Category Archives: Risk Management

Oprah … Host, Actress, Producer, Publisher, and (Unintentional) Destroyer of Supply Chains

While I usually try to avoid anything even borderline with popular culture — as the last thing I want to encourage is rumour, gossip, or unfounded hype — I just couldn’t avoid this topic after coming across this recent article on CIO that did a great job of explaining ‘why the “Oprah Effect”‘ can take down the best supply chains because it’s a serious issue for any retailer who comes up with the next big thing.

The “Oprah Effect” happens when Oprah Winfrey picks a product, which is often a book, but sometimes a favourite thing like a cake or a robe, and advertises it on her show — and when it does, fortune’s are made or lost. When Florida Cake Maker “We Take the Cake” was picked as a favourite thing in 2004, it’s business went from struggling to thriving, but when Oprah declared her love for Kashwere robes, operations were overwhelmed and a lot of potential customers were turned away unhappy when they couldn’t get the product they wanted in time for Christmas. In extreme cases, it can even move markets. When she exclaimed that she’d never eat another burger again in 1996 on her episode on Mad Cow Disease and the cattle industry, beef futures plunged the next day in what industry experts called the “Oprah Crash“.

While an Oprah endorsement can delight a CEO and marketer, it can agonize a supply chain manager who needs to ensure that the product is available for purchase when a customer wants it. Even the largest supply chain can be strained under an Oprah endorsement, and even when it has early warning. For example, Amazon was stocked out of the Kindle within a week of Oprah’s October 24 endorsement of the Kindle and was subsequently out of stock for most of the 2008 holiday season.

But what’s really scary is that the Oprah effect may not be limited to Oprah much longer. With the rise of new super-celebrities on a regular basis and up-to-the-minute trend reporting on the internet, any celebrity’s praise, or disdain, for your product could have a serious impact on your supply chain — as the fashion industry already knows. If Jessica Alba or Angelina Jolie gets photographed in a hot new dress or blouse from a relatively unknown designer, whomever manufacturers the fashion line will likely be bombarded with orders … that they may not be in a position to fill rapidly. If a major actress like Kristen Johnson or Sophie Monk or Alicia Silverston strips down for PETA and denounces fur or, gasp, your fast food chain … you know sales are going to drop (at least for a while). And with celebrities like Beyonce Knowles, Jay-Z, and Brad Pitt almost as popular on the Web as Oprah, it won’t be long now before any top 10 celebrity has the power to cause an Oprah effect to your consumer-driven supply chain.

Are you ready? What’s your “ramp-up plan” in case demand skyrockets overnight? What’s your “disaster plan” if a quote taken out of context suddenly sends your sales — or stock — diving? Don’t know? Maybe it’s time to do some risk analysis and scenario planning and find out.

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If You Have One Hour To Do Disaster Planning …

… then I hope you’re religious because only a miracle’s going to save you. Every now and then I run across an article that makes me cringe. This article on NewsFactor is one of those articles. It says that minimal preparation — the kind you’d have to resort to if a disaster were in fact on the way — can be accomplished in an hour by a small business.

While that will hopefully be enough time to save your people, that’s all your going to save. If you haven’t planned in advance, say goodbye to your profits as your data goes up in smoke. (Your office might also go up in smoke, but presumably you were at least smart enough to be adequately insured for your physical assets.)

If you lose your location, the first thing you need to do is get up and running again. That’s going to require a back-up location, back-up equipment, and up-to-date data. While most cities always have space available that can be leased and outfitted reasonably quickly, at a premium, this is only the case if you don’t need any proprietary equipment. But if you’re operational data wasn’t already backed up, chances are you’re not going to get it backed up in an hour … especially if you didn’t have a plan in place.

In the average small business, data recovery in the event of a disaster is an afterthought and most of the data is sitting on end-user PCs which are not part of the nightly backup which only backs up the mostly-empty server. Unless you have time to run around and pull the hard drives out of every machine and gather up every laptop, if the building is about to go up in smoke because of a forest fire raging your way, your data is going to go up in smoke too if this is your situation. And up-to-date data is often the difference between a quick recovery and a quick bankruptcy in today’s knowledge-driven economy.

But if you planned your data backup and recovery in advance, a backup process executes in the background every time a user logs into the network or, better yet, you are running virtual machines off of the server that stores all data in a centralized data store that is incrementally backed up to local tapes (with critical transaction data backed up nightly to a remote server). Then all you have to do is shut down the network, grab the tapes, run, shunt them into the backup drive at the remote location, restore, and go.

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Are You Ready for the Mega-Risks?

A recent Supply Chain Digest piece recently covered a few of the supply chain mega-risks that you need to be prepared for, because chances are that you can statistically count on at least one of them happening in the near future.

The mega-risks highlighted by Supply Chain Digest include:

  • Terrorists Attack Your Port
    The article focussed on an attack at at US port, such as the Ports of Los Angeles or Long Beach, which could cripple supply chains for a number of multi-nationals, but an attack at a major port in China, for example, could be just as devastating.
  • A New War Breaks Out
    The article hypothesized that Israel could attack Iran over nuclear capabilities, but war could break out anywhere tensions are high. Northern Ireland, Africa, Venezuala … who knows.
  • Pandemic
    The article mentioned the Swine Flu. But it could be Bird Flu. Or SARS. Or something worse.
  • Rapid Inflation / Deflation
    The dollar could rise, or fall, rapidly.

