Category Archives: Risk Management

Quantifying the Value of Supply Chain Security Investments

As mentioned in a recent Industry Week article, recently the Stanford Global Supply Chain Management Forum, together with IBM, conducted a study in the manufacturing innovation series called “Innovators in Supply Chain Security: Better Security Drives Business Value” to determine if the significant levels of investment often required to improve supply chain security and mitigate risks was justified. This study, which was based on inputs from eleven manufacturers and three Logistics Service Providers (LSPs) that were considered “innovators” in supply chain security, clearly demonstrated that supply chain security provides quantifiable business value.

In addition to the collateral benefits of:

  • Higher supply chain visibility,
  • Improved supply chain efficiency,
  • Better customer satisfaction,
  • Improved Inventory Management, and
  • Reduced cycle and shipping time

The report quantified the following benefits that resulted in considerable cost reductions and savings for the study participants:

  • Improved Product Safety
    38% reduction in loss; 37% reduction in tampering
  • Improved Inventory Management
    14% reduction in excess inventory; 12% increase in on-time delivery
  • Improved Supply Chain Visibility
    50% increase in data access; 30% increase in data access timeliness
  • Improved Product Handling
    43% increase in the automated handling of goods
  • Process Improvements
    30% reduction in process deviation
  • More Efficient Customs Clearance
    49% reduction in cargo delays; 48% reduction in cargo inspections
  • Speed Improvements
    29% reduction in transit time; 28% reduction in delivery time windows
  • Resilience
    30% reduction in problem identification, response, and resolution times
  • Higher Customer Satisfaction
    26% reduction in customer attrition; 20% increase in new customers

Supply chain security challenges are becoming much more apparent with the rapid expansion of global trade. Currently, over 200 million containers are shipped to the world’s seaports annually, and the US receives approximately 17,000 containers today. With an average of only 6% of US containers physically inspected, increasing security concerns, and the recognition that security has to extend simply beyond asset protection, the US government has implemented and adopted a number of initiatives to minimize transportation risk. These initiatives include:

  • The Advanced Manifest Rule (AMR) / Advanced Cargo Information (ACI)
    that requires detailed cargo data for all modes to be submitted to the U.S. CBP before arrival and an ocean container is allowed into the U.S. only if detailed contents information has been electronically provided at least 24 hours before the container is due to be loaded on a ship at a foreign port of origin
  • The Container Security Initiative (CSI)
    being used by the U.S. government to push inspections and pre-screening upstream to originating ports
  • The Customs-Trade Partnership Against Terrorism (C-TPAT)
    a pseudo-voluntary security initiative that overviews security best practices and implementation procedures that will reduce inspections and expedite processing for participants
  • The Emergency Planning and Community Right-to-Know Act (EPCRA)
    that details information requiring environmental and safety hazards relating to hazardous materials to be given to people in the community
  • The Free and Secure Trade (FAST) initiative
    that allows low-risk goods being transported by trusted drivers via trusted carriers for trusted firms to pass rapidly through border crossings
  • The Smart and Secure Trade lanes (SST) program
    established by the container shipping industry to ensure the global security of cargo containers by way of a baseline infrastructure that will provide real-time visibility, physical security through non-intrusive, automated inspection and detection alerts, as well as a complete audit trail of a container’s journey

Failure to comply with any of these initiatives can lead to significant delays, and even disruptions, in your supply chain as the result of delayed loading, unloading, clearance through customs, or even diversions.

