Category Archives: Risk Management

Avoiding Risk Management Pitfalls

The Supply Chain Management Review recently posted an excerpt from an article by Jayashankar M. Swaminathan and Brian Tomlin that summarized six common pitfalls and strategies for avoiding them that’s worth a quick look. In “How to Avoid the Risk Management Pitfalls”, the authors summarized the following pitfalls and their mitigations:

  • Assuming disruptions can only occur when operating at normal strengths. Disruptions can occur at any time – even when you are in the process of recovering from a disruption. Human-caused disruptions in your supply base and natural disasters can happen at any time.
  • Assuming yours is the only company affected by a disruption. If the disruption is caused by a natural disaster, chances are other suppliers are also affected. For example, if a tsunami wiped out 25% of the cocoa crop along the west coast of Africa, then your back-up supplier is likely to have just as much of a problem meeting your needs as your current supplier and your emergency supply, if attainable, might cost considerably more than you originally planned for.
  • Ignoring the supply risk associated with demand-pooling tactics. Demand-pooling strategies might work great under normal circumstances, but they can lead to a false sense of security since they might serve only to understate the seriousness and immediacy of a disruption should one occur.
  • Ignoring demand risk when choosing a supply-continuity tactic. Just as you need to factor in supply risk when evaluating demand pooling, you need to factor in demand risk when evaluating supply-continuity because supply-continuity can seriously increase your demand risk. Insuring significant supply can be costly, and if the demand never materializes, this can result in a significant loss.
  • Allowing managers’ risk attitudes and timelines to determine strategy. Managers can vary widely in their tolerance for risk, from extremely lax to dangerously intolerant. Furthermore, even if a manager is willing to invest in supply-chain resiliency, a manager’s choice of tactics can be strongly influenced by his tolerance for risk. Good risk management entails having the right strategies in place for each identified risk, whose cost and effort should be dependent on the probability of the risk occurring and the financial damage that could be caused by the risk materializing.
  • Building short-term resiliency at the cost of long-term vulnerability. Supply risk management is not effective if only performed as an intermittent activity carried out every few years on an irregular basis. A good risk management strategy today might not be a good risk management strategy tomorrow. As the authors note, you need to be continually vigilant in scanning for changes in your operating environment that may necessitate adjustments to your resiliency strategy.

I summarized some good strategies and tactics to manage demand and compliance risk in this post back in April. Some of the better strategies and tactics include:

  • Supply Buffer Management
  • Cycle Time Reduction Strategies
  • Collaborative Processes
  • On-Going Screening and Quality Control Processes
  • Continual Training
  • Regular Supply Chain Audits

In addition, as I summarized in this post that summarized Aberdeen’s supplier performance and risk management benchmark report, there are a number of enablers that you can implement to improve your risk management program management. These include:

  • Supplier Scorecarding and Reporting
  • Automated Calculation of Key Supplier Performance Metrics
  • System Notification of Performance Issues & Disruption Events
  • Integration with Spend Analysis Tools
  • Reporting of Key Supplier Operational and/or Financial Risks
  • Web-Based Portal for Supplier Self-Registration & Information Maintenance
  • Insurance Solutions

the doctor’s Guest Posts: The Year in Review

Over the past year, I’ve blogged a number of guest posts over on eSourcing Forum, including forty posts last summer as part of the weekend series. For new(er) readers to the blog, here is a list of all guest posts over on eSourcing Forum with direct links.

Weekend Series Posts on e-Sourcing Forum [WayBackMachine]

Purchasing Innovation I: An Introduction
Purchasing Innovation II: TRIZ
Purchasing Innovation III: The Verifier Approach
Purchasing Innovation IV: Innovation Continued
Purchasing Innovation V: Sourcing the New Organization
Purchasing Innovation VI: CrowdSourcing
Purchasing Innovation VII: The Road Ahead
Purchasing Innovation VIII: Transforming New Product Development
Purchasing Innovation IX: The Purchasing Evolution!

