Category Archives: Risk Management

By The Time You Detect Financial Risk …

… it’s too late. As per this article on “the quality and performance connection” of supply risk, indicators of financial risk are usually preceded by a slow decline in quality or performance that is difficult to detect from delivery to delivery as suppliers, looking to survive, begin to cut corners that they hope will go unnoticed but which often compound the farther up the supply chain you go.

As the author, Jim Lawton of D&B notes, you need to consider supplier performance metrics to be the best leading indicator of overall supplier financial viability. This means that you need to define a process to monitor quality and performance from a risk perspective. Do this by:

  • identifying which areas of supply where quality, performance, and/or financial risk factors are likely to be most pronounced;
  • defining a way to track and measure performance using delivery, performance, and other system data;
  • aggregating the data regularly for analysis;
  • creating corrective action plans to be implemented as soon as elevated risk is development; and
  • creating a closed-loop process that continually monitors and assesses risk information to insure that risks are detected early enough to permit the corrective action plans to be undertaken successfully.

And maybe you won’t be the one that finds out about an impending supplier bankruptcy after it’s too late!

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Plain English Contracts Can Be Reasonable

Last year, Dick Locke, who has an entire state on his side, wrote a great post on the importance of plain English in contracts. Then, last month, with the help of The Temp Life (Season 2, Episode 7), I made it very clear what might happen if you don’t follow his advice.

But one aspect of contracts we haven’t tackled yet is that of “reasonableness”. As highlighted in this recent article over on SupplyManagement.com which asks you to “now be reasonable”, these clauses can end up causing more disputes than they ultimately resolve. While they are included in the hopes of raising contentious issues during critical phases of contract negotiations, they simply delay the inevitable because, given enough time, a supply disruption will happen and finger pointing will begin.

The key to preventing disputes is to define precisely what conditions define a breach and what steps each party will take to try and remedy it, in plain English, so there are no disagreements down the line. While it’s true that a contract cannot predict, or define a remedy for, every type of disruption that could happen, it can predict, and define actions for, the most likely disruptions. The use of plain English to define reasonable remedies for these disruptions will prevent problems down the line. This will minimize the chance that the “catch-all” reasonableness clause will need to be invoked, but even if the “catch-all” clause does need to be invoked, if the reconciliation process is defined in plain English (notify, meet, accept, correct, etc.), things will still go smoother than if plain English is not used.

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How Will McKinsey’s Five Reshaping Forces Affect Your Global Supply Chain? Part II

Our last post overviewed a recent article in the McKinsey Quarterly that discussed the “five forces reshaping the global economy” that every executive has to grapple with, which left the reader with as many questions as answers. This post will attempt to shed some light in the directions the answers may lie.

The following are the forces that were identified:

  1. Growth and Risk Management in Emerging MarketsMultinationals will have to get in on the ground, attract local management talent, and let the local management talent craft an appropriate strategy for the local market. The multinationals that don’t do this will likely miss out on most of the growth opportunities that are available as the current economic climate, coupled with declining population growth, will significantly limit growth opportunities in developed markets. As a result, your supply chain leaders will be working considerably with local talent in analyzing product costs and sourcing for remote developments.
  2. Labor Productivity and Talent ManagementMultinationals will have to look to developed countries for R&D talent, engineering capability, and innovation and focus on grooming talent in emerging markets to manage the new breed of talent available to them. In addition, management will have to double down on new technology, process innovation, and alternative delivery models to maintain productivity levels with a decreasing workforce in developed economies. Sourcing teams will continue to become global. At first, the team leaders will be in the developed world, and the supporting analysts, with the technical and mathematical skills, will be in emerging markets. (A couple of big consultancies are already very successfully applying this model today.) As time goes on, your leaders will move to emerging markets (following IBM’s example), and the leaders of tomorrow will be just as likely to be in Shanghai as Chicago or London.
  3. Global Flows of Goods, Information, and CapitalMultinationals will have to learn how to maximize efficiencies in existing trade flows as current global economic conditions will likely slow down the introduction of new channels and opportunities. They will need to adopt trade management software to automate manual processes, decision optimization to optimize carrier and route selection, and “spend” analysis to analyze trade data to identify emerging trade patterns that they can take advantage of. Your supply chain will increasingly see solutions developed by Asian multi-nationals, like Algorhythm and Zycus, implemented by local consulting powerhouses, like InfoSys and Wipro.
  4. Natural Resource ManagementCompanies will have to design new products with resource and environmental management in mind, or risk incurring additional costs, and bad press, in the future. Even if the up-front costs are higher, decisions not to use more environmentally friendly materials and processes will have to be very carefully considered. In addition, identifying the effects of forthcoming regulations in India and China will become a top priority.
  5. The Increasing Role of GovernmentsCompanies will have to continually analyze the potential impact of major government programs on the economy and GDP and determine the best markets in which to pursue not only new product introductions (NPI) but new product development (NPD).

