Category Archives: Risk Management

Seven Things Manufacturers Should Be Able To Do With S&OP Data

A recent article in Industry Week summarized “five things manufacturers should be able to do with S&OP data” that were quite good. So good, in fact, that this post is going to summarize them before adding two more things that manufacturers should be able to do with S&OP data.

  • Minimize SurprisesAn effective S&OP process that focuses on collecting and understanding demand data from internal stakeholders and trade partners is essential if you want to minimize surprises such as a delayed shipment, insufficient supply, or raw material shortage.
  • Optimally Manage InventoriesHaving the right amount of product, at the right time, in the right place is key to increasing margins, cash to order cycles, and customer satisfaction, among other benefits.
  • Improve MarginsImproving margins is often an area that’s under-emphasized in an S&OP process, and yet [it] is ultimately the most important factor in the health of a company. Making sure the relevant S&OP data, such as average product unit cost, inventory levels, logistics costs, anticipated margins, customer satisfaction rates, etc. is shared across marketing, finance, supply chain and the executive suite is critical because input and shared data amongst all functional groups is what drives margin improvements.
  • Improve Customer Satisfaction RatesImproved customer satisfaction gives you the ability to build stickiness with customers, which leads to profitable relationships. Knowing what your customers need, when they need it, and delivering on that need in a timely fashion is key to increased customer satisfaction — and good visibility will allow you to do just that.
  • Better Resource UtilizationEach part of the S&OP process should leverage the data as fuel for the decision making process as this allows for fact-based resource allocation which enables significantly greater resource utilization.

These are great starting points, but don’t stop there when you can also use S&OP data to:

  • Decrease CostsOnce you have an effective handle on demand across all product lines, you can use that knowledge to negotiate the best prices on parts against true volume levels. No more lowball estimates to be safe or missed rebates due to overly aggressive estimates.
  • Effectively Prioritize NPDOnce you have an effective handle on sales across product lines, you can determine which types of products sell the best, and which products in the pipeline are the most likely to be successful. Focussing on these products should allow the company to most effectively utilize its resources.

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You Did Not Predict the Weather? Too Bad. See You In Court!

As if you didn’t have enough risks to worry about, now, as per this recent article in Industry Week on “Climate Change Risk Management”, you now have a new risk to worry about. If you don’t anticipate extreme weather events that can cause sudden and material damage to business assets, interrupt business operations directly, or disrupt key elements in transportation or support activities, then you might be sued by your investors for losses from your failure to disclose and anticipate those risks, just like American Electric Power Company was sued by the state of Connecticut.

Right now most of these claims are limited to “public nuisance” claims based on GHG emissions (which, according to various plaintiffs, have contributed to events like Hurricane Katrina), but they could be brought under security laws in the near future, now that the SEC has issued interpretative guidance for publicly traded companies related to climate change disclosure. Any company that fails to disclose in accordance with the guidance could be on shaky ground, especially now that shareholders’ resolutions for disclosure of management’s responses to climate change are becoming much more frequent in proxy statements.

In other words, if you’re not identifying all your risks, disclosing all your significant risks, and preparing to mitigate those risks, you’re not only on the fast track to major disruption and loss, but lawsuits that drag on forever.

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Supply Chain Leaders Internalize Risks Before They Come To Pass

A recent article in the Harvard Business Review on “leadership in the age of transparency” noted that whereas, in ages past, companies could ignore “externalities” and still prosper, today’s leaders are finding that, in order to truly prosper, they have to internalize the “externalities” and successfully manage them long before they creep into realm of regulation or law.

(In economics, an exernality [or transaction spillover] is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. As a result, in a competitive market, prices do not reflect the full costs or benefits of producing or consuming a product or service, producers and consumers may either not bear all of the costs or not reap all of the benefits of the economic activity, and too much or too little of the good will be produced or consumed in terms of overall costs and benefits to society . The examples give by the article are the tobacco industry, that profited by burying research it did in the seventies that proved smoking was an addiction and not a choice for most people, and the use of trans-fats, which are only now being outlawed in restaurants despite the facts that it has been well known for a while that they have no health benefits and provide a danger to some people.)

