Category Archives: Risk Management

Global Sourcing: Addressing Myths with Capabilities Part III: Risks & Opportunities

Today’s post is from David Henshall, Founder of Purchasing Practice. Dave can be reached at dhenshall <at> purchasingpractice <dot> com.

In this four part series, we examine eight dimensional capabilities that will help you overcome the myths surrounding global sourcing. In today’s post, we will focus on the dimensions of risk and opportunity. (Yesterday’s post addressed corporate social responsibility.)

The decision to pursue a global sourcing strategy will ultimately depend upon the amount of value that it creates. Value in this context, however, should include not only the available savings opportunities, but also the inherent risk after considering the organisational capabilities in managing the increased vulnerability from sourcing in higher risk countries or region.

Dimension #4: Risk

Increased risk comes in the form of damage to brand and reputation, unplanned cost, supply chain failure, delay, currency fluctuations and IP theft, for starters. Professor Richard Wilding & Professor Alan Braithwaite, from the Cranfield School of Management in the UK, have identified six capabilities for the effective management of global sourcing risk:

  1. ‘Total Acquisition Cost Management’ – the ability to analyse and predict the total cost of a good from the source of supply to its final point of sale. They advise it is important to analyse and build into the costing the inherent lost sales risk of the product by developing and applying a market-risk and cost risk profile. The inventory holding cost through the chain must also be factored in.
  2. ‘One touch information flow’ – to avoid double entry, duplication, mistakes and inconsistency as the same transaction moves through the many points of contact in the chain. Accuracy of information is a precondition of pro-active management and the ability to exercise risk mitigation measures. This capability is systems enabled; it is critical to have the widest view of the total chain on one information platform with the ability to recognise inconsistencies.
  3. ‘Total product identification and compliance’ – to ensure fast accurate product and handling unit identification that feeds the “one touch information” requirement without delay. The use of bar codes and RFID (Radio Frequency Identification) to the correct standards is the enabling technology; this needs to be quality assured and enforced on the ground across many sites with failures being fixed where they occur.
  4. ‘Real time routing through dynamic visibility’ – the capability to see through the chain, know what is coming, and test for events that have not happened as planned; to interpret the implications of failures in a pro-active way and make decisions to minimise their impact.
  5. ‘Vendor development’ – cycle time compression linked to real demand’ – the capability to understand and improve the long-term performance of vendors in terms of cycle times, timeliness, quality and accuracy is central to time compression and risk reduction. Based on historical performance of the end-to-end chain, it is possible to identify improvement programmes to develop supplier reliability. The ultimate goal is to issue orders and schedules on shorter lead times, reflecting real demand or more accurate forecasts. Understanding the underlying performance of the vendor, and his category of products in the marketplace, is the starting point for this; it is dependent on information across the chain.
  6. ‘Information platform’ to provide consistent and timely information – the capability to put in place, operate and maintain a full supply chain visibility solution. All of the above capabilities are anchored by the operational skill to secure and maintain the information backbone with the diverse data structures that are needed by each supply chain function.

All of these capabilities relate to management information and the skills to apply that information with greater precision; information on the extended chain in terms of accuracy and speed of availability is central to these capabilities.

Dimension #5: Opportunities

Global sourcing can facilitate both supply side and demand side opportunities. On the supply side, Ford Motor Company cites these as:

  • Annual cost reductions in LCC markets have consistently exceeded those in mature markets due to:
    • Expanding scale
    • Deepening relationships with suppliers
    • Competitive environment
  • Wage rate growth in China and India will be limited by the large number of under-employed:
    • China has 1.338 Billion people living in the country
    • India has 25 million English-speaking, educated workers, and this number is expected to increase every year (as there are 232 Million people who speak English as a second or third language)
  • Labor rate differential is so large, gap is expected to remain substantial for the foreseeable future

On the demand side, global sourcing can facilitate the pursuit of export opportunities. Organisations can leverage supplier relationships to open the global marketplace, allowing them to market and sell their products in new markets across the globe.

Part 4 will examine Politics, Local Context, and Enabling Infrastructures of global sourcing.

Thanks, Dave.

Share This on Linked In

Stay Hip with the Program with Hiperos

Last year, I told you how you could Get Hip with Hiperos, an “Extended Enterprise Management” platform that allows you to manage your risk, performance, compliance, sustainability, and supplier information through a single portal that they dubbed R3. Knowing that you can’t stay still in the quickly evolving supply chain space (and knowing that there were lots of point players with deeper solutions in each), they’ve been hard at work on R4 since that time. Last week, I had the chance to do a detailed review of R4, and am pleased to say that they did a great job and that a number of significant improvements in R4 greatly increases the value the solution offers.