On Demand I: The Good
On Demand II: The Not-So-Bad
On Demand III: And the Coming Pretty …

Cost Reduction and Avoidance I: An Introduction
Cost Reduction and Avoidance II: Metrics
Cost Reduction and Avoidance III: Incentivize for Success!

Supply Risk Management I: An Introduction
Supply Risk Management II: Risks and the Need for Resilience
Supply Risk Management III: Managing Risk

Supplier Performance Management I: An Introduction
Supplier Performance Management II: The Road to Success
Supplier Performance Management III: Best Practices

Demand Driven Supply I: An Introduction
Demand Driven Supply II: Stages and Implications
Demand Driven Supply III: Challenges and Implementation

Center Led Procurement I: An Introduction
Center Led Procurement II: A Center of Excellence
Center Led Procurement III: Best Practices

Procurement Outsourcing I: Is it right for you?
Procurement Outsourcing II: Selecting a PSP
Procurement Outsourcing III: Getting the most out of your PSP

Optimization I: A Powerful Tool
Optimization II: Why it was Relegated to the Shadows
Optimization III: Why it’s time is finally here
Optimization IV: POE or BoB?

Six Sigma I: An Introduction
Six Sigma II: Innovative Quality
Six Sigma III: Value Based Strategic Sourcing

Weekend Series Wrap Up I: Process and Technology
Weekend Series Wrap Up II: Supply Chain Management
Weekend Series Wrap Up III: The Innovation Revolution

Miscellaneous Posts on e-Sourcing Forum [WayBackMachine]

* Lead Time Optimization: Groundbreaking New Technology or just Applied Total Value Management-based Decision Optimization in Disguise?
* Sustained Sourcing Success
* Are there any limits to procurement’s role?
* Outsourcing Gets Tough
* Design for Supply
* The Benefits of an End-to-End e-Sourcing Suite
* Accelerating Value with On-Demand: An Aberdeen Perspective
* Supplier Enablement Enables Savings

And just in case you missed it, here’s a link to the chaos-causing post on Emptoris’ optimization over on Spend Matters:
The Doc’s Perspective on Emptoris’ Optimization*

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Best Cost Country Sourcing and the Concept of “Riskturn”

 

Today I’d like to welcome Ashton Udall of Global Sourcing Specialists and the author of the Product Global blog [WayBackMachine].

Low cost country sourcing; high cost country sourcing; near-shore sourcing; home-shoring; off-shoring…keep ’em coming. The manufacturing and distribution industries are just starting to get interesting. It can be tough to keep up. But, you only need keep up with the best concepts out there. And “best cost country sourcing” is one of them. Merging the “best” of risk and return?

Michael Lamoureux of Sourcing Innovation recently wrote a post entitled Best Cost Country Sourcing. His post was based on BrainNet’s white paper, “Best Cost Country Sourcing”, which I have yet to find a working link to. But fear not. Michael has summarized some of the concepts and made noteworthy commentary:

Taken from the white paper:

…cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for.

It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.

I agree. Generally speaking, you get what you pay for. But you have to take it on a case-by-case basis and think of it in terms of your overall competitive strategy. If time to market is too important, or you need components that are very high quality and technologically sophisticated, or exposure of your IP could sink your whole company, countries further along the development path with higher costs might end up saving you money in the long run.

Two basic concepts found throughout business, risk and return, are critical to the supply chain and sourcing. The problem is, it’s much more fun to speculate about substantial returns and savings, than try to quantify, measure, and assess risk. Thus, risk, and potential sources of risk and their effect on return, often fall off the radar. Perhaps someone should coin the term “riskturn”. Wait…I just did. It follows the whole celebrity gossip magazine promotion of co-identity: two things fused together which we dream will never be broken up again. People-Magazine-reading 14-year-old girls and desperate housewives have their Brad Pitt and Angelina, “Brangelina”, or Ben Affleck and Jennifer Lopez, “Bennifer”. Now CEO’s and sourcing managers will always remember “riskturn” and know that risk and return are a couple made in heaven.

Back to sourcing … Michael astutely notes:

In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.

