Archive for the ‘Supply chain risk management’ Category

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There was an excellent article in IndustryWeek based on a conversation with Jim Lawton from Dun and Bradstreet Corp which talks about the importance of knowing who your suppliers are and what their current state of health is.

The article raises some really good points about the knowledge we should have about our business partners.  From the article;  

“One of the lessons learned … was that we often do a very good job of looking at the creditworthiness of our customers and their ability to pay us, but we don’t do as good a job looking at the financial wherewithal of our suppliers,”

This is ironic when you think about it.  If a customer fails, we have some options to reclaim some of our lost money, however, if a supplier fails, the impact could be far greater!  Yet we will check the customers health before we accept a sale, but we often don’t check our suppliers health prior to sourcing from them.

Also discussed was how risk factors have changed as companies try to reduce the cost of their supply chains.  In our focus on reducing costs, we’ve reduced our supplier base, we’ve single sourced on suppliers that have the lowest costs, and then pressured these suppliers to reduce costs even more.    Then we are surprised when these suppliers don’t make it through a recession.  The article says it well;

“Companies, by and large, pay too much attention to the costs and not enough attention to the risks, and so when the economic downturn did hit, very few companies had invested in and developed a robust risk management infrastructure that would have given them an early warning.”

We’ve talked about this issue in a previous blog post;  Newest Supply Chain Risk: Zombies.  Especially now that demand has started to turn around, many suppliers have cut so deep and been hurt so bad by the recession that they will be unable to respond when your demand hits them.

The difficulty of assessing supplier risk is when companies have grown through acquisitions and as such, have large number of disparate ERP systems.  Often these companies have no centralized view of who their suppliers are and what goods those suppliers provide.  The article provides an extreme example, but even when dealing with much fewer ERP systems, there is still a significant issue to overcome;

“There’s a particular company I’m thinking of that has 72 different ERP systems,” Lawton says. ” … They don’t have a single view of all of those companies that ties together all of the interrelationships in terms of this company is partially owned by this company, and so risk in one is potentially setting up risk in the other.”

While the article does a great job of detailing the importance of understanding the financial health of your supply base, I’d like to expand on a few points;

• First, remember that your supplier is only as good as their suppliers.  Your supplier could be very healthy, but your supplier’s supplier could be in trouble.  If one of those supplier fails, you are in just as much trouble as if your supplier failed. 
• Next, identifying a supplier that is at risk is only half the battle.  Understanding the impact of that supplier failing, and knowing what alternatives you have should that supplier fail is key to your establishing a mitigation strategy. 
• Finally, the article raises a good point that focusing on only your top suppliers, while often necessary if you don’t have the tools to manage a larger set, is not protecting you from significant risk.  That 20th ranked supplier could still cause significant pain were they to fail.   That being said, companies need to start somewhere.  If you haven’t started a supplier evaluation project yet, you need to establish a rational for where to start.  Looking at those suppliers that have the largest impact to sales is probably a reasonable place to start.

With the holiday season upon us, many of us are concerned about making the numbers for the year. Most midmarket companies, whether they are public corporations or privately held enterprises, have revenue targets for each reporting period, usually by fiscal month, quarter and year. These revenue targets are obviously an important part of the financial plan and operational performance for the company.

With manufacturing enterprises, a variety of unforeseen events can occur on a daily basis related to customer demand and the supply of the manufactured goods, as well as the supply of required purchased components from vendors. Even with the best of plans going into a reporting period, actions need to be taken to adjust for these unplanned changes in demand and supply in order to meet the revenue target.

I read the recent report titled “Performance Management in the Midmarket“, by David Hatch and Max Gladstone, from the Aberdeen Group, dated November 2009. The thing that struck me is that based on data collected for the report, the top pressure related to performance management for both midmarket and large enterprises is “lag times and the inaccuracy of operational business decisions”. What is stated is that operational performance is negatively impacted when “the lag time for determining operation performance is greater than the decision window (the opportunity to affect performance based on taking or changing an action)”.

The report goes on to identify the major stumbling block is the identification of source data: “During a fiscal period review process, or within an operational performance review meeting, senior executives often ask for metrics and analyses that send their business managers and teams scurrying to find the data that supports the desired answer”. From my point of view, the problem is that data is not readily available to the decision makers. In addition, reports and analytics need to be available against the data for review and to enable effective operational responses. The data and reporting cannot just be looking at the past, but the analytics need to be forward looking to provide information to decision makers so that actions can be taken to meet the performance metrics.