In particular, five improvements in the Hiperos R4 platform commanded my attention:

  • In-Line Collaboration
    It’s a pretty simple idea, but the fact that you can associate a discussion thread with any element of the system is quite powerful. No longer do you have to search separate discussion forums or, even worse, try to track down out-of-system e-mails to find out what happened, or why part of a questionnaire is still blank, or why a template was modified.
  • New Workgroup Capability
    Hiperos recognized that true performance, compliance, and sustainability is collaborative, that single-directional Q&A is not collaboration, and built in a new discussion-based workgroup capability that lets buyers, suppliers, and other involved parties collaborate through a centralized, integrated environment.
  • The Program
    Since compliance, risk management, sustainability, and performance all revolve around programs designed to satisfy a regulatory initiative, emerging threat, or a green goal in the real world, in the Hiperos platform, it’s now abundantly clear that everything revolves around the program, which is very easy to define and manage. There are three ways to create a new program. Instantiate it from a template, load it from a properly structured Excel file, or define it from scratch in the tool — which will walk you through its creation step by step in a simple 7-step process. (Outline Detail, Organizational Units, Questions & Documenation Requirements, Dates, Individual Organizational Unit Reqirements, Measurements, and Reviewers.)
  • Out-of-the-Box Compliance Programs
    They have over 60 compliance templates built in, with heavy support for the finance (BITS, etc.) and health-care sectors (HIPAA, etc.).
  • Supplier Focus
    The supplier portal is almost as extensive as the buyer portal. Suppliers get their own set of dashboards, which they can do deep reporting dives into to find out where the measurements came from and how they were calculated, relationships, which they can manage, programs, which they can track, and communities. Truly enabling the supplier on your platform goes a long way towards supplier adoption. The only functionality suppliers don’t get is Supplier Information Management (SIM) and Application Administration (unless, of course, they buy the platform themselves).

The system also includes a number of other improvements, particular in the area of SIM (where you can capture a lot more information in out-of-the-box templates and define your own data elements to be tracked), reporting (where, in addition to dozens of reports in each area that you can use out of the box, you can also create your own reports using an improved wizard that walks you though a simple 6-step report definition process), and built-in KPI and SLA templates available for your use (there are over 6,000 that can be accessed system wide). Furthermore, the dashboards are more than just pretty gages, they also contain a quick summary of your action items (open evaluations, pending approvals, etc.); the relationships you are responsible for; and current risk assessments, in-process supplier profiles and compliance controls. And while other providers might still go deeper in specific areas (though none go deeper in all areas), the breath of integrated capabilities put them in a fairly exclusive club as I have only seen applications displaying a similar breadth and focus in enterprise management from Aravo, CVM Solutions, Rollstream, and, in the healthcare and agency management verticals, Vendormate and Decideware.

Share This on Linked In

Are You Being Hit with the “Double Payment” Problem in Your Shipping?

Logistics Management just ran an excellent article on “Logistics and the Law: Don’t Pay Twice”, by Brent Wm. Primus, J.D. of Primus Law Office that I think is a must read for anyone responsible for global shipping.

When a shipper engages a broker or when a shipper or a broker books a load with a carrier, they expect to be billed and to pay for the charges for moving the freight. What they don’t expect is to have to pay the charges twice. Unfortunately this does happen and, in the last few years, has happened with increasing frequency. This emerging issue is called the double payment problem.

As the article points out, there are three variations of this problem:

  1. The going-out-of-business broker.
    In the last weeks or month of its business life, a broker continues to book loads and collect payment for carrier charges, but fails to pay the carrier.
  2. The double-brokering carrier.
    A load is tendered to a carrier with the understanding that the carrier will be providing the actual transportation, but, instead of providing the transportation itself, the carrier uses its broker authority and tends the load to another carrier, which it fails to pay.
  3. The fraudulent broker.
    A fraudulent broker solicits loads that it then tenders to carriers with every intention of collecting from the shipper but with no intention whatsoever of paying the carrier

With respect to the first two variations of the problem, two competing legal theories have developed. The first theory is the well-established principle that under the traditional bill of lading contract, the consignor has primary liability for payment of the charges on “prepaid” shipments, and if the consignor fails to pay, then the consignee must pay. For “collect” shipments the consignee has primary liability and if the consignee fails to pay, then the consignor has to pay (unless the no-recourse provision of the bill of lading, known as “Section 7”, has been signed).

But what happens when the consignor or consignee has fully paid an entity under a good faith assumption that the entity is the carrier or paying the carrier? In this situation, a legal principle known as “equitable estoppel” has developed and applies in situations where Courts have held that it would not be fair or equitable to ask a party to pay twice. However, there are situations, such as Freight Lines, Inc. v. Sears Roebuck & Co. where the principle, though it had merit, was not applied by the courts.

With respect to the third variation, which has become a more significant problem as of late, typically no money ever reaches the carriers and you, as a shipper, will likely end up with full responsibility for the payment unless you can demonstrate that you had a reasonable expectation that the company was legitimate (and thus use the equitable estoppel argument). This of course means that you have to do your homework, and unless the company in question has hacked US Government Systems to make it look like they are affiliated with reputable companies (like Viacheslav Berkovich and Nicholas Lakes did), it might be hard to demonstrate a reasonable expectation of a reputable enterprise, especially if the broker is relatively new.

