Archive for the ‘Supply chain risk management’ Category

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Is it just me or does it seem like the topic of supply chain risk management is everywhere these days?  It seems like no matter where you turn the notion of supply chain risk is being talked about.  Some evidence:

• Jason Busch at Spend Matters has a post entitled “Managing change: a supply risk imperative” that cites Noha Tohamy of AMR Research who says “global companies are struggling to understand and mitigate risks across their extended supply chains in arguably some of the worst economic conditions of modern times.” Jason adds, “but not only are times tough — they’re volatile as well.”
• At the SupplyChainNetwork, Jeff Ashcroft has a post entitled “Analysis shows downturn decimating global suppliers.”  The post references insights from Panjiva, an objective information source on global suppliers that were based on analysis of the apparel industry in the second half of 2008.  It reveals staggering statistics, including: The number of suppliers actively serving the U.S. market dropped over 70% in just three months; from 22,099 suppliers in July to 6,262 suppliers in October.  The post also states that according to Aberdeen Research’s July 2008 survey and report on Supply Chain Risk Management, 58% of companies surveyed “suffered financial loss because of supply chain disruptions.”
• Jeff has another post entitled “Detroit 3 bankruptcy would ‘implode’ supply chain“ at the SupplyChainNetwork that talks about the potential cascade of failures amongst suppliers should the Big Three automotive companies declare bankruptcy.  There’s another post at SupplyChainer entitled “When supply chain makes two enemies good friends” talking about the shared suppliers between the Big Three and the Asian manufacturers, making a situation where they too are worried about the potential impact of bankrupties.
• At Supply Excellence, Tim Minahan has a post entitled “Risk: the next big (bad) thing.“  Tim writes “And suppliers are equally concerned about their customers. The CPO at one of the U.S.’s leading regional financial institutions told me last week, “Risk is a big issue in our sector. Period. Our supply base is now doing as much diligence on us as we are on them.”  He goes on to propose some risk mitigation approaches.
• IndustryWeek has a new article entitled “Supply chain risks threaten shareholder value.”  The article opens with “Supply chain integrity is a risk management issue that affects not only business operations but also long-term shareholder value, according to a new report from PricewaterhouseCoopers LLP. The report found that the average stock return of companies suffering from disruptions was almost 19 percentage points lower over a two-year period relative to the benchmark group.”
• And, I’ve commented on this numerous times (see here, here and here to name but a few).

So, there’s no shortage of evidence as to the magnitude of the issue.  The last thing you want to do at this point is to freeze and not do anything.  Market leaders are taking proactive action in light of the current environment.  They are establishing supply chain risk management strategies that include:

• Risk assessment–understanding where you have risk exposure by ensuring you have supply chain visibility and early warning systems in place.
• Risk mitigation–ensuring they have the right tools to simulate potential risks to mitigate negative impacts associated with any potential risks.
• Risk response–arming their staff with tools for risk tradeoff and response to those risks that do materialize, ensuring people can detail and collaboratively reiew various action alternatives and implement the right course corrections.

The current environment requires you to be on your toes.  Proactively developing a solid supply chain risk management strategy will ensure that you can spot potential risks, avoid many of them and manage those that do materialize.

I just finished reading “A sense of urgency” (order at Amazon.com) by John P. Kotter. I found the book to have some great insights, especially in light of the current economic environment.

The basic premise of the book is that many organizations don’t really have a true sense of urgency about the actions they need to take…even when they believe they do.  I’ve found this to be largely true in both my personal and professional lives.

The book starts by discussing the differences between complacency, false urgency and true urgency.  It highlights the pitfalls and warning signs of complacency and false urgency and then details strategies and tactics for increasing true urgency.

The four tactics for increasing true urgency are:

1. Bring the outside in–you need to “enlighten” people with emotionally compelling evidence of what is going on “in the real world” to reconnect internal reality with external opportunities and hazards.
2. Behave with urgency every day–in essence, lead by example.  Demonstrate your own sense of urgency in everything you do.
3. Find opportunity in crises–be on the lookout for crises that can serve as catalysts in destroying complacency.
4. Deal with NoNos–you need to remove or neutralize those that are “urgency-killers” in the organization.

In light of the current economic environment, the book really got me thinking.  How many companies are dealing with a drop in demand (are there any that aren’t?) and trying to figure out what to do?  Is the complacency and denial about what is happening in the economy and what impact it could have on the company, or is there true urgency?

One of the things that I’ve come to appreciate over the years is that great companies take downturns like we’re seeing and make something of them.  They have a true sense of urgency for dealing with the realities as they unfold because, as Kotter explains, they start by “bringing the outside in.”  They aren’t insular, they are eyes wide open to what is happening in the market.  They then act on these signals in a way that gives them a jump on the competition.