The operational requirement to meet revenue goals for reporting periods is a common concern among midmarket enterprises and could also be viewed as a fairly standard process across entities. Also, given that the absence of source data and the required reporting and analytics is also common, there exists a real opportunity for a standard solution. Midmarket companies can increase their effectiveness at meeting revenue goals by implementing an out of the box solution. The best solution will have the following key attributes:

• Standard integrations with various MRP/ERP systems
• “Cloud computing” enabled – midmarket companies can subscribe to the software rather than having to stand up and manage the infrastructure and software
• Simple to use with little or no training required
• Easy to tailor and configure if needed

Of course, many other operational issues could be targeted other than revenue management and with today’s technology, many solutions that only large enterprises have the resources to invest in can be made available to the midmarket. What do you think?

Thought this was interesting….

MIT is conducting a global survey on Supply Chain Risks and Risk Management,  and is looking for business and supply chain professionals within manufacturing, retail and distribution organizations to participate.

If you complete the ~12-minute survey you can sign up to get a copy of the results in early 2010 when it is completed. 

Scope of survey includes:

• Gauging the importance of risk prevention, event response, control points
• Understanding risk and disruption frequencies and priorities
• Understanding what companies are doing to address risks
• Questions about the respondent’s region, country, languages spoken, work setting, size of company, and type of industry.

To take the survey go to: http://tinyurl.com/RiskSurveySN1

To learn more about the project go to: http://ctl.mit.edu/RiskSurveySN1

I know I am certainly looking forward to the results!

A couple of weeks ago, I was honoured to speak at a regional conference for PMAC (Purchasing Managers Association of Canada) about supply chain risk management.  At the end of my session, one of the attendees asked about one of the risk mitigation approaches I had suggested;  developing alternate sources.    The question went something like this;  How come you are proposing developing alternate sources when companies are trending towards supplier consolidation?  Actually, a very good question and one which points to one of the many dichotomies supply chain professionals deal with on a daily basis.  While I answered the question off the top of my head that day, I’ve been thinking about the question since and think it deserves a more complete response.

The answer, like many for questions in life is:  it depends. 

Just to go on the record, I fully support the idea of supplier rationalization if it is done with the idea of improving the relationship with a smaller number of suppliers.  The reason I put conditions on my support for this practice is because I have seen far too many cases where companies eliminate a large number of their supply base then continue with business as usual with the remaining suppliers.  No improvement in communication, no sense of partnership, no added value.  

On the other hand, companies that truly understand supplier rationalization understand that by reducing your supply base, you have the opportunity to improve communication and partnership with the remaining suppliers through more detailed forecasts, sharing of product plans and resolution of financial issues. The supplier, because they are getting a much larger part of your business, could share cost issues (and savings!), capacity information, supplier concerns and other key information that gives your company far better visibility into potential risks.

Which brings me to the dichotomy between supplier rationalization and risk management (which really isn’t a dichotomy at all…) If you have a component that is key to a product (if you couldn’t get this component you would not be able to make your product(s)).  If that product is key to your business, you need to identify and evaluate the risk that this supplier won’t be able to supply your goods.  If you truly have a partnership with your supplier, this risk assessment ought to be pretty easy to do because the necessary communication has been happening.  

But what if you have been reducing suppliers but not putting effort towards improving communication?  In my opinion, you are in a much poorer position for evaluating risk and as such you should absolutely work towards either improving the partnership with that particular supplier or developing other sources.  Depending on the strategic importance of this component, you may wish to develop an alternative source regardless. No level of partnership can provide visibility to an earthquake, hurricane or fire for example.  Despite the strong partnership, that supplier would still not be able to produce.

Remember, the need for a mitigation strategy depends on the risk and the impact of that risk.  You need to do the risk assessment for those suppliers that will have a significant impact on your business.  In today’s environment with the efforts towards supplier consolidation, you have much fewer suppliers to assess. On the other hand,  if any one of those suppliers fail, the impact on your business will be much higher. 

