Category Archives: Risk Management

The Most Often Overlooked Risk in Your Energy Supply Chain?

Is it the grid and the possibility of another great blackout (due to a lack of breakers)?

Is it the unpredictable terrorist act that could blow up a pipeline in North America (which includes friendly Canada)?

No, it’s Sciurus Carolinensis!

One little squirrel in one little circuit-breaker in one little substation can knock out power to 9,000 homes with a single nibble, as FirstEnergy customers in North Royalton found out on Tuesday.

Maybe Dark Verne has the right idea when he thinks we need to Get Rid of that Squirrel!.

Do You Have Your Biggest Supply Chain Risk Covered?

If you said “yes“, think again! I know for a fact that the odds of you having your biggest supply chain risk covered are so statistically insignificant that they are effectively zero. Why? Because I cover supply chain technology, and it’s current reach. And despite the best efforts of myself, and a few other individuals who have been pounding away at the keys for years, most of the technology that you really need hasn’t yet permeated your four walls (or your ceiling or your floor for that matter).

You see, your biggest risk is not market shifts, natural disasters, or political turmoil — it’s your platform. The platform that your people rely on day-in and day-out to do their jobs … and if it doesn’t give you the visibility you need, you’ll never know which risks you have, which risks you have mitigated, or which risk just appeared that is about to wipe-out a third of your operations if you don’t act fast and mitigate it.

So check out my two-part series that ran last week on @Risk and 2Sustain, because when I say “don’t ignore your platform risk” because “sustainability is an internal concern as well”, I mean it!

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To Reduce Risk: Collaborate, Relate, Invest, & Optimize

A recent Inside Supply Management article on “The Global Reality of Geopolitics” noted that terrorism, war, disease and political unrest are just some of the geopolitical pressures that supply management executives face today. The geopolitical risks for most multi-nationals are increasing daily, and most of their supply chains, which still assume flexible JIT models will always be possible, are still not prepared.

To prepare your supply chain, you need to identify, assess, and put a mitigation in place for each likely or significant threat. One way to assess the threats, according to Celina Realuyo of CBR Global Advisors, is to look at its impact from a space, time, and depth perspective. With globalization, unless multiple countries adopt the same protectionist measures, there are no boundaries. As a result, disease outbreaks can spread rapidly around the globe. Today’s marketplace is 24/7. As a result, most leaders are in response mode instead of strategic planning mode. A problem usually produces multiple instantiations as it ripples through the chain. Thus, a solution that solves a second level effect may not solve the base problem. Thus, if a problem is unrestricted by boundaries, relevant to the market, and related to manufacturing, it’s probably significant as its repercussions could quickly spread throughout the supply chain. Another way to assess threats is to consult experts to assess severity and likelihood.

So how do you mitigate the threats? According to the article you:

  • Collaborate with the C-suite
    It can be extremely difficult to price and protect against certain types of (geopolitical) threats, so you need all of the experts in the room who understand the potential repercussions. To get them, you’ll need the C-suite’s support.
  • Invest in Expertise
    If you don’t have risk experts in-house, get them. In the interim, bring in consulting experts to help you.
  • Establish Local Relationships
    You need to work with your suppliers to identify all of the relevant geo-political and location-based threats, their potential impact, and their potential likelihood. Otherwise, you could be panicking for no reason or ignoring a potentially explosive situation.

And it’s not a bad start. However, I was really disappointed that there was no mention of Optimization, which is very relevant in risk analysis. You see, where risk is concerned:

  • You’ll never be able to mitigate all the risks.
  • You’ll never have enough money to implement all of the mitigations you identify.
  • You never know precisely when a risk might materialize or how much it will really cost.
  • No matter what you do, you’re still going to experience disruptions.

Thus, the only way to come up with a mitigation plan that’s going to truly minimize the cost of future supply chain disruptions is one that uses simulation, modelling, and optimization. Now, it’s true that there’s very few solutions on the market to help you at this point, but it’s where you need to get to. Decision Optimization isn’t just for Logistics, Sourcing, and Supply Chain Planning. It’s for much, much more.

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When Short-Term Gains Equal Long-Term Miseries

Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.

Dimitrios P. Biller, a former managing counsel for Toyota Motor Sales USA Inc., alleges in a recent lawsuit that Toyota forced him to withhold evidence from opposing counsel in lawsuits relating to vehicle rollover accidents. As some readers will remember when (small) sports utility vehicles (SUVs) were introduced there were a rash of rollover accidents that occurred. I recall that the reasons were generally centered on the vehicles being top-heavy and thus prone to rollover due to sudden steering wheel movements such as in accident-avoidance scenarios (see “the physics of SUV Rollover Accidents”).

