Category Archives: Risk Management

Another Reason to Be Wary of Outsourcing

As per this recent article in Industry Week on how the “New CPSC Complaint Database Is Trap for the Unwary”, as of March 2011, the US is going to have a searchable electronic database of consumer complaints, implemented by the Consumer Product Safety Commission (CPSC). In a mere four months, instead of having to file a request to the CPSC for the release of documents and wait for the results of a manual search, a consumer will be able to go online and do their own search at any time — and retrieve all complaints that are over 10 days old unless the manufacturer has proven (and the CPSC agrees) that the reports are inaccurate.

However, instead of having 15 days to review a complaint, a company will now have as little as 5 days (as the CPSC will have 5 days to forward a complaint to the manufacturer) to review a complaint and, whereas before the CPSC would not release the documents until the manufacturer’s response was reviewed (provided the response was provided by the deadline), the CPSC is now required to release all complaints after 10 days, whether the manufacturer’s response has been reviewed or not.

As per the article:


[I]ncorrect reports are likely to be included in the database and available to consumers, reporters or advocacy groups. … [T]he CPSC could perform compilations that may lead it to believe that a substantial hazard is presented by your product. Finally, plaintiff’s attorneys will use these complaints to prepare class action petitions, which will require significant resources to derail or defeat.

In other words, if a product that you manufacture fails, you could be in serious trouble … even if you outsourced the manufacturing to a contract manufacturer. It’s yet another reason to be wary of outsourcing, because if your contract manufacturer doesn’t enforce strict quality control, and the product fails, not only will everyone be able to find out each and every complaint 10 days after it is filed, but every class action lawyer in the country looking to make a quick buck will be automatically compiling evidence against you!

Maybe it’s time to bring (some of) your core supply chain back in house?

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Life Lessons from Clown College: II

   

First of all, let me apologize for taking so long to write Part II. I never expected such an overwhelmingly positive response to my previous posts, and it went to my head, and like a writer who wins a National Book Critics Circle Award for their first novel, I developed a severe case of writer’s block because the last thing I want to do is disappoint you. But thanks to some prodding, and the realization that I don’t have to tackle it all at once, I was able to capture three more life lessons that I learned in clown college that I’m sure will help you in your Procurement Career.

  • Learn to Barter (because it’s all funny money in the end)
    Not all purchases should involve exchanges of currency for goods or services. When possible, and especially when the deal is with a strategic supplier or partner, an exchange of goods or services should be considered. For example, if you’re a temporary labor placement agency buying software from a foreign IT company that needs temporary labor in your home country, consider an exchange of services in lieu of paying for support or future upgrades. Not only will this reduce cash-flow requirements in a tight economy, but it protects you from currency exchange risks in countries with unstable currencies undergoing fairly rapid inflation or deflation.
  • Be Cognizant of the Risks
    Those of you who don’t might end up without a job just like Fred ended up without a head. I didn’t know No-Head Fred, but, thanks to him, my entire class knew why you didn’t stick your head in the mouth of a hungry lion who didn’t like you. Fred didn’t understand that a lion could bite your head off and, as a result, didn’t insure that the lion was fed before performing the stick-your-head-in-the-lion’s-mouth trick. However, since the rest of us understood the risk, we always insured that the lion was fed and happy before performing the trick, and we all kept our head. Now that trade is truly global, this is one of the most important lessons for a Procurement Professional. If you’re not cognizant of the risks, you’ll never know when you might lose an entire shipment, or, if you’re not careful, your life. While a short-cut off the coast of Somalia in a shipment from Mumbai to Adan (for example) might seem like a good idea at the time, it won’t seem like such a good idea when Pirates are boarding you. North of Seoul might be the last place you want to build a new plant if North Korea declares war on South Korea. I know the risks aren’t always this big, but they can be, and if you’re not cognizant of them (and do not take the necessary precautions), you could lose your head over them.
  • Don’t Be Afraid to Laugh at Yourself
    Just like the situation gets a little tense in the dressing room when you have a poorly-timed wardrobe malfunction, negotiations in challenging economic times can get so dire that you couldn’t even cut the tension with a knife. In these situations, the only way to break the tension-ice is with a good hearty laugh, but no one is going to laugh unless you laugh at yourself first. In the first situation, the only thing you can do is look down and let out the heartiest laugh you can. In the second, you’ll have to make a slip of the tongue that’s so funny that you can’t help but laugh heartily at yourself. For example, if you were buying ball bearings and you accidentally called them bears’ balls, I’m sure laughter would break out.