Supply chain leaders take a similar approach to supply chain management. Whereas good business leaders look beyond the market of today to the market of tomorrow where regulation, activism, or other forces could threaten their business and find ways to internalize those threats and eliminate them before they occur, supply chain leaders are always on the lookout for issues that could cause a major supply chain disruption. Leaders have noticed the increase in natural disasters in recent years that are posing supply chain threats and developed alternate routes and contingency plans. Leaders keep on top of the results of additive and chemical testing and find ways to remove dangerous chemicals and additives from their products long before regulations prevent their use. Leaders are on top of supply and demand swings and proactively lock up supply before it becomes a problem. Leaders look ahead and internalize what’s important.

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A Couple of Surprises in the Supply Chain Strategy Survey

A cooperation between the Cranfield University School of Management and Solving Efeso that resulted in the publication of Supply Chain Strategy in the Board Room (based on a survey of 181 senior logistics and supply chain executives) between July 2009 and January 2010) had a couple of surprises in the top ten findings, at least to me.

While the following findings made sense:

  • The most important supply chain performance drivers are cost focus, customer lead-time and customer quality but these vary by sectorUnfortunately, supply chain initiatives are still primarily focussed on cost and not the overall value supply chain can deliver in terms of risk mitigation, service level improvements, and innovation.
  • Customer service issues and cost issues are the main triggers for strategy reviewReviews are usually reactive and not proactive.
  • Supply chain strategy implementations are not straightforwardThe supply chain affects all areas of the business and multiple systems in sourcing, procurement, logistics, warehouse, and trade management are needed to address the supply chain end-to-end.
  • Successful supply chain strategy implementations have top level supportGreat results typically require significant changes to systems and processes, which just don’t happen without support and leadership from the top.
  • Cross-functional accountability and a balanced combination of several key approaches and techniques also improve the likelihood of successAll of the affected parties need to collaborate. This will generally only truly happen if they are all held responsible for the success or failure of the initiative.
  • Development of the supply chain strategy is largely internalisedEven though most corporations don’t truly understand how to revolutionize the supply chain, those that embark upon defining a supply chain strategy generally try to do it themselves without the help of an expert guide from outside the organization (even though Consultants are Cheap).
  • Of the many barriers to success, the major ones are company culture, lack of leadership and poor supply chain visibility. Barriers are predominantly people-related, rather than technical.Implementations may be difficult, but with the right guidance, support, and elbow grease, they can be done relatively quickly and efficiently and, depending on the system or process in question, sometimes be completed in a few weeks. Most of the solutions are fairly matures these days. As a result, any hiccups are generally caused by humans and not hardware.

The following findings are a little shocking:

  • Supply chain is recognised as an important part of the businessWhile I hear a lot more talk these days about how important supply chain is to the business, I still don’t see a lot of action. It’s shocking how many mid-market companies still don’t have basic e-RFX/e-Auction platforms even though affordable solutions have been available for years! As far as I’m concerned, it’s Action, Not Words, and until I see more action, I won’t believe it.
  • Service and corporate strategy are key driversNo, cost is. While 10% of the true innovators might have moved onto service and strategy in an attempt to generate long term value, 90% of the time it’s cost, cost, cost. (If you get any other response is just lip-service.) While it should be value, it’s still cost.
  • Review of supply chain strategy is highly cross-functional and in many cases, a continuous process with regular monitoring and continuous adaptation according to circumstancesWell, at those few companies that actually have real supply chain strategies, review is likely to be cross-functional (as these are the few companies where the CSCO/CPO will actually have a seat at the table), but at the vast majority of companies monitoring is irregular, adoption is haphazard, and cross-functional participation is still a pipe-dream. Sorry, but this is either wishful thinking on the part of the survey respondents, or the survey sample was very skewed towards the 10% of true innovators. If review and monitoring was continuous, you wouldn’t have 40% to 60% of negotiated spend unrealized at the average company, because maverick spending would be caught and eliminated, overcharges would be caught and never paid, and off-contract shipping options avoided in all but true emergencies.