But those are just a few of the mega-risks. As highlighted in nine cautionary tales (which I reviewed in your supply chain is not secure I and II), you also have:

  • Massive Power Failure
    A targeted attack or opportune failure in a critical region of the grid can take out a city, state, or even an entire region of the country.
  • Toxic Atmosphere
    A train wreck could unleash toxic chemicals into the air and make an entire subdivision, town, or city uninhabitable for an indefinite amount of time.
  • Severe Oil Shortage
    A single attack on a major refinery or drilling platform could take out a sizeable chunk of global production.
  • Agro-Armageddon
    Mad-cow could spread faster than a viral outbreak and decimate national farm populations.

And natural disasters and catastrophes, though unlikely, that are still too numerous to mention. Are you ready?

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Educating to Reduce Risk (in Your [Retail] Supply Chain)

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.

Being just a little past my mid-40s I realize I’m at risk (how appropriate or rather inappropriate is that in this blog!) of dating myself, but does anyone remember the phrase “The Three Rs”?

This phrase represents the basic foundation of education: reading, writing, and arithmetic.

Still to this day, and probably emphasized by all the standardized testing done which grades the performance of schools, I don’t think the necessity of this trio of core skills is any less important. However, I’d like to throw in a fourth (and actually fifth) R in regards to the benefits of education: risk reduction.

Of all the supply chains in the world, the retail supply chain in the United States is arguably the toughest and most sophisticated of them all. The smallest disruptions can result in profit losses and missed sales. Timeframes are very tight and the drive towards 100% perfection is relentless.

Retail suppliers invest heavily in technology, automation, and business processes to ensure they are complimentary collaborators with their retail trading partners, all with the goal of reducing the risk of not shipping the right products in the right time at the right quantity to the right destination in order to ensure their products are on the shelf when the consumer wants to buy them.

But what about investing in education to reduce risk? Can technology and automation eclipse the need for some sound, basic education on how to participate in a supply chain, retail or other? I would argue that such education is absolutely necessary. Without a good educational foundation, enterprises run the risk of incorrectly investing in technology and business processes that fail to truly address the root-cause of problems or don’t enable growth, planned or otherwise.

Selecting the right education provider can be tricky in-and-of-itself. There are plenty of companies who offer quality training. Do your due diligence and investigate the company and its trainers for experience and depth of knowledge. Keep in mind that anyone can offer training classes and that slick sounding company names may be just that and offer little in terms of training that will have any substance or credentials in daily business activities.

Certifications and training courses are often provided by trade associations. This is good because trade associations often carry a “name” or brand with them so there should be confidence in the quality of the education and that it will be recognized through one or more industry verticals.

Some associations are independent and are thus self-certifying. For these independent associations some have grown quite large and are well-recognized such that their certification is accepted and respected. Look at who is backing the certification and whether the backer has respect and visibility throughout one or more industry verticals. Is the training endorsed by outside entities? And just because a list of well-known companies is provided does not necessarily mean that the training is recognized as a standard or is widely respected. Do your homework! How long has the association been around and how many members does it have?

What this boils down to is that fraud can be perpetrated by training and education organizations too. Knowingly misrepresenting goods and services is fraud.

Buyer beware. Trust but verify. Due diligence.

Not just catchy phrases but ones to live by.

Norman Katz, Katzscan

Have No Fear … the CFO is Here!?

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Recently, no doubt due to the severe financial implications of a poorly performing supply chain or unexpected supply chain disruption in this economy, I’ve been noticing a lot more articles about supply chain finance. This is a good thing … and a bad thing. It’s a good thing in that it shines light upon the savings that are available as a result of good financial decisions and a bad thing in that some articles are still written by people who don’t have a clue and think that factoring, extending payment terms to suppliers, and / or shifting inventory to suppliers are good financial decisions. (They’re not … if you don’t put your supplier out of business, at the very least you will see higher prices. You’ll probably see a lot of animosity and an unwillingness to do anything beyond the contractual obligation and, when the next boom comes and the supplier can choose their customers again, you will ultimately get dumped for a better customer.)

However, one article in particular on “supply chains and demand” in CFO Magazine made a few points that should be highlighted.

While it might be convenient (and even more profitable from an optimization perspective) to model multiple supply chains around product groupings, geographies, or raw commodity requirements … you should only have one global supply chain from an administrative perspective.
When Sara Lee integrated essentially two separate supply chains, administrative costs were reduced by 10%. Furthermore, one chain means one set of best-of-breed applications, which means one set of fees, and one (set of) centralized data store(s) … which saves you big come spend analysis time.

You need to be deliberate and rigorous when it comes to the financial security of your suppliers.
You need to not only make sure that they have enough business to remain in the black, but that they are also getting paid on time. In this economy, working capital loans … assuming your supplier can get them, are very expensive and could tip them into the red and on the fast-track to bankruptcy. You also need to analyze key financial metrics like working capital, ROIC, and ROE to insure that they have stability.

If you’re not sensing demand, your forecast accuracy is likely to cost you significantly when the market picks up again.
Even in stable markets, most traditional forecasting software is barely tolerable. In this market, its accuracy is likely unusable. But new demand sensing based forecasting software that updates daily can be quite reliable in the hands of a knowledgeable user with enough historical data at a granular level. Improvements of 20% to 40% are not unheard of, like the improvement of 25% at Unilever.

For more good advice, and a good introduction to supply chain finance, see the supply chain finance primer on the e-Sourcing Wiki.