Category Archives: Risk Management

Four Good and One Bad Suggestion For Preparing Your Supply Chain for Volatility

A recent article over on ChiefExecutive.net on Volatility: Predictions and Prescriptions presented five suggestions for dealing with the current market volatility that guarantees both minor and massive disruptions will continue to occur on a global scale, impacting your supply chain(s) to various degrees as they occur. Four of them were quite good. One wasn’t. Since it is important for a supply management organization to face the reality of increased volatility and plan for it to mitigate its risk, this post will review the suggestions presented in the article. Disruptions are going to happen. The only unknown is how bad the disruption will be. Since a disruption is always worse for an unprepared organization, it’s important that an organization do everything it can to be prepared.

The organization should start by:

  1. Expecting Disruptions
    They’re going to happen. Some you will predict. Some you won’t. The more flexible the organization is, the more capable it will be in dealing with the disruption. Plus, an organization that expects to be disrupted won’t be shocked by a disruption and won’t have the additional disruption of having to deal with the emotional impact of not being prepared for the initial disruption.
  2. Feeling the Malaise
    An organization that expects disruptions will, at first, feel uneasy and weary knowing that at least some of its best laid plans will come to ruin. But once the organization gets used to the feeling, and begins to savor it, the preparedness will save the organization in its hour of need because the disruption won’t seem so bad.

The the organization should take heed of the following four suggestions:

  1. Simulate Scenarios
    Once the organization expects disruptions, it can “game plan” how to deal with them. It can identify the different kinds of disruptions that can occur and scope out a sequence of responses to each. And although some disruptions can never be anticipated and “game planned”, if similar disruptions have been addressed, the organization will have a starting plan that should be workable with only a few minor tweaks.
  2. Diversify Geographies
    Many disruptions, such as natural disasters and political turmoil, are localized to a region or a country. A supply chain that multi-sources key products and services from different regions and countries should be in better shape to withstand a shock of a product no longer being available from a supplier in a certain region due to a natural disaster or political disturbance.
  3. Diversify Products and Services
    Not only should geographies be diversified, but so should raw materials, products, and services when applicable. Although the former will often be hard to diversify, as certain raw materials will not be substitutable, services are very easy to diversify and should be.
  4. Deleverage Balance Sheets
    While a leveraged supply chain can generate great returns in good markets, it can be downright risky in bad markets. In a volatile market, it is often safer to sacrifice some ROE in return for safer debt/equity ratios (or inventory/equity) over the longer term.

However, the organization should not listen to the fifth and final suggestion, which is downright destructive:

  1. Enable Rapid Downsizing
    Supply Management is getting more knowledge-intensive by the day and we’re in a serious talent crunch. The last thing you do is get rid of good people, especially those that can often generate savings of 10 to 100 times their annual salary on a single buy. While high fixed costs can be dangerous in times of reduced cash flow, it is much better to get rid of assets (and rent them back if you need to) then to get rid of good people.

Cost is Just Another Component of Risk (Bonus NPX Take Away 3)

One of the most useful, and possibly controversial take aways, from the NPX exchange put on by The Mpower Group is that a Next Practice organization should not have cost as part of its value equation as a focus on cost has not only not served the Supply Management community well, but has destroyed incalculable value over the years. This is especially true in high-value or strategic categories.

Cost should be viewed as just another component risk, and in particular, the risk of cost increase beyond an acceptable level is what the organization should be focussed on. Furthermore, once the organization has established that cost is in an acceptable band, the organization should remove cost from the equation entirely in high value and strategic categories.

The reality is that for some categories, a +/- of up to 5% is insignificant when compared to the critical factors of stability of supply, quality, and flexibility. Consider the Apple iPad. While it is obviously in Apple’s best interest to drive down cost as much as possible, it’s more important that Apple be able to guarantee supply, quality, and flexibility in its supply chain. The extra savings of $2 on each unit will not make up for the loss in profit if Apple fails to deliver on 100,000 orders. Nor will it make up for the warranty costs if the quality drops to the point where Apple has to make 25% more repairs under service contract.

So if you really want to focus on value, band cost, and then remove it from the top-level value equation altogether as cost control then becomes simply another component of risk management in the overall value equation. The organization just might see better results in its high-value and strategic categories.

Comments?

Is Piracy About to Become Standard Operating Practice in Somali Government?

As per this article over on MSNBC which headlined that a “US pilot [was] jailed for 15 years over pirate ransoms”, six foreigners have been jailed on charges of illegally bringing money into the country (to pay ransoms for the release of vessels held by pirates), carrying cash intended to pay ransoms, and landing in Mogadishu without the correct papers. Their sentence is a 15 year imprisonment and a $15,000 fine each, as reported by the Mogadishu’s court judge Hashi Elmi.

However, according to the article, Elmi said the six might be able to buy their freedom. “The men can appeal and if they ask to pay more instead of (remaining in) prison then we shall see and take our decision”, Elmi said.