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Tips for Evading the Black Swan

The black swan has been on a rampage in recent times, taking down supply chains, companies, states, and even countries in his wrath, which seems to have no end. It’s foolish to assume that he’s not coming for you, because, even if you’re not on his list, it’s only a matter of time before you are. He’s as determined as robot santa claus, and just as indestructible. But if you’re ready for him, even if you can’t stop him, you can survive the encounter, and with the right blast shield, even minimize the damage. So how do yo do this?

Nassim Nicholas Taleb’s exceptional article on The Fourth Quadrant: A Map of the Limits of Statistics has some great advice for minimizing your chances of encountering the black swan, and even minimizing the damage if you can’t avoid him. And to make sure there’s no misunderstanding, I will use plain English, and not statistics (which most people, including the “experts”, don’t really understand), in my presentation of these tips.

  1. Redundancy

    You can over-optimize and over consolidate. You need multiple sources of supply, multiple products, and multiple channels.

  2. Avoid the Long Tail

    Yes you can make money in the long tail, if you’re lucky, but the further you are from the norm, the harder it is to predict what will work.

  3. Don’t try to Numerically Model Atypical Events

    You can’t predict future stock-outs based on past stock-outs or the degree of future demand surges based on historical demand surges. They could be the same, or be off by a factor of 10. That’s why they are atypical. Address them generally, and you’ll be better off.

  4. Take Your Time

    Only time can reveal the true nature of a cycle. Depending on what you’re trying to model, that could be months, years, or even decades. If you avoid drawing conclusions too early, you’ll be better off.

  5. Don’t Reward Luck

    Just because someone made a foolish bet and won doesn’t mean they should be rewarded. The more extreme the bet, the more likely you are to lose. Don’t encourage ridiculous behaviour.

  6. Don’t Measure What Can’t Be Managed

    For example, the “average time” between stock-outs or demand surges is meaningless, and it will just increase the desire for your team to “model” the situation, which will give you the illusion that you understand something you don’t, and that you don’t need to have contingency plans for “unexpected” stock-outs or demand surges because you modelled them.

  7. What’s the Nature and Magnitude of the Uncertainty?

    In NPI, the uncertainty is that the team might fail given the resources assigned to it. The nature of the uncertainty is positive (if they succeed, you win) and the magnitude is limited to the investment. But in chemical processing, the uncertainty is that a storage tank could rupture, contaminating the local environment. The nature of the uncertainty is negative (if it the tank ruptures, the environment gets damaged to some level) and the magnitude is large (if the chemicals reach a lake or the groundwater table, the local population is screwed). Put your efforts on creating emergency plans for large negative uncertainties first, as those are the events that can bankrupt the business.

  8. Do Not Confuse Absence of Volatility with Absence of Risks

    For example, if you look at the graph of daily variations in a derivatives portfolio exposed to U.K. interest rates between 1988 and 2008, almost 99% of the variation occurs on 1 single day — when the EMS (European Monetary System) collapsed. On almost every other day, variation was less than 1/100th of a percent. This is not dissimilar to the eruption pattern of Mount Vesuvius (which buried Pompei and Herculaneum in 79 AD). If you plot a daily graph, it’s typically flat for 30 to 50 years, until one day a massive eruption wipes out the local area. Remember, the black swan will show up where you least expect him.

  9. Most Risk Probabilities are Lies

    A rare event that happens once every 30 years does not have a 3% chance of occurring every year. The chance is typically dependent upon whether or not there is a confluence of initiating events and factors, and could be 0.03% or 99.3%, depending. Furthermore, the presentation of a risk statistic has a significant effect on it’s impact. People are unlikely to heed a warning for anything that only has a 3% chance of occurrence, but very likely to at least give serious thought to any event that will happen once every thirty years with 99% certainty.

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