So what can you do to improve your security? Although the report did not focus on any specific initiatives, it did overview some of the measures taken by the companies that were interviewed. These measures included:

  • additional storage and transportation security
  • anti-piracy features / methods for identifying genuine products
  • product tracking tools / RFID
  • implementing measures to comply with voluntary security initiatives
  • advanced training programs
  • incorporation of security requirements into supplier contracts
  • development of a security knowledge base

The Global Supply Chain Benchmark Report

Yesterday we discussed the “Innovators in Supply Chain Security: Better Security Drives Business Value” report recently released by the Stanford Global Supply Chain Management Forum and IBM that detailed the qualifiable and quantifiable business benefits that result from supply chain security investments. Although the report detailed some of the initiatives being undertaken by the participants, including:

  • additional storage and transportation security,
  • anti-piracy features / methods for identifying genuine products,
  • product tracking tools / RFID,
  • implementing measures to comply with voluntary security initiatives,
  • advanced training programs,
  • incorporation of security requirements into supplier contracts, and the
  • development of a security knowledge base;

The report did not really detail generic priorities for visibility, collaboration, and trade compliance for companies that have identified the need for increased supply chain security or risk management. However, again Aberdeen comes to the rescue with the Global Supply Chain Benchmark Report (sponsored access) that identifies industry priorities for companies about to embark on risk management initiatives.

The report, which notes a critical lack of global supply chain automation, notes that the most critical areas that a company needs to address to keep up with global trade growth and increased competitive pressures are:

  • Supply Chain Visibility
    to increase the transparency and velocity of global activities
  • Business to Business Collaboration
    to improve supply/demand synchronization
  • Trade Compliance
    to ensure undisrupted movement across borders and take advantage of preferential trade agreements to lower total landed costs
  • Risk Management
    to ensure resiliency in the face of supply chain disruptions

The report found that:

  • On average, global supply chains are only 50% as automated as their domestic supply chains at large companies;
  • An astounding 90% of all enterprises report that their global supply chain technology is inadequate (to provide the corporate finance organization with the timely information it requires for budget and cash flow planning and management); and
  • Only 11% of the 82% of companies concerned about supply chain resiliency are actively managing risk.

As a result, Aberdeen recommends that you:

  • Extend supply chain visibility
    by moving to exception-based management of activities and increasing the number of monitored milestones
  • Scale business-to-business collaboration
    and implement collaborative forecasting, advanced inventory management, and replenishment applications
  • Go corporate-wide with trade compliance
    and move toward a single corporate wide trade compliance platform with comprehensive origin and trade agreement management
  • Institutionalize risk management
    and make risk assessment and contingency planning part of your standard operating procedure

In addition, based on the Innovators in Supply Chain Security report, I would recommend that you

  • insure your trade compliance platform incorporates advanced product features,
  • insure your visibility applications are fully RFID compatible, and
  • augment your risk assessment and contingency planning with extensive training on your visibility, collaboration, and compliance systems.

After all, according to the report, best-in-class companies:

  • have end-to-end and cross-functional automation,
  • use commercial visibility solutions to monitor order-line level status, inventory, and mobile assets,
  • collaborate across 3+ processes across multiple supplier and customer tiers,
  • run on an enterprise-wide trade compliance platform that includes preferential trade agreement optimization,
  • frequently perform 3+ logistics agility actions,
  • use managed services or BPO solutions to augment staff, supported by visibility and collaboration technology, and
  • manage supply chain resiliency to risk related events.

The report also contains some great recommended actions for laggards, industry average, and best-in-class companies, so check out the “Global Supply Chain Benchmark Report”!

Strategic Supply Management at Japanese Companies

Yesterday in What can we learn from Keiretsu? we outlined methods in which correctly applied Keiretsu teachings could rejuvenate your supply chain, referencing a report released by the CAPS Center for Strategic Supply Research Supply Management Research Group last year titled “Japan’s Keiretsu as a Strategic Relationship with Suppliers”. However, the teachings do not end there. This year, the CAPS Center for Strategic Supply Research Supply Management Research Group released “Strategic Supply Management at Japanese Companies”.

