Category Archives: Risk Management

The Value of Proactivity in the Current Business Environment

Today’s guest post is from Robert Rudzki, a former Fortune 500 senior executive of supply management who now runs Greybeard Advisors, a strategic management consulting firm.

Bob has authored several business books including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise and Straight to the Bottom Line.

He can be reached at rudzki <at> greybeardadvisors <dot> com and found on the SCMR Transformation Leadership blog.

Now is the time NOT to hunker down in a fox hole; rather, this is the time to be pro-active. One idea: take the opportunity to perform a candid assessment of your supply management and procurement practices. More companies are doing just that. In fact, in the past few months, my firm, Greybeard Advisors, has experienced an increase in requests for proposals to perform such assessments.

Proactive companies of all sizes seem to have renewed interest and seriousness about a number of critical topics:

  • understanding – candidly – how their current practices compare to “best practices”
  • identifying the specific financial opportunities, and quantifying them
  • developing a prioritized plan of action that creates near-term wins
  • using those near-term wins to help fund true strategic transformation along numerous dimensions required for achieving world-class status

Clearly, some of this renewed interest can be attributed to concerns about the economic downturn. But, what really excites us as practitioner-advisors: some of these companies are approaching it for other reasons; namely, wanting to be the premier firm in their industry, and realizing that procurement and supply management is a way to get there. Done well, procurement and supply management can impact not just total costs, but also revenues, and working capital. And that can have a powerful effect on total financial performance (ROIC, ROE, EPS).

These are very difficult and challenging times – all the more reason to approach your job with creativity, resolve and leadership.

Having been through a number of business cycles as a Fortune 500 corporate officer, I can attest to the challenge – and the opportunity – of being proactive in this environment. Companies that maintain their strategic focus and work to create their future will be well prepared to reap the benefits when the economy improves.

Thanks, Bob!

 

Get a Grip on Supplier Risk

In modern supply chains, supplier risk is no longer limited to supply disruptions or quality lapses and also includes legal, financial, and brand risk, as evidenced by recent catastrophes which have caused unequalled harm of a preventable nature to pets and people alike. Nor is supply risk limited to products, as approximately 80% of the US economy is now driven by service industries. Risks need to be managed, as highlighted in a recent Supply Chain Management Review article on “Coming to Grips with Supplier Risk”.

Furthermore, they need to be managed counter-intuitively. According to the article, there are three situations where this is the case:

  • Amount of Spend does not Matter
    Many supply management organizations sort their suppliers by descending spend and focus their attention on the top 20% of suppliers that make up 80% of the spend. But low spend suppliers can be a source of significant risk as well. A cheap part in an expensive engine can cause the engine to fail. Data theft (enabled) by (the poor security practices of) a small IT provider can cause irreparable damage to a retailer’s brand, and lead to lawsuits.
  • Return on Risk Management can be Tough to Measure
    There’s no measurable return until the risk materializes and you can quantify the avoided loss. Until then, it’s only possible to estimate the impact using a metric that takes the probability of the risk and the expected magnitude of the loss.
  • You Will NOT Be Fully Prepared for Some Risk Events
    Even the most successful risk management programs only reduce the impact of a risk, they do not eliminate it.

So where do you start? As I hinted above, start by graphing the probability of occurrence vs. the expected impact of each risk. The greatest risks are those with a high probability of occurrence and a large expected impact.

The result of this first step is a prioritized list of risks that need to be addressed in the sourcing process, which starts with Supplier Qualification. In this phase, a supplier is researched to determine whether or not it has adequate controls in place to address the identified risks. If it does, requirements are laid out that a supplier has to agree to before it is allowed to participate in the negotiations.

The qualification phase should also involve the creation of centralized, systematic, and readily accessible records of suppliers, products, and verifiable certifications. This augments a supplier risk database that provides a searchable repository of supplier risk profiles, as well as documented audit trails to show that the risks have been assessed, that controls have been developed, and that the supplier has the necessary certifications.

After a supplier has been selected, risk management proceeds with supplier performance monitoring. This not only helps to ensure the strength and safety of the supply chain, but it also identifies potential risks in supplier performance and compliance and makes it easier to identify problems before they occur.

Supplier performance monitoring makes it possible to set baseline goals, to tie those to performance scores, and to create alerts if those goals are not met. It also means that companies can identify not just when a target is missed but whether key milestone dates are not met, which would flag an impending problem. Monitoring also allows suppliers to provide feedback to the supply management organization in order to enhance collaboration. Suppliers can monitor their own performance against company goals and objectives.