What is your approach to supplier rationalization?  How is this impacting risk management in your company?

The article “Supply Chains and Demand” in the September issue of CFO Magazine points out that

‘One aspect of supply-chain management that is likely to become a legacy of the recession is a much more careful assessment of the financial viability of suppliers and customers.’

Heck, if twenty-five US banks including Indy Mac, Washington Mutual and Silver State can fail in 2008 and the number of US bank failures in 2009 is 89 and counting, why can’t my suppliers or customers fail? It’s a sign of the times that you can’t count on the financial viability of any partner, large or small and in fact, size doesn’t really matter.

What does matter is how critical each partner is to your supply chain. A key tenet of  risk management is to segment your markets and products into groups based on dimensions that are relevant to your business. For example, products can be segmented by their relative contribution to revenue and margin, their stage in the product lifecycle, and whether they are strategic for entering a certain market. Customers can be segmented based on their revenue contribution, or whether they represent a significant potential for sales growth or portfolio expansion. Degree of exposure is a key dimension for segmentation of suppliers. As the article points out Corning does this for their supply base: “The more we spend with a supplier the higher the potential risk, particularly if it’s a sole-source supplier,” says Mark Rogus, senior vice president and treasurer of Corning.

It would also be useful to look at what suppliers have relatively high correlations between the components they supply and your strategic products and/or customers. If you spend a relatively low amount with a given supplier, but that supplier can impact the delivery of your most strategic product or service level with your largest customer, they may represent a relatively high risk in your supply chain.

As the article points out, procurement has found that they need to turn to the finance group for credit analysis which is where the expertise resides. Product, customer and supplier  segmentation is a logical first step in understanding what partners you need to assess first.  Whether this additional assessment continues to be part of the procurement process going forward or if it gradually fades as the economy moves out of the recession, it’s important that the process stays focused on the partners that have the biggest potential impact on your business.

Agree?

Those darn zombies, they keep turning up where we least expect them!  Not satisfied with haunting dark caves and grave yards, they’re now showing up in shopping malls, classic literature and our cities.  This time, however, they’ve gone too far!  They’ve infested our supply chains!

Over at the @Risk blog, there is a post about a recent Reuters article which explains that supply chain zombies could seriously affect your ability to deliver.  Ok, so what’s a supply chain zombie?  According to the Reuter’s article, a supply chain zombie is a supplier that has been significantly impacted by the downturn, is significantly undercapitalized and are just limping along.  However, as soon as demand starts to increase, they will fold because they can’t get the funding to retool and restock to meet the demand.  They are effectively dead, but they don’t know it. They’re zombies.   More disconcerting is that YOU may not know they’re dead – until you start ramping up demand – at which point it’s too late.

As discussed in earlier posts; ‘Supply chain risks change as economic tides turn,’ ‘Taking action now to prepare for the recovery’ and ‘The right supply chain priorities during the downturn position you for future success‘, there are many things that companies can do during economic downturns to ensure that they are positioned for success when things turn around.  Assessing areas of supply chain risk is one of those things that should be done now (and given the coming zombie invasion, is all the more urgent.)

Supply chain risk assessment starts with identifying what suppliers are most important to you;  What supplier parts contribute most to your revenue?   What suppliers contribute most to your revenue?  Once you have these key parts and suppliers identified, you need to start assessing risk.  For key parts, do you have alternate sources?  For key suppliers, what is their financial risk?   If you are already doing supplier analysis, but your last review was more than a year ago, you need to revisit those suppliers. A lot has changed in the last 12 months. 

For those suppliers at risk, you need to make a decision.  Do you help that supplier ramp up?   Or do you abandon them and find another supplier?  That decision is really based on the history you’ve had with that supplier.  Great suppliers are hard to come by and it could very well be worth your while to help the great suppliers survive.

Now…if the zombie hoard (real zombies, not un-dead suppliers) really do rise up,  Amazon has got you covered with their Zombie Survival Kit.  Also, Ottawa researchers have developed a mathematical model of the Zombie infestation which should help the disaster planners.   Let’s hope the zombie uprising never happens, but it doesn’t hurt to be ready!

There’s a good article at Supply Excellence entitled “Has the Economic Recovery begun? Are you ready?” that I provided feedback on and wanted to include here as well.