This report, which starts off by chronicling the impact of Nissan CEO Carlos Ghosen, the shift to strategic purchasing and the rise of the concept of supply management (primarily in the US and Europe), the enhancement of business competitiveness through strategic purchasing, and the evolution of the purchasing function in Japanese companies describes the challenging issues in the shift to strategic purchasing, offers a perspective on strategic purchasing from the Japanese perspective, and ends with a case study that demonstrates the beginning of strategic purchasing in proactive companies that are seriously considering moving forward the status quo that is the result of traditional Keiretsu practices focused on strong ties with traditional partners and not necessarily the best partners.

It points out that in recent years, the goal of Japanese manufacturing corporations has been to build an efficient supply chain that decreases lead time, improves quality, and reduces inventories and costs associated with the logistics process. After all, improving the logistics supply process reduces lead time and improves inventories, even if actual transportation costs are not decreased. Furthermore, whereas purchasing has always played an important role in cost reduction, there is also a new, and increased, emphasis on quality control, supply management, and accurate, quick deliveries from suppliers.

Purchasing is also taking on more of a research role, as its close contact with external resources puts it in a strategic position. In some engineering companies, purchasing is responsible for:

  • giving advice on potential new contracts
  • exchanging engineering information with suppliers
  • participating in design review, facilitating supplier decisions, and leading cost reduction and value analysis efforts
  • cost research for marketing requests

It also outlines the major competencies that are required for strategic purchasing:

  • intelligence and the ability to identify what information is needed and how it will help them attain their goals
  • IT literacy and competence
  • supply chain knowledge

and how Japanese companies are embracing these competencies.

So what does all that mean? In addition to holding on to the best practices of the east, Japanese companies are embracing the best practices of the west. Maybe we should latch on to their best practices as well.

What can we learn from Keiretsu? (Strategic Supply Management)

Keiretsu, which can be briefly described as a long continual business relationship, in one way or another has been a significant force in the Japanese economy for over sixty years and despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan.

“Japan’s Keiretsu as a Strategic Relationship with Suppliers”Therefore, even though some economists would argue that it contradicts the basic principles of the free trade of capital, there must be something to it. Therefore, I think the issue is worth exploring, with the goal of taking away lessons that can be used to improve our supply relationships, especially considering that current markets and supply chains are now filled with volatility and risk. And a great starting point is , a study released by the CAPS Center for Strategic Supply Research Supply Management Research Group last year.

The report indicates that a Keiretsu relationship can be defined as a series of repetitive transactions that occur long term between two or more entities in an asymmetrical relationship where one entity uses its position to govern the relationship. A Keiretsu relationship is based on a close and stable business collaboration between affiliated entities. There are different forms of the relationship, and the term is difficult to narrowly define, but all forms center on a long continual business relationship.

This report, which points out that Keiretsu has a long and varied history starting in world war two, covers the major evolutions over the last six decades and notes that changes in the competitive corporate environment leads to diversity in the Keiretsu system. Sometimes external circumstances force a company to end or restrict some of their Keiretsu subordinates if the relationship did not meet the demands of the increased competition and other times a company could use the circumstances to its advantage to work within the confines of its Keiretsu relationships to increase its competitive edge.

Keiretsu relationships in Japan generally display a number of common features:

  • long-term trade relationships that often prevent third parties from participating freely in the market;
    although this can stifle free-trade relationships that depend on competition, this can also create excellent economic efficiencies and make sense among companies that specialize in a particular product
  • companies often hold significant amounts of each other’s stock to prevent other companies from acquiring shares;
    although this seems to contradict the basic principles of the free trade of capital, this can create stability in the stock market and provides protection against hostile takeovers
  • fixed non-symmetrical trade between companies
  • “dispatching” executives into the Keiretsu
    it is such a common practice, once a parent company’s executive or chief executive retires, to dispatch that person to another company in the Keiretsu that it is a defining characteristic of Japanese Keiretsu
  • supplementation and replacement through business sharing;
    a parent company, with cooperation of the subcompany, establishes guidance systems governing production technology and quality control methodology

