Category Archives: Supply Chain

The Top Three II: Sourcing Innovation’s Top Three

#3: Culture

Supply chains are global, which mean they cross not only physical country boundaries but cultural ones as well. I’m sure you’re saying that “this is not an issue – big companies have been sourcing globally for decades”, and this is true, but it hasn’t been without hiccups. A lot of effort was required to make those efforts successful, a lot had to be learned, and a lot of companies make the same initial mistakes over and over again.

And most of the problems come down to mis-communication that results not from lack of knowledge of the language, but of the culture. For example, when your Asian supplier says “yes” is he saying “yes, I can do that” or is he saying “yes, I hear you”. It is cultural in many Asian countries to acknowledge that you understand what the other person has said regularly, and in some countries, like Japan, it is considered impolite not to acknowledge every new piece of information with either a nod (of the type that signals “yes” in North American culture) or an affirmation (which translates as “yes”).

Another example is that your “problem, disagreeable” employee might actually be your best employee. In North America, it is often considered impolite to vocally disagree with a decision accepted by the rest of the team or to point out flaws with an executive-approved plan. However, in some Eastern European cultures, it is expected that you voice your disagreements and your reasons therefore and point out flaws when you find them. Furthermore, while some cultures consider it impolite to be blunt when there is a problem, others consider it impolite to be anything but when there is a problem that needs to be resolved.

Without an understanding of the large role culture has to play in your global supply chain, which relies not on IT infrastructure or equipment but people, an organization is doomed to not be all-it-could-be. The answer is to forget about the motivational seminars and drop the same-old same-old instructor-led site-based training classes. The key is to bring people from all of the global offices together on a regular basis to not only get training, but to work together on designing new processes, sourcing materials, and solving problems. By working together, your employees will begin to truly understand each other and build an organizational culture that everyone can buy into.

#2: Complexity

Your supply chain is global, and so is it’s complexity. This presents significant complexity for your supply management team. Who do you source from, when do you source it, how do you transport it, where do you store it, and how do you do it in such a way as to get the most value?

The answer to these problems is sophisticated modeling and optimization technology that allows you to capture all of your various costs and constraints and determine the best scenario to meet the organizational needs.

#1: Visibility

Where’s your stuff? Why? How are your suppliers doing? Are you sure?

In today’s global supply chains, not only do most buyers not know where their products are between the time the product leaves the supplier’s factory and reaches the buyer’s warehouse, but most buyer’s don’t know what risks their products are facing. Are they being temporarily stored at an insecure facility? Is the carrier using routes through zones at high risk of natural disasters?

However, an even bigger problem is that many suppliers don’t know very much about their suppliers beyond the quality and timeliness of goods received. What’s their financial situation? Do they use environmentally sustainable processes in the production of their goods? Do they adhere to fair labor practices? A supplier who goes bankrupt unexpectedly could shut down your production line. Suppliers who do not use sustainable processes are not only not environmentally friendly, but in danger of being uncompetitive should harsher environmental legislations be enacted. Suppliers who do not adhere to fair labor practices could cause you a media nightmare.

The solutions to these problems are supply chain visibility solutions and research before you choose a supplier or a carrier. Be sure to use a supplier risk assessment solution, such as the solution offered by Austin Tetra (acquired by Equifax) or Open Ratings (acquired by D&B) before contracting with a new supplier for an important part.

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.

McKinsey, Web 2.0, and India

Recently, the McKinsey Quarterly ran an interesting article on the results of their survey on “How Business are Using Web 2.0” technologies, which rely on user collaboration, including Web services, peer-to-peer networking, blogs, podcasts, and online social networks. They found that there was widespread careful interest in the trend, that most respondents expressed satisfaction with their investments to date and that they viewed Web 2.0 technologies as strategic, but that most companies were placing the greatest importance on the technologies that enable automation and networking.

When asked what their companies might have done differently during the past 5 years to make more effective investments in Web 2.0 technologies, in hindsight 42% of companies said they invested at the right time but should have invested more in internal capabilities, 24% said they should have invested sooner, and 18% would not have done anything differently. In other words, 84% have a strong belief in the value of Web 2.0 technologies.

The most popular bets that companies are using or planning to use are web services at 80%, collective intelligence at 48%, and peer-to-peer networking at 47%. Even though Web 2.0 is best known for blogs, podcasts, wikis, mash-ups, and RSS, most companies are more interested in the tools that connect all of the stakeholders together. This is backed up by the fact that the fourth most popular bet is social networking at 37%.

However, one of the most interesting points was that interest in Web 2.0 was highest in retail, and not high tech, and that investment interest in India significantly surpasses interest in China by 16%. Does this mean that forwarding thinking companies believe that Web 2.0 technology can be used to overcome many of the infrastructure short comings that plague India compared to China and put India on more even footing? I’m not sure, but it’s a very good question. Any thoughts?