### My comment ###

Having had the privilege of meeting with executives of many manufacturers in the US over the past 12 months, one common dialog seems to be prevalent—first, what should we do differently to avoid a latent response to a future downturn and all the pain that implies, and second, how do we posture for the inevitable recovery while everyone around us appears to be operating with a heightened sense of insecurity. It is easy to say that “responsiveness” is at the heart of both of these problems, however, for many organizations, like the titanic, it is difficult to move quickly regardless of advanced warning of risk.

Given that supply chain is a team sport, what I’ve heard, and would be interested in further commentary from the readers, is that responding to downturn risk is more about individual play; that is, each enterprise must take responsibility for their own responsiveness to a downturn. There may be some that would say “we were just following our customers forecast”. Without a doubt, it is the more agile players that avoid injury.

Preparing for the economic recovery, which I believe has already begun in many sectors, is more about team play. Regardless of how agile and responsive an individual player in the supply chain is, winning big during a recovery requires that everyone on your supply chain team be equally responsive and agile. Leading manufacturers are busy working with their suppliers to establish transparency in supply/demand data, and working hard to improve synchronization through tight collaboration.

The top 3 strategic improvements that would improve an organizations operations performance would be to:

1. Gain control over your data, whether it belongs to you, or partners. If it can adversely, or favorably affect your business, you need the visibility to the data.
2. Establish a robust supply chain surveillance system. Knowing sooner about impending risk or reward on either side of the supply chain is key to breakthrough business performance.
3. Empower people within the supply chain to collaborate. I’m not saying this doesn’t happen, but many people think inter-enterprise collaboration is about system-to-system data exchange, and not the old fashion human collaboration factor.

It was approximately 12 years ago when the company I was working for made the difficult decision to outsource the board manufacturing shop.  After a very trying six month transition, the management team was questioning the wisdom of the move.   Deliveries from the subcontractor were consistently late and quality problems were worse than at any time in recent memory.  Much of these problems were not the direct responsibility of the subcontractor as we were quickly learning how much of the hidden factory had failed to transfer (which was not reflected in the process documentation).     We were at serious risk of missing key revenue goals for the year and our customers were rapidly losing confidence in our delivery capabilities.    

I was asked by the site leader to assess exactly how much of our missed revenue was the direct consequence of the outsourcing predicament and what would our year-end performance look like if the situation didn’t improve.  Under normal circumstances, these questions would have been extremely difficult to answer given that the CCA’s were only a subset of the materials required for assembly and the low volume, high mix of our sales activity made general assumptions impractical.   Fortunately, we had recently invested in a response management tool that provided us with some very easy to use simulation capabilities.   In a matter of hours, I was able to not only identify all of the revenue that was impacted by late supplies from the subcontractor, but also create a range of scenarios with different assumptions concerning future performance.     These simulations helped us to rationalize priorities and additional investments in risk mitigation that proved to be instrumental in minimizing the impact to revenue and customer satisfaction.

While this experience made it easy to further promote the value of the simulation tool, many of my peers in supply chain management were significantly less enthusiastic.   They argued that our aerospace business was not very volatile and that we had been profitable and successful at managing the business without any simulation tools for years.  

Much has changed in the business climate since those days, with much greater demand volatility driven by both the global market place and the speed of new product introductions.   The combination is the perfect storm for creating sales and operations plans that are quickly at odds with reality.   Never has the need for simulation capabilities been greater and yet I’m still surprised by the number of companies who have not made investments in this area.   

In a survey by the Demand Management Solutions Group (DMSG) almost half of the 130 respondents said that less than 25% of the decisions related to demand exceptions were supported by technology solutions.    Other supply chain surveys have consistently highlighted simulation capabilities as one the key business technology gaps needed to improve S&OP performance.    In my experience, companies that are testing the various demand scenarios (and their supply chain risks and capabilities to support those scenarios) are more prepared to react when change does occur. 

So when faced with questions about your organizations readiness to address possible variations in the demand or supply picture, if you haven’t yet invested in a simulation tool, you probably can’t fully appreciate  the performance improvements (or risk mitigation) that they can provide.

Supply Chain Management Review has an excellent article that describes a world class approach to risk management.  The article describes Cisco’s  Supply Chain Risk Management program and how using this approach Cisco was able to respond to the Chendu earthquake last year (location to several of Cisco’s suppliers) without significant degradation of customer service.

