Category Archives: Risk Management

Your Supply Chain is NOT Secure!

The September (2006) issue of IEEE Spectrum ran an article entitled Nine Cautionary Tales designed to illustrate that we are not really prepared if terrorists decide to strike again, despite all of the spending on security initiatives and press statements.

However, what it does make abundantly clear is that no matter what you think, your supply chain is NOT secure – regardless of how safe you think your supply chain is or what voluntary security initiatives you might subscribe to. What does this mean? First of all, if security is critical, you need to take extra steps to insure that security is there. More importantly, it tells us that you should be prepared for disruption and have plans in place to deal with that disruption and mitigate the effects quickly and without serious incident.

So just how are they insecure? Let’s examine each of their scenarios.

Bomb in a Box

Scenario: A crazy dictator threatens to detonate a 2-kiloton atomic bomb hidden inside a shipping container somewhere in a major port city (which could do more damage then the 22-kiloton airburst that devastated Nagasaki at the end of World War II).

Danger: With 90% of international cargo now traveling in standard containers, and your average port only able to manually investigate a very small percentage, it would not be too difficult for a terrorist to hide a large bomb in random port container, detonate it, and damage hundreds, if not thousands, of neighboring containers.

ElectroShock

Scenario: Terrorists take out part of the power grid and a whole city, state, or even region goes dark – just as the US Northeast, Midwest, and southeastern Canada simultaneously failed in 2003.

Danger: There are about 1000 high-voltage transformers in the US that step voltage down from transmission levels (typically above 100 kilovolts) to distribution voltages (in the tens of kilovolts) across the US. Most are secured by nothing more than a chain link fence. Each one of these takes down a portion of the grid. The simultaneous knock-out of a handful of these could overload the grid and take out a very large portion of it. This could shut down significant parts of your operation – cold.

Toxic Train Wreck

Scenario: A terrorist blows a hole in the side of a tank car transporting toxic chemicals, such as chlorine gas.

Danger: The gas escapes and blankets the nearby area, making it uninhabitable and killing anyone who can’t escape quickly. Operations run on people – no people, no operations.

Crude Attack

Scenario: A highly trained commando squad blows up a refinery.

Danger: A very expensive processing plant is destroyed, toxic smoke fills the air, oil supply drops, and energy prices skyrocket.

Agro-Armageddon

Scenario: A small group of terrorists infect small groups of cows with mad-cow disease in geographically remote parts of the country. (The virus that causes this disease is harmless to humans.)

Danger: In order to contain what appears to be a burgeoning epidemic, hundreds of million of cattle are slaughtered across the country, significantly decreasing food supplies, driving up food costs, and making the terrorists, who invested in the futures market, rich in the process.

Black Christmas

Scenario: Terrorists blanket shopping malls with open containers of mercaptan, the highly volatile and noxious-smelling chemical ordinarily used to signal the presence of propane gas, and postal offices with anthrax stimulants.

Danger: Christmas sales plummet as consumers fear malls and deliveries can not be made. Furthermore, if the terrorists make threats to use real propane and anthrax next year if their messages go unheeded, Christmas sales, your primary revenue generators, are destined to be low for years to come.

Star Struck

Scenario: A group of highly trained activists take over the Academy Awards Ceremony.

Danger: This scenario applies to any function you hold with a number of important people.

A Farmer’s Fury

Scenario: A group of angry farmers make truck-bombs using their unrestricted access to ammonium nitrate fertilizer, drive them up to a building, walk away, and detonate them using a remote detonator.

Danger: This could be accomplished by any group with access to the right raw materials – farmers, distributor employees, manufacturer employees, etc.

Too Much – Or Too Little

Scenario: In the future, airline security has lapsed to pre-9/11 levels as the urgency to protect the homeland has subsided with reduced terrorist attacks and a new government.

Danger: Someone could walk on the plane with a shoe-bomb. More importantly, if security lapses across the board, it will be easier not only for terrorist attacks, but theft.

So what can you do? Tune in tomorrow!

Managing Global Trade Data

In our last post on Global Trade Data Management we indicated that not a lot of focus has been traditionally placed on the management of Global Trade Data because, if it’s done right, there are no significant savings opportunities and most companies still are not really aware that they should be focused on it. The reason they should be focused on it is that error rates in global trade processes approach 10% to 20% and this is costing many companies millions of dollars, especially when affordable technology solutions to tackle these problems now exist.

