more wind farms, solar farms, and hydro power stations and greatly increase the amount of energy on the grid that come from renewable sources. And we could deal with the irregular energy production by using natural batteries such as pump storage, compressed air (in natural, deep, airtight caverns), and water (to trap heat energy). It’s a considerable amount of up-front investment, but there’s no need to be putting energy on the grid that comes from dirty coal, natural gas, or oil — especially when we still need the oil for planes, trains, freightliners, and automobiles (as battery technology is not there yet for long-distance travel).

Global Supply Chains
There’s no reason we can’t do more sourcing at home — and do it cost competitively. Given the rise in labour costs, transportation costs, and management costs associated with managing production half a world away, with the right investments in new technology and training, we could produce many of the goods just as competitively in North America. But again, this could require significant multi-million investments in new, automated, technology and training to increase the skill of the manufacturing workforce. (But if we’re as talented as we claim to be, this shouldn’t be a problem.)

Increasing Social Inequity
Rick Perry, following the sound advice of economists like Arther B. Laffer, is proposing a flat tax to be applied equally to all. While it wouldn’t fix the fact that we are allowing some people to be 1,000 times as rich (or more) than the average person, a flat 20% tax on all individuals and businesses in the U.S. would go a long way towards reducing the U.S. national debt. If this resulted in an additional 15% tax on the richest 1% who are currently keeping the majority of their wealth in tax shelters, this would allow the United States to reduce the national debt by almost 20% if all of that tax money was applied to the debt!

Gender Imbalance
Not only do we need to promote equality of women in some countries, but we need to promote equality of men in some countries — often the same countries! In some countries, like China and India, certain jobs are viewed as “women’s work” and given the gender imbalance, this is going to be a problem. Just like men can be nurses and airline stewards, they can also be garment makers and janitors.

Population Increase
We can be smart about this. And while we don’t have to go to the extreme “one child per couple” policy, there’s no reason we can’t educate people about the downsides of large families. While the planet can likely continue to support the current population for the foreseeable future, there is a tipping point, so we should do everything we can to prevent additional growth. But since the planet can likely continue to support the current population for the foreseeable future, we don’t need to panic and jump on the bandwagon that the population has to decrease. Note that, as simple math will illustrate, provided that we don’t considerably increase our expected lifespan in the near future, if, on average, we slowed population growth to an average of 1 offspring per person, or 2 kids instead of 2.5 kids in the average household in the U.S., around the globe, we could reach a steady state population very quickly and eliminate the issue of population increase.

Population Migration
Talent tends to migrate to where there is the most opportunity, and all things being equal, to where there is the most tolerance. If we focussed on increasing the acceptance of people in rural as well as urban areas, possibly through telecommuting and telepresence, we could slow down the migration from rural to urban areas and make populations more predictable.

Aging Population
When you dig in, this is another of the problems we’ve created that is hard to identify a solution for. People are getting older. That’s not going to stop. We’re going to have to accept, and prepare, for this reality.

What’s the Biggest Supply Chain Risk?

Us!

The biggest supply chain risks are not bankruptcy and plant failure, they are not unusual and damaging weather patterns, and they are not natural disasters. As clearly pointed out in the Supply Chain Risk Leadership Council (SCRLC) in their 2013 Emerging Risks in the Supply Chain study, the biggest risk is us — the human race — as a collective whole.

To see this, let’s review the fourteen (14) risks that were identified and discussed.

  • Climate Change
    A key contributor to climate change is the amount of carbon emissions we are producing. We keep burning oil, coal, and natural gas, and we keep doing so without any significant attempt to trap and sequester the carbon back in the ground it came from, allowing it to creep back into the atmosphere and increase the carbon dioxide percentage.
  • Global Supply Chains
    We keep outsourcing and offshoring even though, in May 2012, the total industrial capacity utilization in the U.S. was a mere 76.3%. To put that in perspective, one in every four plants is sitting idle at any one time.
  • Increasing Social Inequity
    Less than 1% of households control 40% of the world’s total financial wealth, with inequality ranging from their 34.5% share in the U.S. to their 70% share in China. And we don’t seem to be doing much about it, especially given the number of tax shelters available to the extremely wealthy in much of the developed world.
  • Gender Imbalance
    The one-child policy in China and the cultural history of favouring boys over girls in India has led to the situation where, in the next decade, there will be significantly more men of working, and marrying, age than women. People, trying to fix one problem, created this problem instead.
  • Population Increase
    Statistically speaking, we are expecting a population increase of almost 30% by 2050 where we expect the earth’s population to be 9 Billion people! We’re all contributing to this.
  • Population Migration
    It was only six years ago that the urban population exceeded the rural population. By 2050, we will have 70% of people living in urban areas. We are creating the mega-cities which, instead of being a sustainability boon, are, in many cases, an environmental nightmare.
  • Global Democratization
    What is likely to happen is that instead of replacing years of corruption, political repression, and economic disparity with stable democracies we are going to end up with the chaos and disorganization that could arise from new political systems being established by individuals with little governing experience.
  • Dependence on Information Technology
    We have come to rely on information technology to the point that when the software fails, we are immobilized. We allowed ourselves to become too reliant on technology.
  • Government Financial Crises
    Governments, run by politicians that we elect and allow to stay in office, around the world have taken on too much debt.
  • Government Social Policies
    In many countries, the majority view is that social policies are not properly funded, not equitably applied, and not equitable with those of whatever nation is currently being looked upon as the best role model for social governance. But we elected the government that created and maintains them.
  • Global Economic System Disruptions
    We created the rules that govern the financial systems that are starting to break down.
  • Social Media Threats
    Social engineering, anti-brand campaigns, and other socially-based attacks are all people-driven, not technology driven.
  • Global Mega Cities
    All over the world, we keep building mega cities and keep moving into them, creating extreme levels of congestion and infrastructure problems.
  • Aging Population
    Thanks in part to the baby boomers, we are getting older as a population. The number of people over 60 is growing at a rate that is 2.5 times the population growth rate.

In other words, directly or indirectly, people are the cause of the majority of supply chain risks, and that’s why supply chain visibility and third party management, focussing on the management of people, is so important.

(And while we’re all to blame, as hinted at in the study, the 1% deserve at least 34.5% of the blame! Their unequal tax treatment is a big reason we’re so deeply in debt and can’t adequately support social programs. Statistical models have demonstrated that their campaign contributions play a significant part in who gets elected and forms the governments that control our social, economic, and trade policies. They are collectively the biggest social inequality. And they could do the most towards moving us to sustainable energy models.)