Category Archives: Risk Management

For Lasting Results, Follow the Procurement Leaders …

… but be sure to focus on the right characteristics first. Reviewing a recent summary of A.T. Kearney’s 2011 “Assessment of Excellence in Procurement Study” over on the A.T. Kearney site on why you should “Follow the Procurement Leaders” that described seven ways to lasting results, I couldn’t help but notice that they had all the right suggestions, but in reverse order. Starting from the bottom of the list, and working our way up, we see that the suggestions will transform your organization from an average performer to best in class.

  1. Win the “War for Talent”.
    This is the first T necessary for supply chain success and the most critical one. No supply chain function can be happen without someone in place to plan, manage, and execute it — and for any function to be planned, managed, and executed in an optimal manner, you need world-class talent.
  2. Adopt Technology.
    This is the second T necessary for supply chain success and the next most critical one. Once you have found the right talent to take your supply chain to the next level, you need to enable your talent with the right technology to make them as efficient and effective as possible.
  3. Transition to Category Strategies.
    As the article notes leading procurement organizations use more advanced toolkits — systematically employing more than twice as many methods as the followers — to tailor their approaches to each situation. That’s why leading e-Sourcing / e-Procurement providers are now offering platforms with category templates / workflow management capabilities to allow platform customization to each organizational category and support the third T of supply chain success.
  4. Use Supplier Relationship Management.
    Suppliers are key to supply chain success, and leaders manage the relationship to get the most out of it. They use suppliers to improve innovation and growth, monitor compliance and risk management, and improve capabilities across the supply chain.
  5. Manage Risk Systematically.
    Leaders use risk-impact analysis, financial risk management, and disaster planning as ways to protect against, and mitigate the effects, of disruptions — unlike the risk management “followers” that constitute 80% of companies that are a single natural disaster away from a major supply disruption.
  6. Contribute to Top and Bottom Lines.
    It’s not just about cost reduction, but about value generation. Good Supply Management doesn’t just stop at cost reduction, but goes onto demand reduction, component innovation, product innovation, and even market innovation. This is done by managing risks, managing supplier relations, applying category strategies, using technology, and using all of the skills your talent possesses.
  7. Align with the Business.
    Leading supply management organizations support the business strategy. And while this is the most important goal from the viewpoint of Supply Management, as the goal is to increase the image of Supply Management in the organization, this can not be accomplished until all of the pieces of the puzzle, described in the first six steps, are in place.

What Impact Will the National Defense Authorization Act (NDAA) Have On Your Supply Chain?

According to a recent press release over on the IHS site, stringent new counterfeit-part regulations in the 2012 U.S. National Defense Authorization Act (NDAA) may have broad international implications that could impact hundreds of of overseas companies that supply Billions of dollars’ worth of items to the U.S. Government. This act, which was signed into the US law on December 31, 2011, not only authorized 662 Billion in funding “for the defense of the US and its interests abroad”, not only included Title X, Subtitle D on “Counter-Terrorism” which deal with the detention of persons the government suspects of involvement in terrorism, but also contains 8-page section 818 on the “detection and avoidance of counterfeit electronic parts” buried in its 565 pages.

This section states that the secretary of the department of defense shall issue or revise guidance … which … shall address requirements for training personnel, making sourcing decision, ensuring traceability of parts and shall revise … the Federal Acquisition Regulation to address the detection and avoidance of counterfeit electronic parts and The revised regulations … shall provide that … covered contractors who supply electronic parts or products that include electronic parts are responsible for detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts in such products and for any rework or corrective action that may be required to remedy the use or inclusion of such parts.

In addition, the act states that the Secretary of Defense shall implement a program to enhance contractor detection and avoidance of counterfeit electronic parts and the program … shall require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall address

 

 

  • the training of personnel
  • the inspection and testing of electronic parts
  • processes to abolish counterfeit parts proliferation
  • mechanisms to enable traceability of parts
  • use of trusted suppliers
  • the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts
  • methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit parts is, in fact, counterfeit
  • the design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts, and
  • the flow down of counterfeit avoidance and detection requirements to subcontractors

 

 

 

And many other requirements, along with punishments for offenses which an include 2 and 5 Million dollar fines for individuals and 5 Million and 15 Million dollar fines for corporations for first offenses with second offenses garnering fines of up to 30 Million dollars.

This is of grave concern, because the legislation applies not just to counterfeit parts, but suspect counterfeit parts. An organization that supplies parts that are suspected to be counterfeit, whether proven counterfeit or not, will have to remedy the situation on its own dime (which could cost Millions to mint), and if it doesn’t do so satisfactorily, could be fined Millions of dollars on suspicion. And given that the reports of counterfeit parts have soared dramatically in the last two years, with 1,363 separate verified counterfeit-part incidents in 2011 as compared to 324 in 2009, this is a serious concern for anyone supplying products to the US Government. Given that many of these counterfeit parts are commercial electronic components that have wide use across every major technology end market, this is an especially serious concern for suppliers and manufacturers in electronics supply chains.

It would appear that this puts the need for supply chain security and risk management in your electronics supply chain at an all time high, now that even suspected fraud can bankrupt your company. The impact of this legislation could be much worst than 10+2. What do you think?

Who sets supply chain standards?

After hearing about the recent NIST (National Institute of Standards and Technology) Interagency Report (7622) on 10 Practices to Secure the Supply Chain, it got me wondering as to who should set the standards. Supply Chains are global, so it shouldn’t be a single government agency, even if it’s a standards agency. While supply chains run on technology — it’s only one of the three corners of the supply chain triangle, with the other two being talent and transition (management).

