Category Archives: Risk Management

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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Are You Ready for the Black Swan?

As recent events have shown us again and again, he’s coming. You better be ready. This means you have to stop worrying about death by a thousand white swan-bites, because, having dealt with the flock day-in and day-out, you know how to deal with them. Their bites might hurt a bit, but you know that you’ve gotten quite good at sterilizing and bandaging the wound so that it heals fast, because you wouldn’t still be around had you not. However, you aren’t (as) familiar with the black swan yet. You are unaccustomed to the poison that accompanies his bite and, chances are, you aren’t stocking the antidote to treat it. This is problematic because the venom is fast acting, and if you don’t treat it in time, it can kill you.

Just because the appearance of the black swan is a fourth quadrant extreme event which cannot be statistically predicted, doesn’t mean that you can’t plan for it. That’s what real risk management is all about. True risk management is all about figuring out where the black swan could appear, what type of damage it could do, and how you will contain the damage and clean up the mess before it spreads beyond your control (and bankrupts your company).

It’s identifying those things that everyone thinks can’t go wrong, but that can, in actuality, go extremely wrong if an extreme event occurs. Like an unexpected market crash, an earthquake in a low-risk area destroying a factory, or an uprising closing a border. And then it’s having damage prevention or containment plans (with necessary equipment and resources ready to go) to deal with a sudden loss of supply, extreme market volatility in the preferred currency markets, or a lack of containment when an earthquake or explosion causes chemicals to start leaking rapidly. Because just like an overinflated balloon will eventually explode with the pressure, so will anything else we keep pumping money or resources into with expectations of a perpetual performance or growth. As nature has shown us, everything breaks down eventually. Even mountains crumble. And it doesn’t necessarily take a deluge to wash away your supply chain, and your company with it. So get ready for the black swan, and maybe you’ll be the one to survive his bite.

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The Most Overlooked Risk in Your Energy Supply Chain Just Got Worse!

And I’m still not talking about volcanic eruptions — which could bury or clog your production facilities with ash, a terrorist attack — which could blow up a pipeline, or plain old management incompetence — which could result in a poorly maintained drilling station blowing up, but suicidal Sciurus Carolinensis, who, over the past few months, has knocked out substations in Ohio and Florida (NWF Daily News).

Now it seems that these organized little critters have figured out that they can’t always do it themselves and have recruited procyon lotor to help with those “well-protected” substations that need some extra muscle. A few days ago, in Memphis (WSVN.com), an acrobatic and mean-spirited raccoon climbed over more than 30 feet of barriers to short-curcuit a switch on a substation and knock out power to 8,000 customers, including two hospitals the newspaper, for over five hours.

It would appear that things are getting dangerous over the hedge now that squirrels and raccoons are working together. If you’re not ready, your energy supply chain could be next!

 

Partners in Terror

 

Another Reason to Use Plain English in Your Contracts

In addition to the fact that you will have an entire state on your side, as Dick Locke points out, and the fact that not using plain english can land you in some dire consequences, as Tim Cummins points out over on “Commitment Matters”, there is the fact that obscure language increases the risk of failure. If no one understands what they are meant to be doing, a dispute is more likely. Contracts need to be clear, so write them in plain English.