Category Archives: Risk Management

Spend Matters in Procurement

Yesterday, over on Spend Matters, JB brought up two very good points.

  1. Every dollar spent on procurement will generate a 300% to 600% ROI
    As noted in “beyond shedding the deadweight in procurement and operations” on Spend Matters, the last place you want to cut budget is procurement. When Hackett data continually finds that average performing companies get a 300% annual return from procurement-focusssed dollars and best-in-class performers get a 600% annual return from procurement-focussed dollars, in these tough economic times, you should be increasing your procurement budget. Many products, especially SaaS offerings where you pay by the month, will generate a return before the second payment is due. Plus, most of the better service providers are willing to wait until the project is completed and you document a return before invoicing you. That means you can actually make the money to fund your operations before you even spend it!
  2. It’s never been a better time for a make/buy analysis
    Not only will this help you turn on a dime if you have to turn on a dime because your current supplier goes under, a natural disaster takes out a key raw material (and you need a replacement product that uses an alternate raw material), or cost increases force a new business model, but it could also help you save a bundle. In addition to the e-Sourcing and Decision Optimization vendors that JB lists, whatever you do, don’t forget the should-cost experts at Akoya and Apriori. You don’t want to make a sourcing decision based solely on price quotes alone. Otherwise, you might accept a low-bid that is unsustainable by the supplier who is so desperate for your business that they effectively bid themselves out of business.

A Very Simple Definition of Risk

Not only is risk everywhere on the map, so are the types of risk and associated definitions thereof. Risk: a concept that denotes the precise probability of specific eventualities (Wikipedia). Financial Risk: probability of loss in the methods used in financing a firm (Business Dictionary). Supply Chain Risk: the damage — assessed by probability of occurence — that is caused by an event within the company, within its supply chain, or its environment affecting the business processes of more than one company in the supply chain negatively (Kersten).

Fortunately, there’s a very simply actionable definition of risk that everyone can understand:

If you’re counting on it, it’s a risk.

This covers every type of risk you can think of.

    • Production Risks
      Machine Breakdowns: check.
      You’re counting on the machine to work.
      Supply Shortages: check.
      You’re counting on parts and raw materials to be available when you need them.
      Talent: check.
      You’re counting on having the operators you need, with the right skill sets and experience, when you need them.
    • Communication Risks
      Network Outages: check.
      When you pick up the phone, you expect a dial-tone. When you send an e-mail, you expect it to leave your server.
      Broken Channels: check.
      When you issue an order, you expect it to be relayed.
    • Business Model Risks
      Disruptive Technology: check.
      You expect that your product will continue to be in demand and viable in the marketplace.
      Disruptive Business Model: check.
      You expect that your pricing model is valid, and that you’ll be able to sell your products at a profit against competitors in the same ballpark.
    • Environmental Risks
      Natural Disasters: check.
      You expect that an earthquake won’t level your plant tomorrow.

Resource Shortages: check.
You expect the water and electricity to keep flowing.

  • Political Risks
    Trade Barriers: check.
    You expect that you can keep importing from your suppliers and keep exporting to your customers.
    Civil Unrest: check.
    You expect that your plants won’t be blockaded and that they won’t be attacked by a terrorist organization.
  • Economic Risks
    Currency Fluctuations: check.
    You expect the currency exchange rate will stay within your predicted window.
    Commodity Market Instability: check.
    You expect prices won’t yo-yo out of control over your contract period or that your current strategy will be able to deal with yo-yo pricing.
  • Internal Compliance Risks
    Maverick Spending: check.
    You expect your employees will buy off contracts using approved methodologies and that expected savings will be realized.
    Contract Adherence: check.
    You expect your employees will live up to supplier, customer, and partner commitments and SLAs.
  • External Compliance Risks
    Trade Documentation: check.
    You expect that your partners will produce all of the necessary import and export documentation, and deliver it on time, to all of the appropriate customs and government agencies.
    Regulatory Requirements: check.
    You expect that your production facilities are complying with the RoHS, WEEE, and REACH directives.
  • etc.

This is also why it’s actionable. To identify risk using this definition, all you have to do is review every business activity and outline what you’re depending on AND assuming, and you have your list of risks. Then, you can prioritize the risks and begin working on the definition of your risk management plan.

Looking for Savings? Don’t Overlook Your Insurance Premiums!

A recent article in Industry week noted that when it comes to “insurance renewal, a 1-2-3 strategy can pay off”. Many decision makers may be tempted to compare corporate insurance renewal with personal insurance … where you get the bill and send a cheque, because you don’t really have much choice as changing (life, disability, health, illness, etc.) plans will undoubtably result in a cost increase and benefit reduction, as costs go up (while benefits go down) with age. But this is a bad comparison because corporate insurance plans don’t work like personal life / disability / health plans, rates change with demand and business conditions, and business conditions change all the time.

