Category Archives: Risk Management

Can You Really Afford to Ignore 20% of Your Supply Base

A recent article over on the CPO Agenda on how “Procurement Success is a Two-Way Street” noted that a recent Efficio grassroots survey found that almost two-thirds of respondents never met with 20% of their suppliers. Now, there are some suppliers, like office supplies vendors, that you never have to meet with because the organization is only using them to source readily available commodities where supply outstrips demand and where another vendor is waiting for the business down the street, but do these types of suppliers really constitute 20% of the supply base? Not likely. I have to agree with the author in that this is a recipe for potential disaster. Considering that, thanks to the recent downturn, small suppliers can often go from financially viable to bankrupt in a matter of weeks, or days (as all it takes is one of their key customers to go belly up), failure is always just around the corner.

In addition, a lack of regular communication keeps the supplier in the dark about your needs, and if the supplier is not aware of projected future demand spikes sufficiently in advance, the supplier may not be able to plan its production schedules accordingly, and you might be left with egg on your face as the company’s hottest selling SKU goes out of stock.

This isn’t to say that you need to meet with each supplier regularly. If the supplier is not critical, or demand predictable and easily communicated in advance, you can simply meet on a quarterly basis and establish a methodology where you push information out to the supplier on a regular basis. But if the supplier is critical, at the very least a status update call should be occuring on a bi-weekly basis just to make sure there are no gremlins in the gears. And make sure communication is agile and happens quickly when something changes, for better or for worse.

For some tips on agile communication, see how “Procurement Success is a Two-Way Street”.

Why Do You Need Market Intelligence?

Because, as this recent article in Supply Chain Brain on how Market Intelligence Helps You Avoid Embarrassing Questions About Your Supply Chain, your competitor could purchase a stake in your key supplier and cut off supply on a moment’s notice (if your contract is on the supplier’s paper and allows for termination on significant change in control) and you wouldn’t know until supply stopped.

That’s why you need to be continually monitoring the market so that you’ll know:

  • when a supplier is in financial distress and looking for an investor,
  • when supply is limited due to spikes in demand or raw material shortages, and
  • when opportunities arise to acquire new sources of supply.

And when you need to bring counter-intelligence strategies into play. So check out how Market Intelligence Helps You Avoid Embarrassing Questions About Your Supply Chain. It will be worth your time.

Hedge Your Bets

The consensus across the board seems to be that significant price volatility in the commodities and energies markets is here to stay, so you better get used to it. A recent article over on the CPO agenda on “hedging your bets”, which makes a great case for continued price swings of 25% or more, presented 10 strategies for managing the swings and rising prices that every buyer should be aware of. The following are particularly relevant:

  • Learn from Last Time
    Which was a mere three years ago when commodity prices reached unprecedented highs in 2008. Refresh yourself on the impact and mitigating solutions you came up with at the time. You’re going to need them again.
  • Hedge
    Get some expertise from the finance organization and hedge your bets with financial instruments. It might increase the overall cost of the buy a little, but what’s worse: adding 5% to the buy, or taking a 50% wash because you bet wrong? There is so much volatility now across so many categories it’s almost a statistical certainty that the organization is going to get burned. And if the loss could be significant, heeding is a small price to pay.
  • Acquire New Technology
    The supply management suite should contain tools that monitor current pricing trends and illustrate their effects on the company’s balance sheet. It should also contain some risk management or data analysis applications that can provide, in the hands of an expert user, guidance on strategies the organization can use to control and limit the effects of rising prices.
  • Substitute
    Are there other materials that could get the job done? Plastics and glass can be interchangeable in packaging, there are multiple choices for alloys in consumer electronics, and some food stuffs can be made with different recipes. (E.g. cow’s milk vs soy milk vs almond milk vs rice milk)
  • Seek Savings Elsewhere
    If there are no savings in direct, reconsider the organization’s needs for indirect and look for savings in the sacred cows. For example, instead of an hourly rate for legal, look at Alternate Fee Arrangements (AFAs) with fixed fees for well-defined, repeatable, cookie cutter tasks. (Leasing agreements, government filings, and discovery are well understood tasks that should only take a fixed allotment of time that could be negotiated on a fixed-cost basis.) And in marketing, maybe you take control of service spend and the agencies only get paid for creative. (Do you think an agency focussed on creative ad campaigns is negotiating the best rates on printing, production, and air-time?)

Even when prices are rising, there are still ways to reign in costs and reduce spending. You just have to get more creative.

For a Successful Supply Chain, Think Long Term

The HBR recently ran a great article on “Creating Shared Value” that quickly gets to the problem with many companies today, and, by extension, many supply chains.

Companies themselves … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success.

By failing to take into account the well-being of their customers, the depletion of vital natural resources, supplier viability, and general economic distress of the communities in which they do business, companies are thinking very short term and sacrificing long-term success for short term gains. And unless they correct their thinking, and, according to the article, focus on shared value, they will fail to build real wealth.

But when the focus is on social good, the real reasons that long-term thinking yields supply chain success become muddied. Simply put, they are:

  • Lower Operational Costs
    Reducing the need for natural resources reduces the costs associated with those resources. Long term thinking selects the solution that will reduce the need for expensive resources in the long term, even if integration costs a little more in the present.
  • Lower Material Shortage Risks
    Switching to more environmentally friendly materials and materials that are not in short supply, even if costly up front, secures supply for the long term. In contrast, depending on a rare mineral or hazardous material brings the risk that a single natural disaster or environmental regulation can take out an only source of supply.
  • Lower Risk of Market Backlash
    If your consumer base all of a sudden goes green and you’re seen as the worst offender, bye-bye sales and no supply chain will save you.

So think long term. The savings will pay for the effort many times over.

Supply Chain Disruptions Come Without Warning

Everyone is still talking about the recent Japan earthquake and the ramifications it will have on your supply chain for weeks, months, and years to come. No one is talking about the fact that, thanks to global warming, forest fire season is now upon as and that more than 30 wildfires raged through Oklahoma last weekend (Fark.com) and that it only takes one fire to destroy a plant or distribution centre.

But it doesn’t take a natural disaster or a political uprising (such as the recent ones in Egypt and Libya) to instantly shut down your supply chain. A simple regulatory decision can have ripple effects through your supply chain. On March 10, the US Transport Security Administration (TSA) issued an emergency amendment to security measures that would take effect immediately that required freight forwarders with air cargo operations at non US locations to request additional information for all shipments on each master airwaybill ( MAWB ). As a result, Air Canada had to embargo all cargo flown to the US until further notice until they could be sure they were in compliance. (Canadian Manufacturing) Now, this embargo only lasted a day, but it could have lasted a week had the regulatory change been more onerous. But like a natural disaster, this disruption came without warning to shippers who relied on Air Canada to deliver their goods to the US.

That’s why you need contingency plans drawn up and ready to go, because you never know when you will need them.