In my case, Michael is preaching to the gospel. It’s right on and it’s worth promoting this kind of information more. ChinaLawBlog did a post eloquently entitled “China Defeats Vietnam in Sourcing Smackdown” which covered a post I did “Offshore Sourcing: An Ever-Shifting Landscape, Part II”. In my post, I talked about the fact that many fashion apparel manufacturers that moved production to Vietnam to avoid the risky/costly quota situation with China, then had to gather up their threads and needles again and head back to China and other countries when the US government announced that they would be monitoring Vietnam’s fashion industry for possible anti-dumping actions. In the comments section of ChinaLawBlog’s post, he noted that huge multinational corporations which fall into $5 million mistakes in trying to source the lowest costs or be the first to enter developing markets is not a strategy for all to follow. His point being, a smaller company making a $500,000 mistake might be up the Mekong Delta without a paddle, because they just don’t have the deep pockets to absorb those kinds of mistakes from a financial perspective like MNCs do.

Chasing lower costs undoubtedly disrupted supply chains, and perhaps order fulfillment, for these companies when they had to deal with a more unpredictable trade relationship between Vietnam and the U.S. For smaller companies, disruptors like this could be devastating. Best Cost Country Sourcing for smaller companies would involve hedging risk by looking for lower overall costs (rather than lowest hard costs) in a country where things like economics, trade, supply, materials, and other things are more predictable. I believe China retains this position over many other countries for smaller businesses looking to source consumer goods. At the very least, it’s certainly a good place to start for many. In many cases, maybe the best…?

Thanks Ashton!

P.S. I expect the comments to start rolling in from Mr. Locke any minute now …

Collaborate, Collaborate, Collaborate, Collaborate III

Just in case the first eight times I said it (in parts I and II) weren’t enough to get your attention, here are a few more summaries of articles extolling the virtues of collaboration – which should be at the forefront of your mind now that you know all of the risks you need to start mitigating!

Supply & Demand Chain Executive ran an article on how the “Collaborative Production Management Market for Process Manufacturing [is] Seen Due for Significant Growth”. Specifically, the market is expected to grow at a compound annual growth rate of about 12 percent over the next five years as global competition and regulatory requirements drive growing interest in emerging solutions, according to the ARC Advisory Group.

The article states that the intense global competition brought about by the “flattening world” is driving manufacturers to seek solutions that reduce cost, increase customer responsiveness, and deal with demand. This is driving them to collaborative solutions.

In addition, Supply & Demand Chain Executive also ran an article on “Supply Chain Strategies to Manage Volatile Demand” that listed four primary strategies for managing demand, of which one was collaborative processes, since collaborating with suppliers enables a company to send forecast data to its suppliers faster, enabling the suppliers to plan their supply chains and respond faster to demand changes passed on.

The Supply Chain Management Review ran “For Closer Collaboration, Try Education” which noted that just as a company educates and develops its own employees to enhance performance, it needs to extend that effort to its supply chain partners as well and provided a framework for collaborative education.

According to the article, there are five levels of collaborative education:

  1. Transactional Knowledgewhere little education is provided across organizations
  2. Product Capabilities Knowledgewhere learning may occur across organizational boundaries by way of requirements and capabilities dissemination
  3. Execution Certificationwhere the customer plances an emphasis on ensuring that the supplier meets minimal training requirements
  4. Cross-Relationship Educationwhich represents the beginning of a true collaborative-education process which is aimed at building a mutually beneficial partnership between members of the supply chain
  5. Collaborative Learningwhich marks the culmination of a collaborative-learning environment where complementary abilities, knowledge, and strategies are leveraged to provide a catalyst for learning

The fifth level can be reached by concentrating on five key areas of educational foci that can help achieve an improved fit between companies. According to the article, these five areas, which constitute the supply chain partner education framework, are:

  • Goals & Objective Alignment
  • Cultural/Change Management
  • Team Training
  • Supply Chain Skills Training
  • Technology & Process Mapping

The article concludes that the crucial differentiator in the global economy is shifting from mass production and manufacturing to knowledge and that success now depends increasingly on the ability to identify, develop, and leverage skills, knowledge, and relationships.