So what should you do? Especially when there is no sure fire way to eliminate the risk?

According to Steve Fernlund, the Executive Director of the Freight Transportation Consultants Association (FTCA), always know who you’re doing business with. Check payment practices and credit rating agencies to make sure there is minimal risk that the carrier and/or broker will default on its obligations. Have a standard procedure to qualify carriers and brokers and follow that procedure in every transaction. The latter will help you in the construction of equitable estoppel arguments should you ever find yourself in one of the first two situations, especially if the standard procedures cover everything you can be reasonably expected to do.

Furthermore, as the article points out, you have to monitor the carrier to ensure they are complying with the terms of the contract as some carriers will sign a contract and then ignore the prohibition against tendering to another carrier through their brokering authority. (This includes a spot check of delivery receipts to see if the carrier named as the delivering carrier is the one with whom you have a contract.)

When you’re using a broker, have a written contract that requires the broker have written contracts with its carriers. The broker’s contracts must require that the carrier specifically designates the broker as its agent for collection and that the carrier waives any right to collect from the consignor or consignee if the broker has been paid. Also require that copies of all contracts with all carriers the broker intends to use be forwarded to you for review and confirmation.

And, finally, if you truly want absolute protection, you could require that any broker you do business with post a surety bond greater than the amount of business you expect to do over a six-month time period. However, this will eliminate many brokers from consideration as most sureties require 150% collateral, which many smaller brokers will not have. It may also increase your brokerage fees, as they might insist that you pay the bond premium.

Share This on Linked In

What’s Really At Risk This Year?

The recent SCMR article on “Supply Chain 2010” addressed the following as what’s at risk in 2010.

  • currency-driven inflation
    Especially for U.S. based companies … because that’s what happens when you start flooding your local economy with government paper.
  • lengthy recovery
    I thought this was pretty much understood … especially with every major publication running a story on the “jobless recovery” on a weekly basis.
  • more financial crises
    The article refers to the large block of bonds, notes, credit lines, and other paper assets scheduled to mature in early 2011. Then you have all of the government debt, including the 56 Billion in Dubai World that just said it needed to delay payments on the 29 Billion of that in Nakheel for at least six months, and potentially worse situations in Greece or Italy.
  • interruption of supply
    the risk that the supplier will go out of business, cut off the buyer’s contract, or simply run out of product is still there
  • “black eye” risk
    is your supplier sustainable, responsible, and fair … or is your supplier producing your products in a sweat-shop in a third world country? (for example)
  • compliance issues
    a government regulator could come knocking down your door if a supplier or manufacturer runs afoul of the law

But these are essentially the same risks we saw in 2009. So what should you really be looking out for? I’d start with a focus on these often ignored risks:

  • lack of global trade visibility
    there’s already 106 steps to global trade, it’s only going to get worse before it gets better, and missing even one of them could cost you Millions in fines (especially since we’re now in the penalty phase of 10+2)
  • lack of flexibility
    you need to be demand driven, on short production cycles, and constructing scenario-driven long term plans which you can tweak at least quarterly as it’s likely going to be a long, rocky recovery to the Old Normal
  • lack of education
    to do more with less, your people need to know how to do more with less, and that means they need to be better educated; fortunately, supply chain is the one area where education can deliver returns in excess of 100:1 so make sure your people get at least a week’s worth of education every quarter

Share This on Linked In

It’s 2010 … Time to Crank The Fear Factor to 11!

Well, it sure didn’t take CNN long to get the 2010 Fear Mongering Bandwagon rolling. Check out The Buzz from January 2 on what could go wrong in 2010. (That’s right, Saturday January 2nd. They couldn’t even wait two days for the first work week to start!)

According to the article,

  • we’re in for part two of the double-dip recession,
  • the US currency is likely to be debased,
  • the housing market could still hit bottom,
  • the market is in for a lacklustre year, and
  • the job situation is not going to improve.

Wouldn’t it be great for a change if the media focussed on the positives and instead of spreading more FUD, talked about the lessons we’ve learned and how we can use them to right the economy?

After all, this is the 2nd major recession in less than a decade, as the the tech bust of 2000 was still a little less than 10 years ago. And a number of other global economies have had similar downfalls in the last 10 years. Should it not be obvious by now that:

  • out-of-control growth will be followed by a rapid contraction,
  • when you flood your country with government paper you decrease the value of your currency value,
  • house prices cannot increase in value at a rate above inflation forever as they quickly reach a point where no one can afford them,
  • high double-digit returns year-after-year-after-year are not sustainable (and anyone who says they are might be another Madoff in the making) in the long term, and
  • it can take a long time to recover from a recession.

Once you’ve learned these lessons and go back to the old-school of business (which takes the long term view that most of Corporate America seems to have forgotten since the turn of the Millennium), where you plan for steady, incremental growth, hire in a controlled fashion, and don’t make, or price, products out of reach, I see no reason that you can’t, once again, do just fine.

Share This on Linked In