Category Archives: Risk Management

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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Transfer Knowledge to Reduce Risk

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.

As reported on August 15, 2009 in my local South Florida newspaper, two New Jersey police officers in their 20’s failed to recognize singer-songwriter Bob Dylan. Mr. Dylan was wondering around a low-income neighborhood when he was spotted by someone who apparently called the police to report a suspicious character. It’s important to note that Mr. Dylan did not have identification on him. The police officers escorted Mr. Dylan to the resort where tour management confirmed his identification.

[Editor’s note: People worry about a return to 1984, but this smacks of a return to 1963. For those of you old enough to remember, it’s alright, ma.]

Around this time I attended a business event and saw some folks I knew from my networking who invited me to join their group. During our conversation I made a reference to the classic rock band Deep Purple (one of my favorites) as we were discussing colors and shades for use in corporate marketing. A young lady in the group, I have no doubt in her 20’s, looked puzzled and said she was unfamiliar with this band. I asked her if she knew the song Smoke On The Water and did my best to hum the famous guitar riff. She confessed she still did not recognize the tune which is understandable if you’ve ever heard me attempt anything musical, though I suspect this was more related to a generational gap. (I did receive a follow-up e-mail from her a few days later stating that she was familiar with the riff but not the band behind it. She may have followed my suggestion and did a YouTube(R) lookup.)

More so in lean economic times companies have a habit of getting rid of employees with deep knowledge and replacing them with younger less-experienced and less-knowledgeable people. This is not a very wise decision when reliance on such knowledge is what separates the company from its competitors as would be the case in most companies.

(One only need look at the demise of Circuit City as an example: experienced floor sales people were let go to bring in a younger less-expensive sales force which failed to provide the same level of customer service and left customers taking their money elsewhere.)

Typical when experienced employees are (suddenly) replaced, there is a failure to transfer critical knowledge. Older employees must understand that they have a responsibility to their employer that goes beyond their own interest of self-preservation: Unless you work for yourself your knowledge belongs to your employer and they have every right to require that you document what you know and provide training to those less-experienced. Good sustainability and risk management practices require this and Sarbanes-Oxley compliance demands it.

Studies have shown that Millenials (aka, Generation Y, born between 1978 and 1989 depending on whose definition you look at) tend to be more result-oriented than process-oriented. This can be problematic in regulated enterprises and public companies. This can run counter to Lean thinking and Six Sigma methodologies that look to process improvements for efficiency. Entities such as ISO (International Standards Organization) rely on documented processes for their certifications.

Is it any wonder why Gen Y is so results oriented when knowledge can be so difficult to acquire and job performance tends to be based on results and not how those results were achieved? It’s important for enterprises to explain and show why the process matters and encourage process improvements that do not cross the line of regulatory or certification requirements.

Classic rock may one day face its own extinction in one form or another and the world will be a sadder place the day the music truly dies.

Enterprises have a more immediate need to and face a greater crisis in the short-term due to knowledge gaps. Risk is reduced when knowledge is transferred. Enterprises should work towards closing generational gaps by creating teams that use the best characteristics of its generational members. Each generation needs to respect the other and acknowledge the benefits each brings to the table. Torches will forever be passed and this does not require that anyone get burned in the process.

Norman Katz, Katzscan

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Oprah … Host, Actress, Producer, Publisher, and (Unintentional) Destroyer of Supply Chains

While I usually try to avoid anything even borderline with popular culture — as the last thing I want to encourage is rumour, gossip, or unfounded hype — I just couldn’t avoid this topic after coming across this recent article on CIO that did a great job of explaining ‘why the “Oprah Effect”‘ can take down the best supply chains because it’s a serious issue for any retailer who comes up with the next big thing.

The “Oprah Effect” happens when Oprah Winfrey picks a product, which is often a book, but sometimes a favourite thing like a cake or a robe, and advertises it on her show — and when it does, fortune’s are made or lost. When Florida Cake Maker “We Take the Cake” was picked as a favourite thing in 2004, it’s business went from struggling to thriving, but when Oprah declared her love for Kashwere robes, operations were overwhelmed and a lot of potential customers were turned away unhappy when they couldn’t get the product they wanted in time for Christmas. In extreme cases, it can even move markets. When she exclaimed that she’d never eat another burger again in 1996 on her episode on Mad Cow Disease and the cattle industry, beef futures plunged the next day in what industry experts called the “Oprah Crash“.

While an Oprah endorsement can delight a CEO and marketer, it can agonize a supply chain manager who needs to ensure that the product is available for purchase when a customer wants it. Even the largest supply chain can be strained under an Oprah endorsement, and even when it has early warning. For example, Amazon was stocked out of the Kindle within a week of Oprah’s October 24 endorsement of the Kindle and was subsequently out of stock for most of the 2008 holiday season.

But what’s really scary is that the Oprah effect may not be limited to Oprah much longer. With the rise of new super-celebrities on a regular basis and up-to-the-minute trend reporting on the internet, any celebrity’s praise, or disdain, for your product could have a serious impact on your supply chain — as the fashion industry already knows. If Jessica Alba or Angelina Jolie gets photographed in a hot new dress or blouse from a relatively unknown designer, whomever manufacturers the fashion line will likely be bombarded with orders … that they may not be in a position to fill rapidly. If a major actress like Kristen Johnson or Sophie Monk or Alicia Silverston strips down for PETA and denounces fur or, gasp, your fast food chain … you know sales are going to drop (at least for a while). And with celebrities like Beyonce Knowles, Jay-Z, and Brad Pitt almost as popular on the Web as Oprah, it won’t be long now before any top 10 celebrity has the power to cause an Oprah effect to your consumer-driven supply chain.

Are you ready? What’s your “ramp-up plan” in case demand skyrockets overnight? What’s your “disaster plan” if a quote taken out of context suddenly sends your sales — or stock — diving? Don’t know? Maybe it’s time to do some risk analysis and scenario planning and find out.

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