Why is managing global trade data so important? In addition to the fact that the Customs Modernization Act of 1993 shifted the responsibility of documentation accuracy from the government to the importer and that errors can result in long delays, huge fines or overpayments (that the government will not identify for you), this years budget for US Customers and Border Protection (CBP) increased 4.8%. As part of this increase, CBP plans to spend $305M in the implementation of the Automated Commercial Environment (ACE) and another $16M on the International Trade Data System (ITDS) program in conjunction with the Customs Trade Partnership Against Terrorism (C-TPAT). When you combine these initiatives with the compliance legislation of the recent Sarbanes-Oxley act, the level of visibility and control you really need with respect to your trade data is probably well beyond what you have. And since you never know when you could be audited, which is probably more likely than you think when you consider that statistics indicate that the goverment collects $7 in fines and interest on underpayments for every $1 it spends on a trade-compliance audit, you should be getting your data into shape now. (Furthermore, in addition to the Securities and Exchange Commission, depending on what you are importing or exporting, you may also be subject to oversight from the Department of Transportation, Department of Defense, Federal Communications Commission, Federal Aviation Commission, and the Food and Drug Administration, for example.)

You start with an audit of your current processes, systems, and, most importantly data, to determine where the issues are and what you have to address. A company like Global Data Mining (acquired by CUSTOMS Info which was acquired by Descartes) can help you do this using a 3-R process that recreates years of historical import transactions to identify and quantify errors and non-compliance activities, produces executive-level reports to provide decision makers the information they need to determine priorities and define go-forward plans, and reparis existing data and current control processes to prevent the same mistakes from happening again.

Manual processes, which are still standard for the majority of importers, and which typically rely on a person to make a decision with only shorthand invoice descriptions available, are subject to errors and generally produce the following common inaccuracies:

  • inaccurate notation of merchandise value
  • improper classification of merchandise
  • incorrect payment and documentation of duties

Generally speaking, your reporting process will highlight these issues and your repair process will focus on implementing new, preferably technology driven, processes that will prevent these errors from happening again.

The reality is that despite the fact there are tens of thousands of rulings by US Customs that need to be referred to in product classification, and that this shear number is beyond the grasp of even the best of human experts, this is a very small number from a systems perspective and a good technology solution can locate and apply the right ruling, classification, and rate in a fraction of a second with the right description and HTS codes.

For more information, I encourage you to check out Global Data Mining’s white papers and their white paper on Import Compliance in particular. I think it will be worth your time.

Global Trade Data Management

We’ve discussed Global Supplier Visibility and Performance, Supply Chain Finance, and even Supply Chain Audits, but we have not yet delved into Global Trade Data Management, an area that, if mismanaged, can cost you millions of dollars.

Why? Maybe it’s because if it’s done properly, there are no considerable savings opportunities when compared with other areas of the supply chain. With visibility, there are always new ways to manage risk that can be significantly more cost competitive. With finance, new payment methods or arrangements always present noticably increased potential. With sourcing, we know where the enormous opportunities are. With global trade, governments fix tariffs and duties and that’s that.

But only if your items are property classified and validated and only if you pay the right amount. The reality is that, in many corporations, error rates in global trade processes approach 10% to 20%. The effective control of global trade processes is often 100 to 200 times worse compared to accounts payable processes in the same company.

Why? A combination of reasons. Up until 1993, the government was responsible for reviewing the accuracy of documentation and markings and assessing appropriate duties. Then the Customs Modernization Act shifted responsibility for import compliance to the importer. Businesses were not ready, so they deferred to third-party providers (customhouse brokerage services). But as they expanded, so did the broad range of countries and commodities they had to processes, as well as the ever increasing range of HTS (Harmonized Tariff Schedule) codes they had to deal with, many of which had confusing sub-classifications that were not well known or commonly used. In addition, whereas accounting had a number of sophisticated accounting systems to choose from on the marketplace, technology solutions for these customhouse brokerage providers were almost non-existent. In effect, proper classification depended on the expertise of the human classifying the data – which leads to errors, all of which are costly since they will result in delayed clearance, fines, or undetected overpayments – the last of which the government is not looking for on your behalf.

How could this happen? Many categories have subcategories. Consider 3703.10, photographic paper. It’s US HTS rate is 3.7% unless it’s 3703.10.60, Other (not falling into the .30 category of rolls exceeding 610 mm), and then its 3.1%. If you were unaware of this special subclassification, or simply left off the .60, you’d be paying 0.6% more. Another common error is a mixed shipment where a rushed or lazy agent simply uses the high level four digit code in a mixed shipment. If the majority of the shipment was at a lower rate, or was subject to reduced rates because of a free trade agreement or free trade zone, you could be considerably overpaying. And if you’re importing 50M and overpaying 2%, that’s 1M you’re losing.

So what can you do? Up until recently, the best you could do is subscribe to a service that kept up-to-date rates and manually verify each shipment against the rates, which required lots of manpower and might cost more than you save if you are a mid-sized company or smaller. Today, there are technology solutions to assist you. One such solution is that offered by Global Data Mining [GDM] (acquired by Customs Info, acquired by Descartes), a company that specializes in helping high-volume, high-value global trade businesses build effective trade databases for extensive trade reporting and comprehensive auditing to significantly improve their processes, reduce their error rates, and save time and money in their global trade endeavors.