Once monitoring is in place, the next phase of risk management is collaboration which goes beyond simply identifying the symptoms of a problem to determine its root causes. This allows a company to reduce future risks and maximize the value of its relationship.

So what do you need to do? According to the SCMR article, you need to:

  1. Ensure the Right Focus
    Focus on the big risks and the benefits of risk management.
  2. Engage Stakeholders
    This will help ensure you see the big picture.
  3. Align Suppliers with Program Objectives
    If your suppliers are not on board, your efforts will be wasted.
  4. Capture Immediate Benefits
    Early benefits enable buy-in.
  5. Leverage Enabling Technologies
    Enabling technologies, such as e-sourcing, contract management, and collaboration solutions can help improve a program’s efficiency and effectiveness.

In addition, be sure to keep the Supplier Risk Management Framework, as discussed in the iBX Purchasing Transformation Blog, in mind. It captures the basics you need to keep in mind when identifying risks, selecting partners, and implementing risk mitigation strategies.

First out of the Gate: Bob Ferrari

Everytime I launch a new cross-blog series, I always wonder who will be first out of the starting gate, trying to be the first to capture the readers’ minds and hearts. This time it was Bob Ferrari of Supply Chain Matters and The Ferrari Group who posted his Seven Grand Challenges for Supply Chain Management yesterday.

In his first post, he lays out his seven challenges and tackles the first three head on, promising us two more posts on the last two challenges before the week is up. Bob’s Seven Grand Challenges are:

  1. Ubiquity of Portable Computing Leading to Real Time Sensory Networks
  2. True Supply Chain Business Intelligence and Decision Making Tools
  3. Managing the Explosion of Data and Information Needs in Global Based Value Chains
  4. Managing Supply Chain Risk Management on a Global Basis
  5. Who Assumes Ownership for the Extended Supply Chain?
  6. Articulating the Value and Consequences of Supply Chain Directly to the C-Suite
  7. A Global Shortage of Talent and Skills in Supply Chain Management

I really like #2, because it meshes with my seventh challenge of Opportunity Analysis. Today’s supply chains are filled with untapped opportunities, and you’re going to need good business intelligence and decision making tools to find them. And we’re definitely on the same page with #4! Risk is everywhere, and supply chain disruptions are still rising rapidly, due, primarily, to poorly managed, if not unmanaged, risk.

I’m not convinced of #1, #3, and #5 though.

1. I can certainly see the value of Real-Time Sensory Networks and systems self-updating as soon as product is detected in area B when it was in area A, but I don’t think this is going to add that much efficiency, especially if we had integrated physical, financial, and information-based supply chains where all it took to accept a complete shipment was logging into the shared system and checking “received”. Plus, I don’t want to see us become over-dependent on technology. What happens on that fateful day, which always happens eventually, when it fails and no one knows how to do it manually?

3. I believe that managing the data explosion is an IT challenge, because it goes well beyond just supply chain and supply chain systems. Data explosion is everywhere, and it’s IT’s job to build the databases, marts, and warehouses we need to manage it. It’s Supply Chain’s job to select from the best systems out there. Bob makes some great points in his post, but I’m not sold.

5. I think this is a great question to ask, but it’s not really a challenge, because, in my view, it’s trivial to answer. The CEO. Today, your company is your supply chain. Sure you have a CSCO who’s job is to manage the chain on a daily basis, but the buck should ultimately stop with the CEO. Nonetheless, I’m waiting to see what Bob has to say on this one …

And #’s 6 and 7 certainly have me thinking!

If we go back to the Top Three challenge, David Bush of e-Sourcing Forum and Iasta proclaimed that the top-three challenges of supply chain today were Adoption, Adoption, Adoption. This is a cry I’m hearing from e-Sourcing and e-Procurement companies across the board. And even though this is the perfect economy for those providers, because e-Sourcing and e-Procurement software is about the only way to reign in your spending during the deflationary/slowdown/recession economy we’ve been in for a while now, the cry only seems to be getting louder. Maybe it is a longer term challenge than I give it credit for. I’m anxious to see what Bob offers up on this one!