According to the article, Cisco’s Supply Chain Risk Management Program consists of four key elements:

1. Business Continuity Planning (BCP) Program –Document recovery plans and drive resiliency standards across Cisco’s suppliers, partners and logistics providers.
2. Crisis Management – A Cisco team responsible to monitor and respond to global disruptions.
3. Product Resiliency. – Evaluating products to identify vulnerabilities in product design and developing short and  long term plans to resolve issues.
4. Supply Chain Resiliency – Identify nodes in the supply chain with recovery times that are outside of Cisco’s established tolerances and develop corresponding resiliency plans.

As a result of this program Cisco was able to identify the suppliers in the affected area within 24 hours of the Chengu quake.  Within 48 hours, Cisco had a full impact analysis completed including affected supplier sites, parts and products.  As a result, “Cisco was able to respond rapidly, ensure the safety of the extended supply chain, identify the risk exposure to the company and work with its EMS partners to mitigate the risk, thus ensuring no impact to customer shipments.”

To me, the article raises several important lessons;

1. The ability to respond quickly is critical. As the article states; “Even the most thoughtful and thorough crisis management program will not anticipate every aspect of a disruption”. 
2. When an event occurs, once the dust has settled,  go back and look for lessons learned.  Were the processes followed?  Were the right people involved?  What could be done better?  What additional information was needed?   Take the lessons learned and revise the Risk Management processes so that the next time an event occurs those issues don’t recur.
3. Don’t let executive complacency derail the risk management processes.  Use past events to highlight the need and benefit of the supply chain risk management process.  When an event occurs, log the event including the pain / cost avoided due to the risk management process being in place.   Present this to the executive team each time an event occurs.
4. Be proactive about mitigating risk.  Cisco, wherever possible, has two or more sources qualified for each part.  They have dedicated funding to identify and “de-risk” risky parts.
5. Collaboration is key.  A successful Supply Chain risk management process include collaboration within the company and with its external partners.

I strongly encourage you to read this article.  If you do, comment back with your lessons learned!  Do you have hard earned lessons learned from your own experiences?  If so, post those too!

I came across an interesting report from Aberdeen Group on supply chain risk.   What do you think the top cause of supply chain disruption events was from mid 2007 to mid 2008?  If you guessed “Supplier Capacity not meeting demand”, you would be correct.  Now, what do you think the top cause of supply chain disruption was from mid 2008 to mid 2009?  “Reduction in customer demand” according to Aberdeen.  Makes sense when you think about the economic upheavals over the past 12 months, but it’s still interesting to see how the risk factors have changed.   An additional factor showed up in the report as well “Key supplier’s financial standing deteriorated” was identified by one in five companies as a supply chain disruption event.

The Aberdeen report goes on to provide some good recommendations around formalizing the supply chain risk management process If you are interested I recommend you follow the link to the Aberdeen report and read them in their proper context.  To me, the key point from the report is the importance of reviewing your supply chain risk management assessment and mitigation strategies on a regular basis.  When you are in a period of high demand / growth, your focus is typically on managing supply shortfalls.  You want to make sure that supply disruptions won’t impact your ability to deliver your product.  When you are in a period of recession, the focus switches to mitigating the impact of customers cancelling orders, overstated forecasts and excess inventory.  If your risk management assessment and strategy was done in a growth period, you could be blindsided by supply chain disruption events when the economy retracts.   Likewise, If you  have recently reviewed and revised your supply chain strategy (in a recessionary mode), be prepared to do it again as the economy starts to pick up steam again.

There is a correlation between the supply / demand factors that influence supply chain risk and the factors that influence Sales and Operations decisions.   This is why many companies benefit from adding a high level supply chain risk management review to their sales and operations process.  I’d encourage you to do this as well.  Add an agenda item to the sales and operations meeting to review the assumptions and focus of your risk management strategy given the current demand / supply situation.  If something has changed, trigger a reassessment of your supply chain risk factors.  It may result in some extra work, but better that then being blind-sided by supply chain disruptions.

How do you reflect the changing supply / demand environment in your supply chain risk assessment?   Leave a comment and share your knowledge.