Category Archives: Risk Management

A.T. Kearney’s Four Dimensions of Strategic Value

In a recent article over in IndustryWeek on why it is “time to tell your CPO to collaborate with suppliers”, A.T. Kearney outlined their four dimensions of strategic value that they claim will allow an organization to unlock the next level of value. The four dimensions of value they outlined are:

  • growth
    through improving the value proposition for existing customers or generating sales to new customers
  • risk management
    to deal with a world of increasingly unpredictable and devastating risks
  • value-chain optimization
    by tweaking the value chain to benefit all players by allowing them to focus on their strengths
  • structural capabilities
    that improve agility, responsiveness, scalability and even corporate social responsibility

And, according to the article, they depend on collaborative relationships with the supply base. However, in order to succeed in these relationships, the parties must reach mutual value. So how do the parties reach win-win situations? They start by using a value-screening process that takes the following steps:

  1. Develop a Relationship Baseline
    does the existing relationship provide a competitive position, strategic direction, and/or joint commercial flow in an aligned culture?
  2. Identify Initial Value Hypotheses
    is there a potential opportunities that brings a level of value to both parties?
  3. Align with Internal Partners
    which opportunities bring the most value to the organizations?

Then, according to A.T. Kearney, the next step is to turn supplier collaboration into a core competency. This is not an easy process, but it is a manageable one. It revolves around:

  • the formation of value creation teams,
  • the establishment of foundational processes, and
  • management of the transformation.

These core actions become part of a two-to-three year transformational roadmap which, when completed, will address all key suppliers and, hopefully, provide value well above and beyond typical cost reduction strategies. And if they are done right, they should enable the four dimensions of value outlined above.

Are they worth it? Any organization that grows, controls risk, and improve its structural capabilities and value chain should be able to create and sustain value even in weak economic environments, so they are worth it. Are they enough to get you to the next level? On their own, probably not as they don’t require innovation (as renovation is often enough for companies who are not leaders), but they are good value dimensions.

Is Polygamy Good for the Supply Chain?

A recent article over on CFO by Shawn Casemore, President of Casemore & Co, on why you should “mend your spend” in order to grow, offered up Casemore and Co’s four crucial steps to building a big-business attitude. Step two, which stated that the procurement department is not the place for monogamy, caught my attention because sometimes “monogamy” is needed for successful procurement.

According to Shawn:

Human nature has demonstrated that the longer we remain in a stable relationship, the less effort we place into maintaining or improving the relationship. In a supplier-to-customer relationship, this tendency is often substantiated through escalating prices and diminishing customer service over time.

As an example, he gives the anecdote of when he worked with an organization that used a sole transportation source for all of its inbound and outbound freight needs — remnants of its early days when it was a small business. The prices offered by the carrier had been steadily climbing, and freight damage was quite prevalent. Despite those problems, the company president was hesitant to change. But when they moved the business away from the incumbent and divided it between two alternative carriers, service levels improved and the firm reduced overall transportation costs by nearly 10% per year.

And this is a common story among consultant firms that specialize in transportation / logistics / 3PL cost reduction. Competition is good for the corporate coffers. And in this situation, a secondary source of supply can mitigate risks and increase competition.

But this isn’t always the case. If you need a specialized widget, or microprocessor, and you split the award, you drive up costs as setup costs, which often involve new equipment purchases, for production of a new, customized, product are high — and you’re paying them twice and information protection and losses due to IP theft — as there are two routes IP thieves can take to steal your IP and produce black-market copy-cat products — are higher.

In other words, competition is great when you have a tactical category where there are lots of low-risk, high quality suppliers to compete for your business, but if you have a strategic category where there are few high-quality suppliers and set-up costs are high, sole-source (with production distributed at geographically dispersed plants) might be the way to go.

Your thoughts?

Product Safety Challenges in European Business

A recent article over on Industry Week on “What [You Need] To Know About Product Safety Challenges in European Business” pointed out something very important that U.S. business that want to expand into Europe need to know — U.S. product safety regulations are not enough if you want to sell your wares over in Europe. As per the article, if you want to sell in the 27 member states of the EU, you need to meet the “made in Brussels” European legal regulations (that set an identical standard throughout the entire EU). Before a product can be sold in the EU, it must have a CE mark that verifies that the manufacturer has ensured that the product conforms with the essential requirements of the EC directives. It must also have a declaration of conformity that includes the manufacturer details (name, address, etc.), requisite EC standards and performance data, relevant id number of any notified body, characteristics of compliance, and a legally binding signature. And if the more stringent requirements are not met, your product cannot be sold.