I’m definitely on board with #7! If you check out the talent category here on SI, you’ll see that I’ve essentially been whining about this problem since day one! It’s a huge challenge right now, and it’s going to be for at least the next five years. However, history tells us that talent shortages tend to resolve themselves over a ten to fifteen year window. Once demand gets high enough, and stays high enough for a few years, students, anxious to have a job when they graduate college / university, see that as a good career choice and take educational paths that will prepare them for that careeer. Young professionals ready for a career change go “back to school” (through night courses, part time programs, private programs, etc.), prepare themselves for that industry, and move on in. Simultaneously, the industry, desperately short on talent and needing to get through the day, re-engineers its processes, automates as many tactical functions as it can, and learns to do more with less. After ten to fifteen years, the talent shortage drops to a manageable level. And I’m looking at a twenty to twenty-five year window with these challenges. It’s definitely a major challenge … but is it important enough to knock, say, GHG Tracking and Reduction off of my list? I don’t know. But I’m definitely anxious to see what Bob has to say on this one too!

the doctor’s Seven Grand Challenges for Supply & Spend Management

Seven deadly sins
Seven ways to win
Seven holy paths to hell
And your trip begins

Seven downward slopes
Seven bloodied hopes
Seven are your burning fires
Seven your desires….
  Adrian Smith / Bruce Dickinson

In my last post, which announced the cross-blog series that this post is officially kicking off, I reviewed the seven grand challenges for IT over the next twenty-five years, as laid out by Gartner back in the spring. Although they ranged from the ridiculous to the sublime, and contained a fair amount of overlap when closely analyzed, it’s a worthwhile exercise to undertake every now and again, because in order to develop a useful solution, you need to identify what is needed and the path you should be on.

This inspired me to propose a set of “seven grand challenges” for supply and spend management, in the hopes that it would get you, dear reader, to think about what is important, what problems should be solved, and where we should go. Considering how important supply management is in these troubled times, I hope that all of my fellow bloggers chime in with their ideas on what’s good, what’s bad, and, what’s downright ugly in supply chain today — because the first step in solving a problem is properly identifying it.

So, without further ado, to kick off this cross-blog series, here are the doctor‘s proposals for the seven grand supply and spend management challenges:

  • Optimization
    There are a number of challenges here. The first challenge is getting people to use solutions that are already out there. There are currently a number of offerings that address strategic sourcing decision optimization, distribution network optimization, and freight optimization quite well, and that, when properly applied, can save the average company up to 12% above and beyond the best solution obtained with auctions. The second challenge is integrating the different problems (sourcing optimization, freight optimization, network optimization, etc.) into a common framework that allows the tradeoff effects of each decision to be adequately modeled and understood in the big picture. The third problem is addressing the emerging non-quantitative regulatory and compliance requirements such as RoHS, WEEE, and GHG emission limits in a consistent and value-oriented manner within the optimization model.
  • Supplier Enablement
    This is something we still don’t have a good handle on. Beyond “supplier enablement is the provision of technology based solutions that enable the supplier to be more productive and better serve the buyer”, there isn’t yet a general consensus of what this technology needs to be, as most companies have not yet embraced B2B 3.0. I’ve argued before that, today, it’s a combination of catalogs, networks, e-Document exchange and management, and supplier portal technology, and I still think that is a good start, but enablement should go beyond enabling the exchange of information, it should improve the supplier’s operations overall.
  • Integration of the Physical, Information, & Financial Chains
    For most companies, these are three different chains. Some companies that have embraced RFID, GPS, and e-document management have taken the first steps to integrating the physical and information flows, but the technology is still emerging, the integration isn’t smooth without extensive integration and customization between a number of different solutions (and only Fortune 500 companies can even afford to consider this), and we have only started to look at the financial supply chain and how to best integrate it with the information supply chain. I think it will be a while before solutions that truly support a holistic view will emerge, especially considering that even the gorillas in the space don’t have end-to-end sourcing and procurement.
  • Solution Globalization
    Let’s face it … supply chains today are truly global, but the solutions are not. Most “internationalized” solutions are only available in a smattering of languages, most “internationalized” solutions are not plugged into real-time currency exchange feeds — and few developers have thought about the need to maintain/display multiple conversions (including the rate at the time of purchase, the projected rate, the current rate, etc.), and most “internationalized” solutions don’t help you understand how to do business with the country of interest.
  • GHG Tracking and Reduction
    Most enlightened countries have woken up to the fact that, even though we don’t know precisely how damaging each ton of GHG and / or carbon we emit is, we do know that it’s damaging and that we have to reduce our emissions. The first step is to get a baseline of the emissions produced by your operations, but for many companies, this is a multi-year effort. Better product and service solutions are needed. Also, although there are multiple proposals on the table to reduce emissions, there are few total value management models out there to help us select the right ones.
  • Risk Prevention
    Not only is risk not going away, but it’s getting worse by the year. Supply chains are getting more complex by the year, and the likelihood of something going wrong is steadily increasing. Solutions that can help a company identify risks, in real time, and identify possible mitigations and actions required to implement them, are desperately needed.
  • Opportunity Analysis
    Costs are skyrocketing, but consumer discretionary spending is stagnant at best. They key to a successful supply chain is cost reduction and avoidance, and this requires continual opportunity analysis. I envision this starting with modern spend analysis, but it needs to go beyond true spend analysis to continual innovation, since the greatest cost reductions will come from true revolutions, and not just the shrewd identification of category-based overspending. I envision that this will start with the integration of PLM with Life Cycle Analysis and Next Generation Analytics and then morph into something that none of us can envision today.