Furthermore, Keiretsu is often established to

  • move low-value-add production to subsidiaries
  • ensure continuous high quality production capability to avoid excess production and consumer problems
  • improve risk management, especially with regards to variable or uncertain demand
  • ensure that increased sales mean a corresponding increase for subsidiaries
  • prevent technological information from being disclosed to competitors through close continuous relationships

A close examination of each of the above points is based on an underlying idea that can improve your supply chain. Specifically:

  • strategic long-term trade relationships with key partners with a long-term focus on process improvement can generate excellent efficiencies
  • a minor position in your key partners demonstrates commitment, and it can help provide financial stability in unstable times
  • non-symmetrical trade stabilizes the relationship
  • seasoned executives have a lot to offer, and should consider consulting beyond retirement from full time positions
  • companies with more resources and established processes should transfer those capabilities to their strategic suppliers to improve processes and reduce costs
  • a company should be focused on high-value-add production, and since value-add production is relative, low-value-add production for one company might be high-value-add production for its supplier
  • the best way to maintain quality is to maintain relationships with suppliers who consistently produce quality
  • risk can be shared among partners and reduced
  • strategic relationships can insure that your key suppliers succeed and remain stable
  • forming key relationships with key suppliers that can adapt to changing demand minimizes the spread of trade secrets

Thus, even though over-applied Keiretsu can lead to closed markets, correctly applied Keiretsu teachings can rejuvenate your supply chain.

Supply Risk Management IV: WisdomNet’s Point of View

As mentioned in Jason Busch’s recent post Another Perspective on Supply Chain Risk* on SpendMatters , WisdomNet recently published a whitepaper that serves as a good introduction to Supply Chain Risk, and a good companion to my introductory posts on Supply Chain Risk (An Introduction, Risks and the Need for Resilience, and Managing Risk) that ran this weekend on e-Sourcing Forum [WayBackMachine]. Although I agree that there are not any breakthrough findings or thoughts in the work, I also found it to be quite a worthwhile read — a perfect supply risk management 101 type of study, if you will. As such, I’m going to highlight the key points made by the author as a comparison and contrast to the key points that I made this weekend (in an effort to encourage you to read more).

According to the white paper, five key factors have an impact on supply chain resilience:

  1. Supply Chain Design
  2. Business Process Management (BPM)
  3. Demand and Supply Visibility throughout the Supply Chain
  4. Supplier Relationship Management (SRM)
  5. Culture

Supply chain design is the primary driver of resilience, and the level of risk in a supply chain is affected by process structure, level of vertical integration (that results from make or buy decisions), the location of supply, the concentration of capacity, and inventory decisions. Process structure is dictated by the choice of make to stock, configure to order, make to order, and design to order. The extent to which suppliers that cannot be easily replaced perform critical steps in the vertically integrated supply chain increases the level of risk. Sourcing outside of the local market in which the goods are to be sold adds considerable transportation and delivery risk. Concentrating supply to a single region, country, or city adds considerable risk and risk (which includes obsolescence, quality, shelf-life, and loss) increases with the number of inventories in the chain.

Resilience can be added to the supply chain design by:

  • using common components and configure to order processes whenever feasible,
  • avoiding sole source arrangements,
  • reserving capacity, implementing maintenance and spares strategies when single sourcing must be used, and allowing for process redundancy,
  • distributing supply among multiple cities, countries, and regions
  • centralizing safety stocks regionally,
  • holding inventory in unprocessed states for flexibility,
  • consistently and regularly measuring and improving forecast accuracy,
  • rationalizing product lines,
  • building rapid re-supply provisions into supplier contracts,
  • collaborating with customers for “early warning” of potential needs,
  • using performance-based contracts with Service Level Agreements, and
  • sourcing locally within your target market to facilitate site visits, minimize cultural differences, and increase manageability.

