Single Multi-Tier Risk Mitigation Strategies Don’t Mitigate Risk

Last year we penned a post on how single tier risk mitigation strategies don’t mitigate risk and that they may, in fact, increase risk. As we indicated in our previous post, the following standard single-tier risk mitigation strategies have the potential to increase risk:

    • Dual Sourcing
      without careful planning, both suppliers could use the same Tier 2 source
    • Alternate Design
      can simply reduce / eliminate the need for one rare raw material in favour of another material that ends up being more rare
  • Financial Risk Monitoring
    for shakey suppliers isn’t enough to catch production shortcuts that a supplier might be taking to cut costs that increase your risk when the product is used or sold
  • Replacement Product Lines
    can share parts and suppliers that actually increase risk from a disruption

We indicated that if you wanted to truly mitigate risk, you have to go multi-tier and work with your supplier to identify the most likely risks in their, and your, supply chain and how to mitigate them.

And this is a great start, but simply using the least risky supplier at each tier doesn’t help you if a random natural or man-made disaster takes out a supplier for a few months (or permanently). There needs to be a dual sourcing strategy, and a well planned one. Using two suppliers in the same region or that use the same raw material source is not dual sourcing. Alternate design that is specific to a small supply base that could be wiped out with a single disaster or single market event is not sound alternate design. Financial risk monitoring using third parties that don’t have deep insight into certain markets, regions, or mining operations is not enough — by the time an issue is detected, it could be too late. And of course, trading one product line with known risks for another with unknown risks is pretty much the opposite of risk mitigation.

That’s why you not only need multi-tier risk mitigation in a single supply chain, but multiple supply chains with multi-tier risk for any critical products or product lines. As per our recent post on how the risk disconnect is still big, Sourcing and Procurement need to place a much bigger focus on risk to ensure negotiated scenarios are actual scenarios to realize the savings and value the organization expects.

70 Years Ago Today Was the Beginning of an Era …

When the first “networked” television broadcasts took place as KDKA-TB in Pittsburgh, Pennsylvania goes on the air connecting east-coast and mid-west programming. And then,

12 Years Ago Today the End of that Era Began …

when Netflix announced it will launch streaming video services. Who needs cable TV when you can watch all the shows on your laptop, iPad, and even cell phone on the go?

Regardless of what you think, that’s a pretty fast rate of advancement. Eras used to last centuries. Now they barely last decades. Can your supply chain keep up?

The Risk Disconnect is Still Big But …

As pointed out in a post a year ago on how there are at least 12 risk disconnects … but one you should never overlook! we talked about how the disconnect between risk and cost is one of the most critical in our view because:


  1. not only can one identifiable supply chain disruption wipe out all of the savings of a single sourcing event, but also increase costs well beyond that point

  2. only an understanding of the true cost of risk will convince most stakeholders and executives to look beyond cost, reliability, marketing differentiation, or whatever else matters most to them — money talks and (imminent) (potential) loss is the one thing that gets noticed

But that’s pretty hard as most sourcing and procurement solutions not only have no concept of risk, but neither do most platforms. And many of those that do are pretty basic — you can import third party risk scores, define risks to track, and query them occasionally. And that’s about it — and that is clearly not enough given that an organization’s chance of experiencing a significant disruption is now about 90%.

But that might change soon. Not that long ago (in late 2017 to be precise), Spend Matters released the Solution Maps for Strategic Procurement Technologies (Sourcing, Contract Management, Analytics, and Supplier Management) were released — with the Sourcing, Analytics, and Supplier Management maps designed (in entirety) by the doctor and the Contract Management map co-designed by the doctor and the maverick.

Each of these maps had a few elements of risk, but not many. And they were application-based, not platform based. But with the newly revised Solution Maps coming out in June, Risk Management will now be a key component of the common sourcing – supplier management component of the strategic procurement technology maps that measures the assessment, mitigation planning, [risk] model definition, monitoring & risk identification, regulatory compliance monitoring, and supplier risk management capabilities of the platform. Going forward, both Spend Matters and Sourcing Innovation will be putting a greater focus on risk management capabilities to help your organization cope with the turbulent times ahead.