Hmmm. Allow pirates to flourish in the north, knowing that they are demanding multi-million dollar ransoms. Wait for foreigners to send in millions of dollars of cash in an effort to free their ships and their people without the right papers. When they do, seize the plane, the cash inside, and the pilots and then charge them for not having the right papers, for illegally bringing money into the country, and for attempting to pay bribes. Then convict the pilots to ridiculous sentences and give them petty fines in comparison. Then say they might be able to reduce their sentence or even buy their freedom in exchange for a bigger fine. Almost sounds to me like the government has figured out they can cash in on the rampant piracy in their country too by passing laws to make bribes illegal, insuring planes suspected of carrying cash never have the right papers, ordering customs officials to deem large cash imports illegal, and ordering the courts to hand down ridiculously harsh sentences in hopes that the foreigners will buy their freedom. Then, they not only get millions of dollars in seized ransom money, but hundreds of thousands, or millions more, in fines.

So what does this mean for your supply chain? Even if it costs more logistics wise, avoid the Somali coast at all costs. Take a longer route. It’ll be cheaper than air dropping a ransom when your vessel gets commandeered, and much cheaper than buying the freedom of your people if they get caught trying to deliver the ransom. Given that piracy attacks are on track to more than double this year, it won’t be long before your ship is next. Unless you’re prepared to hire your own private militia to defend the ship in international waters, don’t take the risk.

Ariba Vision 2020: Tomorrow’s Shoes (Part II)

This is the second of two posts that address the fourteen predictions that were dead on in Ariba’s “Vision 2020 – The Future of Procurement” report. Any Supply Management organization that recognizes the truth of these predictions is well on its way to formulating a plan to be a leading Supply Management organization in the decade ahead.

18. Offensive line takes the field

Supply Management professionals will increasingly use online communities and networks to discover, connect to, and collaborate with suppliers in a relentless pursuit of growth and expansion in line with the strategic goals of the company. Furthermore, the collaboration will be much more intensive and innovation focussed than it is today.

23. Buyer-seller lines blur

The focus will shift from the effective utilization of supplier functions to the effective integration of supplier functions to the point that integrated supplier functions will be almost indistinguishable from buyer functions. In leading organizations, the line will blur to the point where it is essentially nonexistent.

24. Innovation comes from without

As the paper says, the supply management role will be less about “person-who-brings-innovation-in” and more about “person-who-assembles-innovation-communities-and-gets-out-of-the-way”. Even at most companies that use innovation networks today, the innovation is still driven by the supply management professional that posts a problem in need of a solution. In the future, the networks will identify the problems and the solutions and then bring them to the supply management professional. Next generation web-based technology will bring the democratization of technology to new heights.

26. (Key) Suppliers gain power

Increasing reliance upon (key) suppliers is going to give them substantially more leverage in buyer-seller relationships, which is going to result in the supply management organization having to sell itself to the supplier as a customer of choice instead of the supplier having to sell itself to the supply management organization as the supplier of choice. And the more innovative the supplier, the harder the sell the Supply Management organization will have before it.

27. Firms share risks and rewards

The leading supply management organizations, that are incorporating incentives into their contracts today, will move to a shared risk and reward model where both parties share the rewards of a successful venture as well as the risks of the undertaking. No longer will contracts be lopsided in favor of the buyer that will be as reliant on the supplier as the supplier is on the buyer.

30. Risk info catches up

Risk management will take prominence in an average Supply Management organization which will have more access to readily available third party information (from networked communities where participants pool data for operational risk assessment) and be better poised to mesaure risk and formulate appropriate mitigations. Risk management will be embedded in every sourcing and contracting process and a key component in the calculation of expected value.

31. Profits replace cost savings

The shift in focus from cost to value will see most Supply Management organizations retire cost savings and instead institute profit generation as a primary measure of organizational success. Top line growth will be just as important as bottom line impact in an organization that wants to improve business outcomes overall.

The next post will address the predictions that came close to the mark, but did not hit it.

Can Your Supply Chain Be More Agile? Yes It Can!

A recent article on speeding up business agility over on ChiefExecutive.net had some great tips for making your supply chain more agile.

  1. The CIO is Your Business Partner
    Let’s face it, the best supply management organizations run on modern technology platforms that have to be implemented quickly and efficiently and operate 24/7/365. Supply Management needs to make a partner out of IT to insure that this happens.
  2. Foster a Culture of Innovation
    Yesterday’s best practice is today’s common practice is tomorrow’s laggard practice. The best organizations are constantly innovating, and this takes an innovative culture.
  3. Use Software to Fail Fast and Minimize Risk
    Model potential supply strategies and simulate both expected flow and disrupted flows to insure that the supply strategy chosen has the maximum chance of succeeding in today’s volatile and unpredictable global market place.
  4. Integrate IT at the Grass-Roots Level
    Not only is the CIO your business partner, but IT is part of every sourcing team. You need their support, and they need your help to minimize their costs. And they are your best ally when you need a new system.
  5. Establish Centers of Excellence
    Not only are the best supply management organizations generally center-led or hybrid (center-led / centralized models), but they have teams dedicated to nothing but strategy and innovation.

These are all great pieces of advice. They are so good that not only has SI recommended each individually before, but will do so again. Agile supply chains survive volatile times. Make yours agile before its too late.