Category Archives: Risk Management

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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The Real Key to Spotting Disruption Before it Happens

A recent post over on the HBR blogs on “the key to spotting disruption before it happens” noted that executives have to look beyond revenue or basic market share data to determine whether or not a would be disruption [which would trigger rapid declines in their core business] is a legitimate threat. This is because, in the early days of a transformation — such as mail to e-mail and digital document delivery, or CD to digital (mp3) album downloads, or polaroid to digital cameras and home printers — market leaders tend not to feel deep pain. It’s only after the not-good-enough transformation, which starts away from the mainstream in a seemingly non-connected market, becomes more than a slowly rising-tide and reaches the tipping point where the big switch begins that a market leader starts to see the impact.

According to the article, the key is to spotting potential disruptions is to find the right metric(s) to measure your business against the seemingly disparate competitor. If your measure falls while the measure for the seemingly disparate business rises, then you may have a disruption. For example, the U.S. Postal Service could have foreseen the problems it faces today if it had measured it’s market share by way of “pieces of communication” and not revenue, as mail volume has sagged 17% since 2006; Digital Equipment Corp. could have seen the end of the mini-computer market had it measured units sold against the rising PC market; and Kodak could have seen the “big switch” coming much earlier had it measured number of pictures “developed” on its platform.

The article has a good point as good metrics can tell you when a big switch might be coming. However, I wouldn’t go so far as to say it’s the key to spotting a disruption.

First of all, the method can yield a false positive. Consider the example of the potential big switch in progress given by the author. Yes, television viewership might be declining while YouTube and other online channel viewership is rising, but this doesn’t mean that television viewership will drop significantly. It might, but not everyone has a computer yet. Not everyone has (sufficiently) high speed. And not all the content people want to watch is online. This last point is key. Furthermore, when you think about it, TV networks are in the content development and distribution business … and now that TV is digital, there’s really no difference between a TV and a computer monitor. As long as networks produce content people want to see, learn from their counterparts in the music industry, and adapt to deliver their content through the channels their viewers want to consume it, TV networks will do just fine.

Secondly, by the time the method identifies a disruption, it could be too late. Markets are evolving faster and faster and a new market can often emerge overnight. Take the “tablet PC” and “digital reader” markets. Over a dozen providers, including some big names like Sony and Toshiba, have been producing numerous offerings for these markets for years, but sales remained relatively flat overall until Apple launched the iPad, which broke both markets open by selling over a Million units in a little over a month. If you didn’t have a competitive product in development before its release, it’s too late.

Thirdly, and most importantly, it doesn’t tell you where to look. If you were producing e-Readers, you wouldn’t be watching the tablet PC market. If you were producing tablet PCs, you wouldn’t be watching the e-Reader market. Either way, if you misclassified the iPad, which crosses both markets, you wouldn’t see your market disappear to Apple literally overnight until it happened.

This brings us to the real key for spotting a disruption before it happens … and that is to define it in-house. Use scenario planning to identify what types of future technologies could shift the market out from under you and keep a watchful eye out for them. Then, if you can, partner to develop or take advantage of the new technologies as they emerge, so you can ride the wave upward as the wave you are currently riding crests, or start working on alternative product offerings to start a new wave. Every product has a life-span. The successful companies recognize this and are working on next generation products that will either replace their current products or complement the next generation products of their competition (that they do not have the in-house expertise to develop themselves). They are ready for the next wave and the “disruption” is just a natural transition from one market cycle to the next.

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Integration Point Takes Trade Compliance to a New Level

The last time we reviewed Integration Point, one of the twenty-one stops on the 2008 Sourcing Maniacs Vendor Tour, we discussed their global trade solutions and told you they provided another way to get your trade data in order. In that post, we told you about their extensible modularized web-based platform that has effectively solved the core customs, security, and classification challenge as well as the free trade / secure trade zone challenge with solutions that address import and export classification (HTS codes), import documentation requirements, export documentation requirements, C-TPAT, AEO, denied party screening, FTA qualification, duty deferral, customs warehousing, customs control processing, and advance security filing – they have most of what your average multinational based in the US or the EU needs. With regards to three main challenges of global trade — customs, security and classification; free trade / secure trade zones and agreements; and regulatory compliance — they had two nailed.

Since that post, and the Maniacs’ post that followed, they have tackled, and introduced a rather comprehensive, and flexible, solution for compliance and risk management that provides a secure communication channel between you and your supply chain to gather any information you require and apply a risk-based assessment to it. And while the feature set is not yet as rich or as deep as the vendors who tackle compliance and risk as their primary focii — like Aravo, CVM Solutions, Hiperos, Rollstream, SupplierSoft, and others — it is more than sufficient for the majority of global trade organizations that do not yet have an appropriate solution at their disposal.

Like many tools on the market, the solution is survey-based, and allows the user to construct their own surveys for C-TPAT, AEO, SSER, PIP, EMCP, Product Safety, Export End Use, Internal Compliance, Training, or any other compliance initiative, regulatory or otherwise, that they want to track. Each question can be yes/no, multiple choice, check-box list, or list, and lists can have attachments. Each question can be categorized, departmentalized, regionalized, assigned to an industry, given an importance, assigned to a port, assigned a vulnerability, as well as given a type. The questions can be combined into sections, which in turn can be combined into surveys, which can be sent to suppliers, who can then assign each section, or each individual question, to an authorized representative with access to the appropriate information. They can be set up as recurring (as some initiatives, such as C-TPAT have to be re-affirmed yearly), and previous answers can be provided, or hidden to insure a supplier doesn’t just “check the box” without reading the question. In addition, the questions can be formulated in German, Spanish, French, Italian, Japanese, Korean, Thai, or five flavours of Chinese as well as English to support your global supply base. And the system can be configured to send automated reminders to suppliers if they don’t answer in a timely manner, and buyers to let them know that a supplier may need to be contacted.

The solution is integrated with Integration Point’s Supplier Master which allows you to maintain a complete profile for each partner in your supply chain. Each partner, which can be assigned multiple types (such as distributor, freight forwarder, manufacturer, trucking carrier, etc.) can be associated with the compliance programs relevant to it. As a result, your survey can be distributed to all appropriate partners with a single click as well as to predefined partner lists. E-mail, and templating capability, is integrated, and a buyer can choose, and customize, the e-mails to send on survey launch, on reminder, and on completion.

The reporting, which consists of six types of built in reports, is basic, but gets the job done. It allows you to query the status of each survey, against each supplier, to determine which suppliers responded to questions in a manner that implied risk, which questions elicited the most responses of a risky nature, and the overall risk score (determined via user-defined weightings) by survey by supplier, by supplier, and by survey. And if you don’t like the built in reports, you can roll your own with their open query feature that will allow you (or a member of their services team) to define any report you want by way of custom select statements.

Finally, the configurable entry screen allows you to customize the dashboard to insure that you see the relevant data that you need to address, and not data that will lull you into a false sense of security. You can configure it to display the partners with highest risk, the partners who have not answered the most recent survey(s), the risk rating of the most recent surveys, etc. in addition to recent answer activity, sending activity, and a generic statistics summary.

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