But, equally important to the jump on the competition is what they do.  They quickly take actions to re-trench, but never lose sight of the long-turn.  They recognize that every down cycle is followed by a recovery, and they position themselves to be stronger when that comes about.

To achieve this truly does require a sense of purpose and urgency.  Those companies that will struggle the most will be those that are complacent (I would call this denial) and/or exercise false urgency where everyone runs around talking about how bad things are, but doesn’t really have a sense of urgency about what to do about it and how to act in light of the facts.

I would think in this environment, manufacturers with a true sense of urgency are uniquely positioned to not just survive, but thrive.  I would encourage you to read the book and then step back and ask if your organization is complacent, has false urgency or has a true sense of urgency.  Regardless of where you currently fall, I think Kotter’s book provides some great insights on how you can create and sustain it within your organization.

Supply Excellence has an interesting (and troubling) post highlighting statistics that indicates that the number of Chapter 7 (shutdowns) and Chapter 11 (restructuring) bankruptcies are both up considerably.  According to the American Bankruptcy Institute (ABI) there was a 42% increase in the number of bankruptcies in the first ½ of 2008.

It’s obvious now to most people that the world is in the midst of a significant recession.  As such, it is certain that more companies will be declaring bankruptcy in the next several months.  

So what does this mean for you  and your supply chain?   In addition to examining your own business to ensure you can weather the storm, you need to look at your supply base to ensure that they are on solid financial footings as well.    Doing this, involves some analysis of your supply chain;

·     Identify “single source” components.  Those components that have only one supplier identified.

·     Determine the “contribution  to revenue” each of those components have.  A contribution to revenue metric pegs the component part to an end item, looks at demand for that item over time and “dollarizes” it.  The question being answered here is – if this supplier could no longer supply this part, what would be my revenue impact?  An item with a low contribution to revenue is a lower impact where an item with a high contribution to revenue would be considered high impact.  Suppliers of these “high impact” parts are automatically considered high impact when doing your assessment

·     Now look at your supply base.  For each supplier, look at the components they produce and peg them to the shippable part to determine their contribution to revenue.  Suppliers contributing most to revenue are considered high impact.  A supplier may supply many items, each considered to be low impact to revenue, but when taken together provide a significant impact.

For the high impact suppliers, start to look at the financial stability of each.    Those high impact suppliers that are also high risk are those suppliers that you need to either work with to stabilize and / or develop alternative sources of supply so that if these suppliers fail, your business doesn’t fail with them.

So…what’s your strategy to mitigate this supply chain risk?

New research published today from AMR Research finds that China poses the most supply chain risks to global companies.

According to AMR, the top three most successful strategies that companies execute in mitigating supply chain risk are performance-based contracts with suppliers or service providers, closer collaborative relations with trading partners, and dual/multi-sourcing strategies and using redundant suppliers.

We’ve certainly seen all of these strategies utilized by the global customers we work with.  In fact, many utilize all of these strategies.  But, what we’ve found is the cornerstone of any successful strategy is the closer collaborative relationship with your trading partners.  The reality is that you can put all the other measures in place, but without a strong relationship, you’re going to be more exposed (again, this isn’t suggesting that all you need is a strong relationship with your partner, just that you are much more exposed without it).  I wrote about this recently in the post “What’s your relationship with your suppliers?”

A strong relationship is built on a win-win.  When supply chain partners are tied to the same goals and objectives and working collaboratively to achieve them, there’s a greater vested interest in the shared outcome.  Thus, as things go astray, and they will, there’s a shared interest in quickly identifying the risk, understanding its impact and collaborating on the appropriate response.

Global supply chains provide significant benefits, but they also bring substantially more supply chain risk management challenges.  Building solid relationships with your key supply chain partners should be the cornerstone of any supply chain risk management strategy.

In this video, we sat down with MIT’s demand management research director, Larry Lapide, and discussed his views on sales and operations planning (S&OP). Larry comments that he’s always been a big fan of planning, but acknowledges that a plan can only take you so far. There’s a lot of uncertainty in demand and supply that will lead to some degree of plan inaccuracy or risk that must be managed. Larry also comments on the importance of taking risks to win in the market and how that must be supported by supply chain risk management strategies as a part of the S&OP process.

If you are unable to view the video above, please try this link: Larry Lapide, MIT - Supply chain risk management within the S&OP process.