Business change may not only introduce the need for more insurance (such as when a company begins exporting its products overseas), but may also reduce the need for current coverage (when asset values decline). As the article points out, failing to recognize the impact of new business approaches, whether new strategies that increase risks or downsized operations that alter exposure levels, can cause a manufacturer to make the wrong decision on insurance coverage. And for a large company, this can cost it tens (or hundreds) of thousands of dollars annually (and millions if we’re talking employee group benefit plans). (There’s a reason there are consulting companies which specialize in insurance plan selection and negotiation.)

So what should you do? The article recommends the following 1-2-3 agenda:

  1. Coverage Type
    Examine company operations, compare them to what they were in the past, and accurately assess what needs to be covered. Where are the risks, and what will the recovery cost if they materialize?
  2. Coverage Limits
    How much is at risk and how much insurance is needed to cover it? If you have doubled the size of your shipments, then you might need double the transit insurance. But if you’ve moved to JIT inventory, you might be able to cut your warehouse insurance in half.
  3. Risk Management Services
    Examine a potential insurance provider’s capacity to deliver training, information about industry best practices and expert advice when an emergency makes quick action imperative before you enter into negotiations.

The only thing I’d add is a step 4: hire an expert. The few thousand a day it will cost for an external expert to evaluate your needs and negotiate a better deal could not only save you many times her fee, but prevent financial disaster should an emergency arise.

Supply Chain Challenges for 2009

Industry Week recently ran an article on the “top nine supply chain challenges for 2009”. Some were dead on. Some less so. But it got me thinking … what were the obvious challenges for 2009, and what were the challenges that were most likely to be overlooked.

The obvious challenges are getting their fair share of press.

  • Risk Mitigation
    Between risk of supplier financial failure; the volatility in the energy, commodity, and global financial markets; and the unpredictable nature of economic recoveries, every organization will have their hands full with risk mitigation this year.
  • Working Capital
    In a very short time-span, we’ve gone from a credit glut to a credit crunch, and chances are, unless you are among the small minority with flush bank accounts, you’re constantly facing working capital challenges.
  • Shorter Supply Chains
    Since you can no longer afford inventory, you have to move to a demand-driven pull-based model which requires a shorter supply chain to pull-off.
  • Renewed Focus on Safety
    After all of the recent salmonella, melamine, and lead-paint scares, there is a renewed focus on safety around the globe. You need to make sure your safety procedures and independent safety tests are in order, or risk massive fines and lawsuits.
  • Heightened Regulatory Compliance
    In response to the recent consumer product safety fiascos, many countries are stepping up import and export related requirements and introducing new documentary and testing procedures. Are you ready?

The most-likely-to-be-overlooked challenges, less so. But they’re just as important.

  • Technology Upgrades
    You have to do more with less, but your current, aging, software and hardware infrastructure won’t support it. You need new best-of-breed sourcing, procurement, trade, visibility, and analytic solutions as well as a new green infrastructure to run them. That costs money. And even though you can state case-study after case-study and customer success after customer success demonstrating the 2x to 5x ROI the upgrades will deliver, you’ll have trouble navigating the ridiculous obstacle course that the cost-focussed savings-blind CFO will force you through.
  • Sustainability
    Recession or not, the sustainability advocates are not going away. And neither is Generation Y. Since you have to redesign your supply chain anyway, you might as well make sustainability a core requirement.
  • Near Country Sourcing
    Shortening your supply chain is a good start, but you really need to find ways to take advantage of supply sources in your local geography if you truly want to win in the long term. LCCS regions come-and-go, but your neighbors will always be your neighbors. Find mutual opportunities for success and stick around for the long term.
  • Procurement Outsourcing
    Every procurement organization has functions and categories it does well, and functions and categories it does not. It needs to get a handle on the latter, figure out what needs to be done, and then outsource those functions and categories to a professional outsourcing firm that has the expertise to do those functions and categories well.
  • The Path to Procurement Mastery
    If you’ve been keeping up to date with the Hackett and Accenture research, not only do leaders do things different, but they structure their organizations different. In addition to adopting new technologies, methodologies, and supply chain structures, to truly overcome the supply chain challenges of 2009, you’ll have to restructure your organization and intersecting business processes as well. Change management is always a challenge.

10+2 Is In Effect. Are Your Trade Programs Ready?

The requirements of the Importer Security Filing, 10+2, took effect on January 26. The clock is now ticking, and there are only eleven months left in the CBP informed compliance period to achieve full compliance before full enforcement and (significant) monetary penalties take effect.

Under the Importer Security Filing initiative, the electronic transmission of 10 data elements from an importer (or its freight forwarder), and 2 from the vessel, must be executed no later than 24 hours prior to the loading of cargo onto a vessel destined for the US, shifting data transmission to an earlier stage of the supply chain distribution process.

If a company does not comply, it can be fined a minimum of $5,000 for each violation. If you do a lot of importing, that will add up fast.

Are you in compliance? Are you sure? If you don’t have good trade visibility, and don’t verify the 10+2 submissions filed (on your behalf by your freight forwarder and broker), you might not be … and you won’t know it without good trade visibility. Moreover, you might be risking other non-compliance losses. For more insight, check out the latest Sourcing Innovation Illumination on Why You Need Trade Visibility.