Category Archives: Risk Management

Supply Chain Management Implementation Risk Minimization

As both an enterprise software expert and a supply chain technology expert, it’s a safe bet that the recent article in i2’s Supply Chain Leader on “Minimizing Risk During SCM Implementations” would get my attention. The reality is that a poorly executed supply chain management implementation across an enterprise can destroy your business. The 2.25 Billion Inventory write-down that Cisco had to take in 2001, due to a breakdown in its supply chain forecasting and visibility systems, might have been bad, but Foxmeyer, who in 1996 was the 2nd largest wholesale drug distributor in the US with annual sales over 5 Billion went out of business thanks to an ambitious IT revamp, that included a massive enterprise wide ERP upgrade to manage and automate its supply chain and distribution. It sold in a bankruptcy fire sale to a larger rival for a mere 80 Million.

As the article notes, while innovative SCM processes and technology tools have the strength and capability to revolutionize an organization, they can also disrupt business as usual, at least in the short term. And if not handled properly, SCM implementations can disrupt processes and technology in the long term as well … and even affect the viability of your business! They have to be intelligently managed, and risks have to be identified, mitigated, and monitored from the start.

As the article notes, the project team can’t just focus solely on achieving the deliverables when they are planning a new SCM implementation. They have to consider the risks that may arise during post-implementation, when the solution will be subjected to multiple process and technology changes that it will need to support, and possibly risk business viability. As the article points out, broader issues such as long-term performance and scalability, operating environment and hardware, and reporting and connectivity must be considered up-front to mitigate future risks.

So what advice does it gives? It provides the following three tips:

  • Identify Every Risk
    Collect information from multiple stakeholders and perspectives, identify any potential risks, asses them, and manage those that are likely or would have a severe impact if they occurred.
  • Track Critical Risks Over Time
    Information on the relative priority, likelihood, and status of of any risk should be available, and up-to-date, at all times.
  • Ensure Ownership of Solutions and Associated Risks
    Make sure that everything you implement is identified, documented, tracked, and maintained. No under-the-radar implementations without proper documentation and knowledge transfer. Otherwise, the next system update will be a total disaster when multiple systems that people depended on to their job, that no one in IT or upper management knew about, just disappear.

Not bad advice, but it only scratches the surface, doesn’t give you anything you can really use to start (or track your efforts), and, most importantly, doesn’t give you the best advice of all:

  • Bring in an Independent Expert
    Don’t trust yourself, or your vendor, to do it right. Let’s be honest … you’re not an expert in enterprise software, implementation, and integration and your vendor is not an expert in your business. You might use the same vocabulary, but, fundamentally, you don’t speak the same language (or at least not fluently). Bring in an independent third party who is an expert in both supply chain software and IT project management and in supply chain processes, and supply chain process reengineering, to manage the planning phase to insure you don’t miss any key risks, that you select the right systems, and that the implementation doesn’t disable functions or miss modules that you really do need for a subset of your staff to do their jobs. The right plan will go further to mitigating risk than any mitigation effort ever will. I guess what I’m saying is, if you don’t know where to start, don’t be afraid to call the doctor, because, nothing beats preventative medicine.

Just remember, Consultants are Cheap and it’s easy to get Maximum Value from Your Consultants.

Supplier Management Works … Even in the Public Sector

One of the presentations at the 6th Annual International Symposium on Supply Chain Management was a Supplier Management Case Study by Canada Post. Canada Post, which is the 6th largest employer in Canada, employs a workforce of 71,000 that has to deal with 40 Million items a day that can originate from 24,000 points of access (including 7,000 retail outlets), and that may need to be delivered to any one of 14 Million locations across ten million square kilometers. As a 7 Billion dollar organization, over 4 Billion dollars flows through Procure to Pay annually, with over 2 Billion dollars of that spend managed. Major categories include transportation (350 million plus), professional services (300 million plus), information technology (250 million plus), facilities (200 million plus), and mail operations (100 million plus). Approximately 80% of invoices are electronic, and approximately 64% of payments are through electronic transfer.

Given the magnitude of dollars that are at stake, Canada Post has implemented a score-card based supplier management system in an effort to reduce costs and increase value for money. It did this because a number of recent studies, including a study by Aberdeen, found that organizations that include supplier measurement and management in their sourcing programs save an average of 8% more than those who don’t, have an on-time-delivery performance that is twice as good, and a quality of product or service that is four times better. Furthermore, without a good supplier management program in place, an organization can expect 75% of sourcing savings to erode within 18 months.

To date, Canada Post has placed 60 of its 176 large (volume/spend) active suppliers on scorecards, and it intends to add 20 more by year end, with a goal of eventually having the majority of large (volume/spend) active suppliers on scorecards in the next couple of years. It’s goal is to increase value for money by implementing a common measurement approach that will allow for a comparative measure of of supplier performance within a commodity group, improve sourcing decisions, provide a foundation for supplier relationship management, and drive improvements.

It uses a multi-part scorecard that measures different aspects of on-time delivery, defect free delivery (of a product or service), continuous improvement, and value for money that rates a supplier on a 1 to 10 scale. Anything under 8 is unsatisfactory, anything between 8 and 9 needs improvement, 9 is on-target, and anything above 9 means that the supplier has exceeded expectations. The goal is to get as many suppliers as possible exceeding expectations because this is where savings and value materialize.

As part of their supplier management initiative, they did two case studies. The first case study was on a supplier who was perceived to be a poor service provider with major problems in invoice accuracy on a regular basis and unsatisfactory service. Over two quarters, the scorecard identified poor performance that ranged between 5.5 and 7.1. This got the attention of the supplier’s senior management who, committed to fixing the problem, performed a root-cause analysis, identified corrective actions, and implemented them. After the senior management implemented their corrections, overall performance improved to 7.7 over the next two quarters and the supplier is now trending to an 8.8 within the next two quarters, which is a considerable improvement.

The second case study was on a supplier with a history of excellent service who consistently exceeded expectations. The question was whether or not supplier management could be used to edge out even better performance. After implementing the scorecard, the supplier reduced spending by 3.5% over the next 6 months and identified and implemented a number of Joint Performance Initiatives that are expected to yield even further savings in the future.

In short, Canada Post found that a good supplier performance management initiative, which in this case was built on a variation of a common scorecard where both parties agree on the metrics and the supplier is tasked with maintaining the scorecard (which has to be signed off by a buyer before it is accepted), can save considerable money even in the public sector.


Editor’s Note: I wrote this before my colleague posted his take over on Spend Matters last month, but decided to delay it as a reminder to readers of both our blogs that good SPM programs achieve results. Jason’s posts can be reviewed here:
Supplier Performance: Lessons from Canada Post (Part 1)
Supplier Performance: Lessons from Canada Post (Part 2)

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!