Earlier this week I had a chance to speak with the president of GDM, and the president of their sister company, International Trade Bureau and I must say that I was impressed with their knowledge of the issues in the global trade space and their processes and solutions for addressing them. Although they do not provide a complete solution on their own, with the right internal team and consulting partners, the foundation their solutions provide will allow you to address your trade issues end to end. How? That’s a topic for a later post.

Sometimes Good Advice for IT is Good Advice for Sourcing

A while ago, ZDNet published a short article that described a “10-Step program to SOA Success”. What’s neat about this article is that it could have been titled 10-Step Program to Sourcing Success as it is a great primer if you are just entering the world of e-Sourcing.

Let’s examine the ten steps carefully.

  • Who’s Your Daddy?
    Without support, any project is doomed to failure. If your organization does not yet have a Chief Procurement Officer on the senior management team, you need to find someone in senior management who is responsible for a top business imperative and convince them the project will save money and let them champion your cause.
  • Have a Vision!
    You need to articulate your vision regularly and consistently to gain support from other teams, departments, and upper management. You’re implementing the foundations for sweeping business change that is going to affect the business for decades to come.
  • Identify Attainable Projects.
    Start with an initial project that has immediate value and that can be finished in a few months since nothing speaks louder than a successful project delivered on time with better-than-planned savings.
  • Support the Business.
    If you choose the projects with the greatest potential impact to the business, you will ensure that your sourcing projects get the attention they deserve.
  • Flexibility Matters.
    Create flexibility through loosely coupled on-demand services that can be formed to create composite applications that automate business functions across the sourcing and procurement cycles. This flexible infrastructure will form the basis of business processes that are capable of adapting quickly as markets change.
  • Networking is Not Just for Salespeople.
    A key to success is the establishment of corporate-wide support at all levels of the organization. Be visible, promote your success, and find a way to make your success their success.
  • Don’t Lose Control.
    Establish strict governance procedures from the outset. With stringent government regulations, organizations need to be acutely aware and be held accountable. In sourcing terms, this means documenting each step of the process and ensuring compliance with negotiated contracts.
  • Don’t Fear Change.
    Organizational changes are imminent and you should be prepared to not only adapt to them, but guide them. After all, procurement is a central business unit in a successful organization.
  • Learn as You Go.
    Even if the first projects go very well, which they can if you use good tools, best practices, and follow the advice of experienced category professionals (that you should consider hiring as consultants if you do not have the expertise internally), there is always room for improvement. The most successful aspects should be recognized, captured, and carried to the next project while the less successful aspects should be identified and improved.
  • The Best and the Brightest.
    Create a center of excellence and staff it with the best and brightest. This team will be responsible for identifying best practices and guiding your procurement teams in their implementation.

There’s Such a Thing as Too Much Flexibility (in your Make-to-Order Supply Chain)

As you have hopefully figured out by now, there were a lot of good presentations at the Fourth Annual International Symposium on Supply Chain Management. Some were more insightful than others, some more interesting than others, and some more eye opening than others. A presentation that fit into this last category was Sascha Schoor’s presentation titled Flexibility Cost Oriented Management of New Car Orders in the Automotive Industry.

German premium car manufacturers differ from other European manufacturers and American manufacturers in two distinct areas:

  1. build to order
    almost 100% of cars are configured by customers or dealers
    (as opposed to 48% in Europe and 6% in the US)
  2. individual configuration
    there are theoretically up to 1032 different configurations of a BMW5

This is because German manufacturers believe that consumers not only want a significant amount of customization capability in their cars, but that customers also want the flexibility to change their order up until a few days before production begins – the “5 day car” model. However, the study carried out by the presenter determined that despite marketing’s insistence that being able to change an order up until 5 days before production was very important to consumers, this is not the case.

The study, which analyzed responses from 803 participants, 508 of which planned to buy a new car in the next 12 months and 295 of whom had recently bought a new car, found that the majority of customers would not only be satisfied with a longer delivery time and, thus, a reduced capability to change an order once it is made, but that a substantial number would be willing to accept a significantly longer delivery time if an early booking rebate was offered (with 69% willing to lock in an order early if a 5% to 10% rebate was offered).

When you consider that

  • only 13% of customers change their orders after signing, and of these, the median number of changes is less than 2%
  • a total of 85% of these customers would accept a longer delivery time with an early booking rebate,
  • most of the changes revolve around easily configured electrical components (i.e. stereo/CD), interior choices (seats, color), and exterior choices (paint, optional accessories), and
  • having your orders locked down a few days in advance allows you to configure your production lines for optimal productivity, which can greatly lower your costs

it becomes clear that German manufacturers could save a lot of money and substantially increase profits by adopting a happy medium between the German car philosophy and the American car philosophy and providing rebates for those customers who lock in build orders early or choose a standard configuration. Then, for the 15% of customers who want flexibility, they can still provide that flexibility at a premium.

What do you think?