A focus on business process management can enhance capability through the supply chain. Participants whose processes are controlled and reliable are less likely to induce supply chain disruptions internally than those whose processes are not under control. Operations where statistical process controls and improvement programs, such as Six Sigma, are in place tend to have more predictable processes and introduce less variability when compared to those operations without such controls.

Resilience is the result of business process management that includes

  • using fact-base process improvement and control techniques like Six Sigma,
  • working with partners to build the same process disciplines into their operations (as your supply chain is only as strong as your weakest link),
  • focusing improvements on reducing economic order quantities to increase flexibility, and
  • building the ability for flex capacity.

Enhancing visibility through the supply chain improves your ability to deploy appropriate levels of resources where needed and reduces the risk of internally generated disruptions. Also, the more open the participants are about providing early warnings about (potential) disruptions, the more likely the chain can either avoid them altogether, or at least reduce their effect and duration.

Resilience results from increased visibility when you

  • implement collaborative forecasting, planning, and replenishment,
  • use partner agreements to provide inventory visibility,
  • implement systems that integrate data feeds in (near) real-time, and
  • (contractually) require suppliers to provide immediate and specific notification of (potential) disruptions as soon as any event of significance occurs.

Competency in Supplier Relationship Management is the key to building and maintaining a strong supply chain team. SRM skills enable an organization to reduce supply chain interruption risk by strategically spreading business among multiple suppliers and multiple locations. SRM techniques include good performance measurement processes, collaboration and supplier development, and solid category management programs wherever sole sourcing is required.

With regards to performance measurement, it is important to establish clear expectations, provide timely feedback when performance falls short, and manage consequences. Reward suppliers that succeed and penalize suppliers that fail. Performance is increased when joint efforts with strategic suppliers are undertaken to optimize cost, inventory, processes and flexibility. Manage key categories with a sound understanding of the underlying commodity markets and devise substitution options when you foresee an impending shortage or crisis.

Resilience results from Supplier Relationship Management when you

  • establish supplier performance measurement processes and apply them consistently,
  • invest selectively in strategic supplier development,
  • manage categories for strategic and single-sourced components,
  • use supplier segmentation to guide relationship management, and
  • move toward performance-based contracts that build risk sharing into contract pricing.

Culture is used to refer to the level of trust, delegated decision-making structure, and rapid information movement. In order to build resilience:

  • participants need to share information about demand, inventory positions, capacities, and vulnerabilities,
  • lower levels of the organization need to be empowered to sound alerts regarding problems or potential problems (as the sooner a problem is found, the cheaper it is to fix, and the smaller the duration of the associated disruption), and
  • processes should be in place to enable timely information flow.

In addition to the steps that have been outlined above to improve resilience, there are actions that can, and should, be taken by an organization to prepare for a disruption. These are:

  • Identify potential risks, possible ramifications, and associated likelihoods.
  • Explore risk-reducing measures and decide on actions to mitigate risk, investing more in plans and processes to mitigate high likelihood and high impact risk scenarios.
  • Prepare business continuity plans that address both emergency response and plans for business resumption.
  • Practice drill the continuity plans against different scenarios to uncover and address potential weaknesses before a crisis happens.
  • Work with critical suppliers to make sure they are prepared and have business continuity plans in place.
  • Update plans regularly and as conditions change.
  • Respond to disruptive events as they occur.

In addition, the business continuity plans should include:

  • event impact analysis,
  • organizational roles and responsibilities for crisis management,
  • crisis communication plans,
  • well defined procedures for the evacuation of personnel,
  • consideration for means to provide food, water, shelter, clean air, security, and basic medical, and
  • secure back up of key business data and systems required to run the business and service your customers.

Events that cause supply chain disruptions are inevitable. The impact of these events, however, can be minimized by proactively taking steps to build a resilient supply chain and by preparing for disruption. For an in depth discussion, I refer you to WisdomNet’s white paper “Managing Supply Chain Risk: Building in Resilience and Preparing for Disruption” (registration required).

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