But, of course, supply chain standards are probably not high on the WTO (World Trade Organization) agenda — as the primary purpose is to supervise and liberalize international trade — keeping the flow smooth. Trade agreements take priority over standards. Someone has to bite the bullet and take the challenge. But we need more than high-level practice definitions. These are the 10 perspective practices that the NIST recommends:

  1. Uniquely identify supply chain elements, processes and actors
  2. Limit access and exposure within the supply chain
  3. Create and maintain the provenance of elements, processes, tools and data
  4. Share information within strict limits
  5. Perform supply chain risk management awareness and training
  6. Use defensive design for systems, elements and processes
  7. Perform continuous integrator review
  8. Strengthen delivery mechanisms
  9. Assure sustainment activities and processes
  10. Manage disposal and final disposition activities throughout the system or element life cycle

Taken one by one:

  1. obvious, no help here
  2. also obvious, no help here either
  3. you should be doing that already to conform to the plethora of trade and security regulations you’re already subject to
  4. given the lack of openness in most supply chains between trading partners, this is probably already happening
  5. this is good advice — it’s common knowledge, but when it comes to training, no one is listening
  6. here’s where it gets good — I don’t think defensive design is part of supply chain design today and it’s a great approach to keep things in perspective
  7. that’s just good risk management
  8. that’s just part of continuous supply chain improvement
  9. this is good advice too — while the sustainability message should also be common knowledge, there’s not enough action on this front either
  10. this is great advice — everyone focusses on the acquisition, but often neglects that, at some point, everything created has to be destroyed; everything acquired has to be disposed of

In summary, I give it a 4 out of 10. So, what would be good recommendations? We’ll take that up in a later post. But for now, do you have any?

A Digital Transformation Requires At Least Five Critical Factors, Not Three!

A recent article over on Chief Executive on Digital Transformation that asked “[If] CEOs [are] ready for the Challenge?” caught my attention. And it kept it when it said less than 20% of the companies surveyed are truly reshaping their businesses for digital and many are only partially fulfilling their potential because, as a technophile, I know this to be all too true.

But I screamed NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO with @rantinggirl when I read that you need three factors in place — top-down vision, clear governance and investment — to deliver a true transformation. While these factors are a necessary condition, they are not a sufficient condition, and if all you have is vision, a governance model, and the willingness to invest current resources into the problem, then you should pack it in now as your days as an organization are numbered.

You see, a successful digital transformation requires at least the following Five Critical Factors:

  1. Top-Down Vision
    that emanates from, is communicated by, and is embraced by the top
  2. Clear Governance
    that consistently communicates and enforces the vision, ensures the allocated resources are directed towards the effort, and that keeps the vision on track when fires threaten to cloud the business with smoke or people want to return to the old ways
  3. Investment
    in resources and dollars, as money will need to be spent requiring the right infrastructure
  4. Technologically Adept Talent
    since going digital requires being digital
  5. Transition Commitment
    since there will always be those that fight the transformation and, more importantly, since some of these resources may not be able, or willing, to adopt to the new way of doing business and have to be let go

Anything less is like skydiving without a properly packed parachute. You had a clear vision of jumping out of the plane, you invested in the plane, and you convinced the pilot to take off, but you forgot about the nature of the landing and that if the chute doesn’t properly deploy, you’ll be hitting the ground at 195 km/h (or 122 mph) — without much chance of survival. Mr. Boole may have survived, but chances are you’ll end up like the skydivers on CSI.

As the article points out, the transformation journey is full of roadblocks, including organizational skill gaps, culture, and legacy IT (that is more antisocial than your average arrogant PhD, and I should know).

If You Are Using a 3PL, Should You Focus on Outcome-Based Pricing?

Yesterday we discussed whether or not you should hedge your transportation costs, given this recent article in Canadian Transportation & Logistics (CTL) that found “global shipping lines grapple with plunging rates, overcapacity, and faltering recover”. Today we discuss another recent Canadian Transportation & Logistics article on “why it pays to focus on outcomes rather than transactions in procuring supply chain services”.

While an outcome-based focus is starting to take hold in some leading Supply Management organizations in their strategic sourcing processes, it’s often focussed on more traditional services where outcomes are easily defined and well understood by the organization. For example, procurement back-office functions where it’s all about throughput improvement (in terms of invoices processed), customer service (where it’s all about trouble-ticket resolution), and preventative maintenance (where it’s all about reducing downtime).

But back-office, customer service, and system up-time are not the only things that can be measured as outcomes. So can 3PL. As per the CTL on global shipping challenges, only 56% of containers delivered on time globally. Fifty-six percent! For those of you going for the perfect order, that’s 44% of your orders that rely on globally sourced products that won’t be perfect as of day one! (That’s why Maersk launched its Daily Maersk service in late October of 2011 which, with daily cut-off and built-in safety margins, allows it to guarantee virtually total reliability between select ports in Asia and Europe.)

Of course, this will require a shift in mindset in both buyers and 3PLs, but if both parties are willing to share greater risks, both parties could reap greater rewards. Current trends seem to indicate that. For example, by focussing on outcomes, Microsoft saved $30 Million by outsourcing its procure-to-pay operation to Accenture One, which doubled profit by focussing on value add activities. And Proctor & Gamble saved $1 Million in the first year of outsourcing $70 Million of facility management to Jones Lang LaSalle.

When the 3PL focusses on process and productivity improvement, and not price reduction, the efficiencies that fall out will most likely lead to cost reductions in the long term. For example, just getting the on-time delivery rate to 94% from 56% will likely decrease expediting costs 86%. And reducing “empty miles” will reduce costs (and likely speed up delivery time-frames as well, shortening lead times).