Category Archives: Risk Management

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.

The World Economic Forum’s Global Risks 2007 – Part III

Expert opinion suggests that levels of risk are rising in almost all of the 23 risks on which the Global Risk Network has been focussed over the last year – but mechanisms in place to manage and mitigate risk at the level of businesses, governments, and global governance are inadequate.
Global Risks 2007, World Economic Forum

In Part I we covered the 23 ore global risks of an economic, environmental, geopolitical, societal, and technological nature identified by the World Economic Forum and in Part II we covered the “5 Pathways” to mitigation identified by the report: improving insight, enhancing information flow, refocusing incentives, improving investments, and implementation through institutions. Part II also introduced to potential institutional innovations for managing global risks: chief risk officer and a “coalition of the willing”. Today we’re going to discuss some potential mitigations to each of the risks that you can consider in your planning efforts.

Economic

  • Oil price shock / Energy supply interruptionsConsider using price hedging strategies and cutting long-term supply agreements from preferred suppliers.
  • US current account deficit / fall in US$ Don’t just look at cost when making outsourcing and low-cost country sourcing decisions – look at total value. That way, if the dollar drops and your supply increases in cost, relatively speaking, it could still retain its value.
  • Chinese economic hard landingDon’t over rely on Chinese suppliers who could be hit hard by a Chinese financial crisis. Be sure to mitigate risk with secondary suppliers in other countries as well.
  • Fiscal crisis caused by demographic shiftClosely monitor your financial situation in the G8 countries, especially with regards to debt financing as well as the financial situation of key suppliers in these countries.

Environmental

  • Loss of freshwater servicesDon’t start or expand your freshwater bottling business.
  • Natural catastrophe: Tropical stormsBe sure to insure all of your ocean freight and to maintain safety stock of key commodities on each continent.
  • Natural catastrophe: Inland floodingDo not build new production plants in areas at risk of inland flooding and be sure not to single-source key commodities or materials from such areas.
  • Natural catastrophe: EarthquakesDo not build new production plants near fault lines and be sure not to single-source key commodities or materials from such areas.

Geopolitical

  • International terrorismBe sure to have a business continuity plan ready to go in each of your locations in the event of a terrorist attack on or near your premises.
  • Interstate and civil warsBe sure to keep an eye on the political situation of each unstable country you are involved with and have a plan in place to move operations to a more stable country should a war break out.
  • Failed and failing statesDo not set up operations in any country that is failing. Furthermore, if such a country is the sole source of a raw material you require, find a back-up source. If you cannot find a back-up source, put on your innovation hat and try to find a product design that can use an alternate raw material.
  • Transnational crime and corruptionIdentify facilities that store critical information or materials and take appropriate actions to step up security. Furthermore, make sure you have a response management plan in place in the event of a crime in order to expedite matters with the local authorities and get you back in operation as soon as possible.
  • Retrenchment from globalizationBe prepared for the slowdowns in trade that this could bring by having appropriate safety stock of critical commodities and raw materials in the relevant countries and have back-up local sources of supply identified just in case.

Societal

  • PandemicsUnderstand your critical operations and insure a sufficient number of personnel understand each critical function and have plans in place to continue operations with at most half of your work force for short periods of time should a pandemic or new flu strain hit your area.
  • Infectious diseases in the developing worldUnderstand that your suppliers in these parts of the world could be severely crippled through the rapid, unpredictable, spread of infectious diseases through their workforce and be sure to have geographically dispersed sources of supply for all key commodities and raw materials.
  • Chronic diseases in the developed worldUnderstand the effects these could have on your workforce and put appropriate mitigation plans in place.
  • Liability regimesUndertake a careful cost-benefit analysis before selecting or avoiding a liability regime.

Technological

  • Breakdown of critical information infrastructure (CI) If your T1 line gets cut, your internet goes down, and so does all of your connectivity and on-demand applications. Make sure you have different wired and wireless connectivity services available, back up key data on site, and either run critical applications locally or use fat clients that do not require 24/7 connectivity to the on-demand service.

This is not meant to be an exhaustive list of risks, or possible mitigations, just some starting suggestions for your considerations to kick-start the process and your risk mitigation planning.

The World Economic Forum’s Global Risks 2007 – Part II

Expert opinion suggests that levels of risk are rising in almost all of the 23 risks on which the Global Risk Network has been focussed over the last year – but mechanisms in place to manage and mitigate risk at the level of businesses, governments, and global governance are inadequate.
Global Risks 2007, World Economic Forum

In addition to identifying 23 core global risks of an economic, environmental, geopolitical, societal, and technological nature that no global organization can afford to ignore in its risk planning and risk mitigation efforts, this report also offered the “5 Pathways” to mitigation.

  • Improving InsightMove risks from the unknown to known through research.
  • Enhancing Information FlowAllow information to flow effectively between decision-makers and those experiencing the risk first hand to provide early warning, inform the public, and exchange best practice.
  • Refocus IncentivesCreate incentive frameworks that allow decisions to be made to reduce risks.
  • Improve InvestmentProvide the investments necessary to mitigate risks.
  • Implement Through InstitutionsImprove the framework needed to mitigate risks for which an institutional response is required.

The report also pointed out which risks are reduced by each of these mitigations.

Mitigation
Risk Insight Information Incentives Investment Institutions
Oil Price Shock / Energy Supply Interruption   X   X   X
US Account Deficit   X   X
Chinese Economic Hard Landing   X   X
Fiscal Crisis Due To Demographic Shift   X   X
Excessive Indebtedness   X   X
Climate Change   X   X   X
Loss of Freshwater Services   X   X   X
Tropical Storms   X   X   X
Earthquakes   X   X   X
Inbound Flooding   X   X   X
Terrorism   X   X   X
Proliferation of WMD   X   X
Interstate and Civil Wars   X   X
Failing States   X   X   X
Transnational Crime   X   X   X
Retrenchment from Globalization   X   X   X
Middle East Instability   X   X   X
Pandemics   X   X   X
Infectious Diseases (Developing World)   X   X   X
Chronic Diseases (Developed World)   X   X
Liability Regimes   X   X
Critical Information Infrastructure (CI) Breakdown   X   X
Nanotechnology Risks   X   X

They also provide two possible institutional innovations for managing global risks.

  • Country/Chief Risk OfficerIn the public sector, governments would appoint a single Country Risk Officer, prioritize risks on a cross-sectional basis, and explore private sector techniques of risk assessment, management, and transference. In the corporate sector, the Chief Risk Officer would be responsible for all categories of risk, risk reporting, consolidation, and aggregation.
  • “Coalition of the Willing”Different groups of countries / corporations would come together in a non-exclusive fashion to create a system of flexible geometry to mutually mitigate risks.

Lastly, although not specifically mentioned in the report, you can address each risk on an individual basis using reason, logic, and common sense to develop appropriate mitigations, which will be the subject of Part III.