There’s a good post here at Supply Excellence entitled “How clear is your visibility program?“   I found myself nodding my head in agreement as I read through it. Justin makes a lot of points that, if you are a regular reader here, you know I too am a big proponent of as well.  In particular he says:  “In times of uncertainty and rapid change, whether in sales, operations or spend management, fortune favors those who are positioned to confidently take decisive action and efficiently execute decisions.”   He goes on to talk about how data is the currency in this regard, but aptly points out that “Even if you have the data, isn’t it what you do with it that makes all the difference?”  Success is about getting the right information, to the right people at the right time.

Justin writes about this in the context of spend management, but this rings true for all areas and functions of the supply chain, and in fact I would argue that individual programs or solutions for specific silos of the organization makes little sense.  These capabilities (supply chain visibility, data analysis and reporting, decision support) are integral not only to spend management but also to the broader functions of demand management, supply management, supply chain risk management, sales and operations planning (S&OP), etc.   

An integrated system that can provide a holistic view and balance decisions based on multiple dimensions is critical to success in today’s marketplace.  To optimize a decision based on the specific objectives of one area of the business, may negatively affect others to the detriment of corporate-wide KPIs.  So while I whole-heartedly agree with the notion of unlocking data and leveraging analysis for strategic decision making, I believe companies need to take a broader and more integrated view of how to empower their organization with these necessary capabilities.

Kerry Zuber and I were talking the other night and he mentioned how funny Jim Carrey was in Ace Ventura - Pet Detective.  Everyone in supply chain will appreciate this clip as Jim Carrey takes a humorous look at supply chain risk management.  And you didn’t think supply chain management could be funny!

What is your funniest supply chain story?  Post a comment with your favorites.

If you can’t see the above video, try this link.

I found this article today and thought it deserved comment (we’ve commented on this before here - “Not-so-perfect order performance management metric“).  In it, Justin identifies the idea that “Hero Culture” is no way to approach supply chain risk management.  What’s a hero culture?  It’s relying on someone to save the company from disaster in the nick of time. 

• It’s the buyer sourcing a replacement vendor when your primary supplier is on strike in time to make the quarter revenue targets
• It’s the production engineer that figures out how to leverage another piece of equipment to get the product out the door when the primary equipment has broken down
• It’s the marketing guy that figures out how to increase sales on a failed product release

There’s a number of reasons why given today’s environment this approach won’t work;

• The supply chain is global today.  You can’t call the vendor across town to make parts for you, instead you’ll be dealing with some company in China
• Customers just won’t wait. People expect to get what they want when they want it.  If you don’t have the product, they’ll go to the competition
• Shareholder expectations and fiduciary responsibilities dictate that you continue to grow the value of the business while not taking risks

While having smart, innovative people in your organization is always important, we can’t rely on them to save us from supply chain risks.  Instead every organization needs to have a structured supply chain risk management program in place that;

• Identifies and quantifies supply chain risk
• Develops and simulates mitigation strategies
• Continuously re-evaluates risk as product, market position and supply base changes

The price of oil over the last year has had a dramatic impact on supply chains around the globe.  In this video, we spoke to Larry Lapide, MIT demand management research director, about the implications of oil prices on the supply chain and on supply chain management processes.  Larry describes how superior supply and demand matching can provide a more energy efficient and green supply chain.

If you are unable to view the video above, please try this link: Larry Lapide, MIT - Greening the supply chain.

You can see more in our series of discussions with Larry here:

• The future of supply chain management
• The effect of oil prices on the supply chain

I can’t take credit for the title.  I’m at the AMR Research “The Business of IT” conference in Boston where we heard from AMR analysts, the CIOs of Merck and IBM and from Karl Braitberg who heads demand management for Cisco.  Karl gets credit for the great quote.

During his discussion, Karl commented that what drives IT investment at Cisco is the need to battle complexity.  In a company that spends $5.2 billion on R&D, you have a very robust product pipeline that creates complexity.  Thus, IT investments are to battle complexity in both IT and the business “before it eats you.”

Cisco’s view is that the right IT investments enable the supply chain team to manage increasing complexity and complexity is a reality today.

Karl described their evaluation criteria and process for recent investments in demand planning, supply-demand balancing (where they selected Kinaxis RapidResponse) and analytical forecasting and data mining.

There were also good discussions about supply chain risk management by several AMR analysts.  One of the key things they pointed to was the fact that too many people look at supply chain risk within the context of their role only - their silo.  Supply chain risk, for example, is not isolated to having a negative impact on the supply chain.  It has a financial impact, can negatively impact customer satisfaction and market share, etc.  Companies need to look at risk more holistically and IT must be an enabler.  Technology is an enabler to compliance, monitoring and managing risk.  And, most risk is at the handoffs between groups and IT uniquely understands these business processes and the associated data.