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What About Risk-Based Development?

I enjoyed the recent article over on Industry Week on “New Models for Product Development” that identified the need for new development processes that will make product development faster, less expensive, and more successful in its outcomes and that covered agile development, knowledge-based development, and spiral development processes as potential processes a company could use to improve product development and associated outcomes. But it made me think about the alternatives not mentioned — namely risk-based development. But first, let’s discuss why new development methodologies are needed.

As noted in the article, a 2008 survey showed that companies met their product launch dates only 45% of the time. Furthermore, a recent survey by Boston Consulting found that only 52% of senior executives were satisfied with their companies’ innovation ROI. That’s clearly a fail. NPD is hard, and not every project will succeed, but these results are equivalent to saying that management is okay with failing half of the time. That’s not acceptable.

However, according to the article, besides making sure that there is a formally defined (and followed) process in place, the only way to see significant improvement is to identify the “next big thing” — the idea, invention, or improvement that will make the product development process faster, less expensive, and more successful. And while I don’t necessarily agree that it has to be “big”, I do agree that, in most cases, improvement is needed. But what kind?

According to the article, the leading contenders are agile development, knowledge-based development, and spiral development processes. Agile development, which started in software, mandates incremental development by teams in short time frames, such as one to four weeks. The frequent inspection and adaption is designed to allow changes to be introduced quickly, and before doing so would be prohibitively expensive. Spiral development, which also started in software, mandates multiple iterations of the entire process, improving and expanding the product in each iteration. For example, in new cell phone development, spiral one would be the base hardware and core OS, spiral two would include the camera and motion centre and API for core apps, etc. Knowledge-based development focusses on the creation of reusable knowledge through learning cycles that use set-based design. Multiple options are created and then refined and eliminated until the winning design is found.

They are all great processes, and they call confer advantages above and beyond the traditional staged development usually employed by manufacturers, but they all miss the point. If the reasons for failure are analyzed, it will quickly become clear that the primary reason most NPD projects miss their deadlines, or outright fail, is because something didn’t go according to plan — a disruption occurred. A risk, known or unknown, materialized and set everything back.

This seems to indicate that what we really need is risk-based development. In risk-based development, after identifying a feature/function list and a few potential high-level designs, the first thing the team would do would be to identify what new innovations are needed to succeed. The team would then rank the innovations on a scale from 1, or incremental renovation of existing technology, to 10, revolutionary invention so that the innovations with the highest score carry the highest risk. Then, the team would attack the highest risk innovations first in a multi-round/multi-stage development process. If the highest risk innovation could not be solved, the project would be suspended until a new idea was identified or terminated if the cost/reward ratio to solve the risk was determined to be too high. This would prevent the situation where the product is taken to 90% completion only to find out that the “killer-app” feature can’t be completed, which makes the product worthless and costs the company millions of dollars and dozens (or hundreds or even thousands) of man years. And this development methodology would work with any stage-based or phase-based process that is already being utilized by the company. It just makes sense.

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How Will McKinsey’s Five Reshaping Forces Affect Your Global Supply Chain? Part I

A recent article in the McKinsey Quarterly, that summarized some of their global survey results, tackled the “five forces reshaping the global economy” as executives are still grappling with how to seize the opportunities of an interlinked world economy. It provides some good information and insight, but leaves one with as many questions as it provides answers. This post will summarize the five reshaping forces and the next post will attempt to shed some light in the directions the answers may lie.

The following are the forces that were identified:

  1. Growth and Risk Management in Emerging MarketsEmerging markets and their young and growing populations will not only raise consumption, but will also become the major contributors to the global talent and innovation pools. However, most multinational executives in developed economies still aren’t betting on significant revenues from emerging markets for at least the next five years.
  2. Labor Productivity and Talent ManagementDeclining birth rates and greying workforces in developed economies are impeding growth, mandating the need for major gains in productivity just to maintain stability. Developed economies are already projecting significant talent shortfalls in management, R&D, and strategy.
  3. Global Flows of Goods, Information, and CapitalThe relatively free flow of goods and capital in recent years drove globalization to unprecedented heights, but the economic downturn and global financial crises appear to be preventing further growth. Most executives do not expect more than moderate increases in the short term.
  4. Natural Resource ManagementIncreasing constraints on supply or usage of natural resources continues to affect companies’ bottom lines in the developed world. A significant number of executives, 25% on average and 45% in energy and manufacturing, expect this trend to have a negative effect on profits.
  5. The Increasing Role of GovernmentsExecutives in North America and Europe are haunted by the perception of crippling public debt levels created by the government and expect that the net impact on GDP growth in their home markets will be negative.

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