Now, I realize that these are pretty much the same problems we have been facing for the last five to ten years, but I suspect that it will be quite a while before they are solved due to the overwhelming complexity of today’s supply chains.

When the series is done, I’ll compile the “master list” of challenges and, if any of my fellow bloggers can convince me there are bigger challenges out there, revise my list.

Equipment Breakdown Risk Management

At risk of sounding like a broken record (or a scratched CD, for you young twitterers), your supply chain is fraught with risk! However, the more risks you’re aware of, the more risks you can mitigate, especially if someone gives you some tips on how to identify and mitigate those risks. That’s why I enjoyed a recent article in Industry Week by Anthony J. Trivella of The Hartford Steam Boiler Inspection and Insurance Company on “Mitigating Equipment Breakdown Risks”.

In his article, Anthony notes that the most vulnerable part of many businesses is the equipment that keeps them up and running — and if the equipment, or the underlying infrastructure that supports it, breaks down, commerce usually comes to a stop and profits vanish as customers go elsewhere for their products and services. Furthermore, risks are being exacerbated as four trends are converging to drive risk to higher levels than ever before: infrastructure is aging; demand for equipment is increasing globally; energy demands, and costs, are rising rapidly; and technology is proliferating faster than Fibonacci’s rabbits.

The Aging Infrastructure and the Data Explosion

The U.S. infrastructure, and the power grid in particular, is being strained by the proliferation of power-hungry technology. (Data centers are now sucking up close to 20% of all energy produced in the US! [IT: The Biggest Threat to Our Energy Future]) Much of the current system was developed over half-a-century ago, and was not designed for today’s energy needs. In addition, many equipment owners neglect to install adequate surge protection, and place their business activities at increased, unnecessary, risk.

The Global Battleground for New Equipment

As the GDP of developing nations that we have been outsourcing to for most of the decade continues to grow, so do their middle class – who now want what Americans want. China and India account for 40% of the global population, and by some estimates, their middle class is now larger than the US population. However, worldwide production hasn’t increased at the same pace, so in addition to a fight for easily made DVD players, there’s also a fight for the modern equipment needed to build skyscrapers, road, bridges, and power grids.

Rising Energy Demands and Costs

Peak demand for electricity in the US is expected to increase by 18% in the next 10 years while committed power generation is projected to rise a mere 8.4%. Considering the total annual energy demand of the US, that’s a huge differential. Can you say “rolling blackouts”? I hope so, because that’s looking more and more likely every year! (So, start greening your roofs, using geothermal to cool your buildings, installing those solar panels and wind mills, and watching that fuel cell technology … because, if uninterrupted power is critical to your business, generating your own power is the only way you’re going to insure you have power when you need it.)

Technology Proliferation

Just look at your average worker who needs a utility belt to hold all of his iPhones, iPods, iFaxes, iBooks, etc. etc. etc. and you can see that we have become slaves to technology. (It’s a damn good thing we’re still not close to achieving artificial intelligence!) How many computer systems do you have? Really? Better count again … between desktops, laptops, servers, backup-servers, backup machines, machines in repair, etc. – I bet you have three times as many machines as you think you have. (And yes, that’s one of the reasons your energy bill is going through the roof!) Then there are all of the different enterprise software systems that you use to manage your business. And your mobile devices. Point of Sale devices. etc. etc. etc.

This widespread use of electrical and electronic equipment, which is highly vulnerable to power surges and other disturbances, is creating equipment and business risks for commercial operations whose owners may not understand their exposures. Moreover, technology is advancing so rapidly that much of it becomes obsolete quickly, making it difficult to repair or find replacement parts. In many cases, if key components are unavailable, it must be completely replaced.

Unprecedented Risks Require Unprecedented Mitigations

Equipment owners need to assess their risk exposure, improve maintenance and operation procedures accordingly, develop contingency plans, and insure they have appropriate insurance protection. Some specific things that can be done include:

  • the life-span of large transformers can be maximized via dissolved gas analysis and other tests that can identify defects and necessary repairs before the transformer breaks down
  • key data systems and servers can be backed up by redundant surge-protected uninterruptable power supplies
  • on-site power generation systems can be installed to not only provide emergency backup, but reduce the amount of power the business needs to draw from the grid at peak times