2020 is Less Than a Year Away. And we still haven’t crossed the supply chain plateau. Part II

In yesterday’s post, we referenced a post from six years ago where we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. And while we do not agree that the plateau has been reached, despite the extensive objective analysis of balance sheets, we certainly agreed that progress was, and still is, stalled.

We also referenced our post from a year ago today, where we asked will this be the year we traverse the supply chain plateau, that we believed the root of the issue was manpower capability. And we conjectured the root of the issue was a lack of education. But good information, good training, good consulting, good peer groups, and good courses — while still few and far between — have been available for years now but there has not been much improvement in the overall education level and manpower capability.

And while it’s true that most Supply Chain / Supply Management / Sourcing / Procurement / etc. managers don’t leave college or university with a solid supply chain background, as few institutions offer such programs, with the right foundational program in STEM (Science, Technology, Engineering, and Mathematics), the fundamentals of supply chain can be rather easily taught to intelligent and capable STEM grads.

So why aren’t they properly trained — especially when there are professionals out there more than capable of training them? And while supply is scarce, and they command top consulting dollar, when you think about the ROI a top performing team can deliver in just a few weeks (which can be in the millions), even a top dollar trainer can deliver the organization a ROI 10 to 50 times her price.

Well, because at the end of the day, management is not as well-intentioned as the Shaman or the doctor gave them credit for. Or, more accurately, their good intentions are more focussed on what’s good for them or their management peers today, not what’s best for the organization (and, at the end of the day, the shareholders) over the long-haul.

That’s why, year after year, when dollars get tight, the training budget is the first to get cut. Management believes that when times are tight, spending should be cut, and rushes to be the first to cut their budget to look good in the eyes of the CFO and CEO. Instead of investing today to take more off the bottom line tomorrow, they take the short-cut to look good today.

Instead of going over budget and buying a modern, 3rd generation, S2P platform, they cheap out and buy a first generation or low-cost, low-capability, second generation platform with limited capabilities that limits the eventual performance gains the system can provide to one that barely makes sense. A 3x ROI with an average 2% to 3% savings vs a 5X to 10X ROI with a 5% to 10% savings.

Instead of owning up to their own incompetence and own short-sightedness, they hire analysts and consultants to do market assessments and find ways to blame the market, the supply base, the systems, or even the staff instead of themselves.

In other words, we haven’t reached the plateau yet because less-than-well-intentioned management won’t do what is necessary to hire and elevate the organizational manpower to the skill levels necessary to scale the walls that surround the plateau and hide the even higher plateau blocked from view.

And while this is a dark and dreary view, what other reason could one give?

2020 is Less Than a Year Away. And we still haven’t crossed the supply chain plateau. Part I

Six years ago tomorrow we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. This was based not on a gut feeling, but on an objective analysis of balance sheets of process companies over the course of a decade. The result: the average process manufacturing company has reached a plateau in supply chain performance. As bluntly stated:

Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

And while SI still believes, as it did last year, that we have not reached the plateau, SI believes that growth is still stalled. As the Shaman conjectured, complexity has increased, but many well-intentioned executives still lack the understanding of the supply chain’s potential or how to manage the supply chain as a system. So while select projects in the hand of gifted buyers, departments as a whole are not performing as well, and often being managed even worse.

The core problem has not changed — manpower capability has not kept up. While leading vendors are building assisted intelligence technologies (and a few are experimenting with augmented intelligence technologies on the way to delivering cognitive, almost AI, experiences), the average organization, if they are lucky, are running on first generation Sourcing and Procurement systems from the early 2000s. And if they aren’t, they are running on spreadsheets and thoroughly outdated ERPs (as noted by the Supply Chain Shaman in the aforementioned article).

A year ago tomorrow we conjectured, in our post where we asked will this be the year we traverse the supply chain plateau, we conjectured the manpower capability issue was a lack of education. While the average practitioner is not educated enough, it’s certainly not a lack of education opportunities, so we’re obviously still missing part of the puzzle.

So what are the missing pieces?