I hope you enjoyed these life lessons. Until next time, please join me and eleven of my friends as we take a ride in our clown car.

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Another Headline From the Land of D’OH: Going Global Means Expecting the Unexpected

I have to say that I never expected our next headline from the land of D’oh! to come from Knowledge@Wharton, but I guess that this is just more proof that the unexpected can happen when you go global! But seriously, who didn’t know this? It’s 2010, and everyone knows that every country is different. Different cultures. Different political systems. Different goals. And no matter how much you think you know about another culture or country from reading a book or taking a course, there’s always going to be something you don’t know. After all, there’s lots about your own country you don’t know. For example, for those of you in the US, how many titles in the US code and which ones would impact you if you changed your product line?

And now that national security is becoming a prominent issue in many countries, it only stands to reason that the complexity of doing international business is only going to increase, and that the unexpected is going to become more common. This is especially true in information technology, as information can have political ramifications, and telecommunications, which transmit information, as these are both high-growth industries and there’s a lot of money at stake.

Furthermore, when companies offer products or services that can be used for, or to compromise, national security, there’s a chance there’s a good chance that it can put them in conflict with local governments. So what should they do? According to the article, these companies should put crisis management in place. Because a crisis is almost as inevitable as a supply chain disruption, and we all know that the black swan is coming.

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DnB’s Mobile Capability is Good But …

… it’s no substitute for the real thing.

There’s been a lot of hype recently about Dunn & Bradstreet’s new Supplier Risk Manager Mobile functionality, and a lot of coverage on the blogs. I’m not going to say it’s undeserved, as it is one of the first enterprise applications in the supply chain space to make an effort to embrace mobile computing, but I’m not going to hype it either.

The reality is that while D&B are advertising three capabilities, there is really only one real use for the offering (and I’m pleased to say that, when grilled, they readily admitted it), which is:

determining whether or not an alert needs to be acted on now, or later.

A properly configured Supplier Risk Management System will be configured to send out alerts anytime something might need to be looked at — as the system will be ignored otherwise. When an alert is sent out, the first thing that a recipient needs to do is determine how serious the alert is and whether or not more research needs to be done and/or an action needs to be taken. With the mobile platform, that works on ‘Berries, ‘Droids, and iPhones, a risk manager can drill into the alert and see why it was issued (reduced credit score, late shipments, plant shutdown, etc.) and then drill into the supplier profile to determine what effect the reason for the alert could have on the supplier and/or the relationship. The manager can then determine if the alert needs to be followed-up on or not, and if the follow-up (whether additional research, a call, or another action) has to happen now or later. This is useful if the manager is on the road and doesn’t have easy access to the regular application or if the manager is just enjoying personal time and doesn’t want to drop everything to run to the [home] office to figure out whether or not something needs to be done — which could be the situation if the alert is for a major supplier of critical inventory.

The mobile app also allows you to search for suppliers and look up (random) company profiles, but let’s face it, that’s not something you’re going to be doing when you’re on the road or on personal time — especially when it’s so much easier on the full application. It’s neat, but you’re only going to be doing it when conduction sourcing events back at the [home/hotel] office. In short, it’s good, but don’t place unreasonable expectations on it, or they’ll be dashed.

Should Companies Really Be Building Their Own Credit Scoring Capabilities?

As per a recent article in Market Watch on “supply chain risk companies must develop credit scoring capabilities to predict supplier defaults says oliver wyman report”, a new report issued by Oliver Wyman, in collaboration with the Association for Financial Professionals, suggests that companies must develop their own credit scoring capabilities to prevent supplier defaults from jeopardizing their supply chains. In “The New Weakest Link in Your Supply Chain: Supplier Credit”, they say that companies can no longer rely solely on credit ratings from credit rating agencies to evaluate their suppliers’ financial vulnerabilities.

While I agree that credit scores are not enough, because it can be a few months before a credit score reflects a supplier with failing financial health as it will typically take a few months of missed payments before the credit score accurately reflects the supplier’s financial health, I don’t think that developing sophisticated scoring is the answer. First of all, your average company is not going to have the expertise to even begin such an exercise. Secondly, the whole point is to detect when a supplier might be in financial distress, not score them.

Would not careful monitoring of shipments, payments, and quality be enough? Most suppliers who are in distress are going to either be late with payments, late with shipments, or cutting corners in production, leading to a drastic decline in quality. If you can catch this behaviour early, then you can tell when a supplier might be distressed and start to make back-up plans, all without sophisticated credit scoring. And that’s what’s important. Not how much complexity you can throw at the problem.

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