Toyota paid Mr. Biller a $3.7M severance in 2007; the severance agreement forbade Mr. Biller from discussing company information such as what he is doing in his lawsuit against Toyota which accuses the automobile maker of concealing or destroying information in over 300 such rollover cases where vehicle passengers were injured or died as a result.

But this blog is not about the merits of the lawsuits Mr. Biller and Toyota are filing against each other. Those cases will be played out and decided in a court of law or through some mediation. Nor does this blog post look to accuse or absolve either party of their alleged sins. I merely needed a business example for the subject of this post: when short-term gains equal long-term miseries.

Too often the right thing is sacrificed for short-term gains but then found to lead to long-term miseries, and here is where I believe so much of the root-cause of what ails us lies. There may be early benefits to burying proverbial – and sometimes actual – skeletons but invariably they resurface to haunt us.

The telltale sign of trouble is when vision of short-term gains eclipses, blocks or otherwise obscures and obstructs our view of the long-term goals, and it is here that we can expect the long-term misery from our short-sightedness.

Enron, WorldCom, the real estate bubble, the dot-com bubble, (some) outsourced manufacturing … these are just some of the examples of how knee-jerk reactions to satisfy short-term fantasies created some miserable results in the not-too-distant future. The result is that markets, industries, and supply chains get whiplashed back-and-forth as more knee-jerk reactions are taken under the guise of “corrective actions”. In the fabled race between the tortoise and the hare, let’s not forget why the tortoise won and that there is an allegory to our personal lives and professional conduct.

What we see is that short-term huddling of resources, short-term planning, short-term damage-control, short-term gains to boost balance sheet numbers, etc. only leads to long-term misery. Chaos and confusion lie in wait ready to strike when we are probably least prepared to deal with them. The result is havoc that requires excessive resources to bring under control or at least attempt to damage-control.

Yet this advice seems counterintuitive to the competitive nature of business today, but I don’t think it needs to be. Would sound advice in a logical risk-management strategy be to blaze ahead or put all your eggs in one basket? Probably not or at least not for too long. Yet too often I think we forget that short-term gains do not equate to long-term success. A good risk management focus will recognize this.

So what is the point here? What are the lessons to be learned? (Blog posts need to lead to logical conclusions AND teach us something???) It’s better to clean up small messes early on when they happen than to keep sweeping things under the rug because eventually that big lump under the rug is going to get noticed. A good risk management strategy is one where supply chain frauds are caught early and before they infiltrate our organization and manifest themselves into disasters.

The proper perspective for a risk management strategy is one that looks both short-term and long-term and does not consider those viewpoints as distinct but rather as interrelated.

Norman Katz, Katzscan

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Ariba and The Receivables Exchange – Shoring Up the Weakest Link

With credit remaining tight, there is still considerable liquidity risk throughout most supply chains. But there is something that can be done about it, and I’m glad to see that some vendors, like Ariba, are making it easy for buyers to help their suppliers. Even though traditional banks might not be very helpful in these troubled times, there are a lot of new, innovative, lenders out there that will happily do short term financing, for much more reasonable rates, with assurances that they will be (re)paid within a guaranteed timeframe. This means that if a buyer is willing to commit to payment in 30 days, a cash-crunched supplier can get much needed liquidity in as little as a single day.

In addition, as I indicated in my last post on The Receivables Exchange, the supplier can completely control the process. The supplier can define the minimum advance required, the maximum transaction fee it will pay (for a 30 day advance), preferred “buy it now” financing requirements, and the auction start time. If the request is reasonable, the receivable could be bought in 15 minutes and money wired to the supplier’s bank account the next day.

Furthermore, according to this recent article on “shoring up the weakest link” in Treasury & Risk, trades often happen in as little as 15 seconds and sale of a $1 Million receivable will often occur within 15 minutes. Sellers who cherry-pick their receivables from investment-grade customers often find that 85% will be bought at their buy-out price.

Furthermore, if the supplier happens to be on the Ariba network, the supplier can quickly shunt receivables with all of the necessary supporting documentation onto the Exchange, simplifying the process even further. Plus, they can do so after evaluating what discount the buyer has offered for early payment, allowing the supplier to make the best possible decision.

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