Not long after, the Supply Chain Management Review also ran “A Supply Chain of People” where they noted that in today’s global environment, training efforts need to focus on giving people the skills that enable them to collaborate with their supply chain partners around the world since we are all part of an extended global supply chain community.

The article also notes that a global organization needs to create its own supply chain culture to enable and enhance collaboration and that creating such a culture and that this involves addressing both values, or the way people think, and behavior, or the way people act. The culture must be all pervasive and shine through in service to customers, attitudes toward suppliers, adherence to established processes, readiness for and adoption of change, communication styles, and level of respect for members of the extended supply chain team.

The article offers four recommendations for creating a global supply chain of successful people:

  • Training Workshops Relevant to the BusinessOffer content that combines solid strategy-based principles with case studies and examples drawn from your business environment.
  • Make the Training Events GlobalMake sure to include participants from all of your global operations.
  • Address the Cultural FilterInsure that the training includes content and discussion that will help the participants recognize their own cultural filters and understand how it differs from those of other global supply chain participants.
  • Put the Training to WorkTraining must be put to work on Monday morning to be effective.

    Training not applied immediately is soon lost.

Purchasing ran an article on “Inventory Control: Treat the cause, not the symptom” where they noted that supplier collaboration is critical in inventory control efforts and necessary to reach best-in-class status.

Finally, Optimize recently published a piece on “embracing open business models” which noted that even innovative companies can use a helping hand or two.

In an open model, a company uses a transparent business model, uses greater use of external ideas and technologies, and shares their unused ideas from others. This allows an organization to bring innovations to market more quickly, less expensively, and secure a competitive advantage.

Tips to Manage Demand and Compliance Risk

Over the last month or so, Supply & Demand Chain Executive ran a couple of articles that had some good tips to manage demand and compliance risk.

The first article, “Supply Chain Strategies to Manage Volatile Demand”, notes that managing volatile demand in a cost effective manner can lead to significant benefits for a company but that it is a significant challenge and requires companies to employ robust supply chain strategies.

It presents four strategies to manage volatile demand efficiently:

  • Supply Buffer ManagementBuffers, including inventory and capacity, are used to manage demand volatility.
  • Cycle Time Reduction StrategiesCompanies with shorter cycle times can transfer information quickly and respond to changes quicker.
  • Postponement StrategiesPostponement strategies such as make-to-stock (MTS) and assemble-to-order (ATO) increase flexibility.
  • Collaborative ProcessesQuick responses to change require fast information flow not only within the company but also between suppliers and partners.

The second article, “12 Steps to an Effective Compliance Program”, notes that companies are obligated not to do business with illegal parties or entities, destinations, and end uses and are expected to take steps to ensure that they do not commit such violations. To this end, twelve suggestions are offered to ensure your company remains in compliance:

  • Board Level CommitmentAfter all, the U.S. Government Sentencing Guidelines state that corporate officers and board members must be knowledgeable about the content of their compliance program.
  • Assess ProcessesHire outside trade experts to perform a compliance gap analysis.
  • Embargoed CountriesMaintain a list of embargoed countries.
  • Electronically screen against black listsSelect a firm that maintains the ever-changing international restricted party lists, of which there are over 50, in a centralized solution.
  • Establish an on-going screening processRemain current with list updates and modifications.
  • Perform end-use and diversion risk screeningCollect end-use information from customers and parties that work with you.
  • Obtain jurisdiction and classification informationPerform jurisdiction and classification when information is not easily obtained from a reliable supplier.
  • Perform license determinationPerform license determination prior to each export and re-export.
  • Write and implement processes and procedures for each business functionProcesses should be in place for IT, R&D, Engineering, Manufacturing, Sales, Order Entry, Fulfillment, Shipping, Finance, and Legal.
  • Train, train, trainInstill compliance across the company.
  • Follow ISO 9000 and Sarbanes-Oxley StandardsUse export control best practices.
  • Perform Audits Every YearInsure that internal and external audits are performed at least once every two years.