Energy Buying Is Definitely Not For Those Looking for a Quiet — or Easy — Life

A recent article over on the CPO Agenda on how “energy buying is not for those looking for a quiet life” made some great points. As the article notes:

  • there is continuing political unrest in many oil-producing nations (and 20%+ of available oil goes to international shipping alone [Source])
  • the recent Japanese disaster has cause a renewed apprehension to nuclear energy production (and Germany is going to decommission its nuclear plants that supply 25% of the country’s electricity)
  • in most countries, renewable sources still account for less than 5% of electricity production
  • demand for fossil fuels is still rising, and the rapid rise of China and India which, combined, hold over 1/3 of the planet’s population combined, isn’t helping

Plus:

  • significantly increasing energy production from renewable sources, while now a technical feasibility, will cost many (many) Trillions of dollars which have to come from somewhere (as a side note, 2010 saw a record level of investment of over 240 Billion — but we probably need at least 10 times that for a rapid increase in the production of renewable power)
  • deregulated energy markets, which will soon account for a majority of state markets in the US, allow money grubbing financial types to play hedge games (and we know what eventually happens to hedge markets when Wall Street types get involved)

And:

  • energy cost models can be complex: costs of generation, transmission, storage, distribution over third party networks, and taxation, each with their own cost models, need to be taken into account

All-in-all, you are dealing with a very complex, and very volatile, commodity whose price performance can be almost impossible to predict even in the short term. And even if you manage to lock in a mid-term contract at great rates, what happens if prices spike and your provider goes bankrupt because it predicted downward performance and signed too many deals at the start of what was actually an upward trend? Or if you decide to generate your own electricity and your fuel supplier all of a sudden stops delivering? There will be sleepless nights. Unless you thrive on them, beware of energy buying. It’s not for the faint of heart.

Risk Detection Can Not Be Automated

No matter how many impressive white papers, including this recent one on Uncovering Surprising Supplier Behaviours Creating Organizational Risk by Atlantic Software Technologies, Inc. (an IBM Software Value Plus Business Partner). This white-paper recommends automation of inbound data classification to expedite throughput because automation of this function enables the organization to redeploy up to 40 percent of staff while increasing processing throughput as much as threefold. This is important because one cannot assess the true business value of a supplier relationship unless one understands his or her own personal relationship with the supplier. And, in order to really get a handle on the quality of the relationship, an organization has to
be able to collect and analyze data points from the multiple impact points throughout [its] supply chain, both internally and externally, not just the ones that are easily visible and retrievable.

This is true. And, as the paper points out, if one does not understand the nature and quality of the relationship, one may never know that:

  • a supplier delay, just communicated to one of your employees, will impact multiple customers,
  • new international suppliers are being tapped to avoid single-sourcing risks, which might be causing quality risks, or
  • foreign nationals are handling sensitive information prohibited by export control laws (and this last risk could put an officer of the company behind bars).

But automating the processing and classification of unstructured data is not going to reduce risk. In reality, it’s going to increase risk. In a nutshell, here’s why.

Let’s say that external testing found lead paint on a children’s toy. If you’ve identified “lead paint” as a risk and set up a rule that alerts someone in Quality Control that a review is required, then you might feel you’ve mitigated the risk, as the document will come in, be sent to quality control, see that lead levels are present and well beyond tolerance, and tell Procurement to refuse the shipment. Problem solved. Right? Wrong!

What happens if the test was performed by an individual who speaks English as a second language, who trusts that all misspellings will be handled by Microsoft Word, and who mistypes “lead paint” as “led pant” in the report. Both are legal English words, and if you turn grammar checking off, Microsoft Word will not complain. Is the automated classifier going to catch this? Not likely. While you may remember to program in one or two misspellings, like “led paint”, or an abbreviation, like “ld pnt”, you are not going to come up with every possible misspelling, and you’re not going to want to because, if you include too many, you’ll get a lot of false positives (and misclassifications). If this is a product where tolerance is 0, and the test results are not acted on in time, not only could you be stuck with a multi-million dollar inventory that can’t be sold, but if a product makes it onto shelves, gets bought, and someone gets sick, that’s a lawsuit that could cost more than what it cost to develop and manufacture the first batch of products.

Now, there’s nothing wrong with deploying such technology to scan documents to look for documents of interest that should be reviewed, but it should not be the foundation of any risk management strategy. Good risk management entails identifying relevant risks and having a mechanism for anyone to report when a risk of interest may be materializing. Then someone knowledgeable about the risk reviews the situation and makes the call.