I heard about this issue on TWIT (This week in Tech – a technology podcast).   I followed up and found this story from the LA Times.  The LA Times story is based on a post in Bunnie Huang’s personal blog.

It goes something like this…

Bunnie Huang, Founder of Chumby Industries was called in to look at a quality problem with one of his products, the Chumby one – a handheld digital device. It turns out that the memory card being used in the product failed the quality tests. The failing memory cards were all Kingston branded and all from a single batch.  When Bunnie tried to exchange the cards from that batch, Kingston refused because the memory cards had already been programmed.

Not to be dissuaded, Bunnie did some detailed (and I mean DETAILED – check out Bunnie’s post to see the extents he went to) investigation and was able to determine that the defective cards were very likely produced on the same machines as the certified Kingston memory. This led Bunnie to believe that the Micro SD cards he had been sold had been run in a “ghost shift”.  A ghost shift is where a rogue  worker walks into the factory after hours and runs off a couple hundred units of a product without the knowledge or consent of the factory.  Further, there is no quality control checks made on the finished product, and the products are often made with rejected materials.   When presented with this evidence, Kingston decided to exchange Bunnie’s defective chips with new ones.

This raises issues for both component buyers, and for component suppliers;

For component buyers, the source of your supply is as important as the brand of your supply.  There have been numerous stories outlining the risk and impact of counterfeit components. Similarly, we need to be aware of the risk of supplies that aren’t really counterfeit – they are actually produced in the same factory, on the same machines, but are not certified by the brand owner.  In Bunnie’s case, he was very lucky that the QA process caught the bad parts before they went out to his customers.  This won’t always happen.  The flaws may well show up weeks or months after the customers get their hands on the products.  Depending on the nature of the flaws, the  impact could be anywhere from an inconvenience, to a full blown disaster (a-la Toyota).  When buying components, make sure that your supply source is a reputable dealer. You may end up paying a bit more, but you have a better chance of getting what you paid for.

For component manufacturers, make sure your equipment is being used only to run those components you have authorized.  How many customers would have had the perseverance and technical where-with-all to do the analysis that Bunnie did.  Most would have chalked up the bad chips to poor quality on behalf of the manufacturer – in this case Kingston – after all, the chips were Kingston branded – right?   Companies such as Kingston that have (and deserve) a stellar quality reputation can see that market perception erode if branded rogue products start entering the market.

Do you have a similar story to tell?  Have you run into counterfeit products?  Respond back and let us know.

So…let me get this straight.  70 percent of people say supplier viability is their biggest risk…yet only 10% of people do a risk assessment when analyzing outsourcing.  Huh….go figure.

So let’s take this back to the beginning and look at the outsourcing process. This process for the most part is expensive, time consuming and difficult.   You decide you want to outsource your manufacturing process.  The goods being outsourced are your best selling products.  These are worth millions to you.  You find a supplier, negotiate a great price and terms and you make the deal.  Then you move tooling and design specs,  spend weeks, maybe months getting the manufacturing processes up to speed.  You work though the logistics process of moving goods from your CM (typically oversees) and finally, after months of effort you have a stable supply of goods coming from this CM.  

 There is a LOT of effort involved in this process.  And yet, according to the study above, only 10% of companies going through this process take the relatively small additional effort of doing a risk assessment! 

Imagine for a second that you have just completed the outsourcing effort I described above.  You’ve received your first shipment of goods from your CM and are expecting the next shipment to leave the factory in a few days.  Your phone rings…the CM has just declared bankruptcy and has closed their doors.  Oh **** (insert appropriate expletive). What about that shipment that was just about ready to go?  Where is it now?  You’ve got customer’s waiting for that shipment.  What about that special tooling that you shipped to the now defunct supplier?  How are you going to get that back?  Are you going to get it back?  How long will it take to get new tooling made? How long will it take to get another supplier set up?   Is the bar open yet???  Why didn’t we look into the financial position of this company before we entered this agreement?!?!?!? 

So…obviously, we don’t want to find ourselves playing out this little scenario at some point in our professional lives. How do we avoid it

1. When outsourcing, include a risk assessment along with price, terms and inventory analysis.   Make sure that the risk analysis includes financial information.  If the company is public, this is easy enough to get.  If the company is private, it will take more work but is usually do-able.
2. Maintain your risk assessment.  If the last 2 years has taught us anything, it is that companies that may seem fine when times are good can crumble to dust when things go bad.
3. Establish mitigation strategies.  Even a financially strong company can succumb to disaster (the earthquake in China a while ago is proof of that).
4. Improve your ability to respond.  Put the tools, practices and people in place to allow you to recognize an event and respond quickly to it.  For details on capabilities need to respond quickly to significant supply chain events, check out a  post I wrote about this last year.

What sort of risk assessment do you do when outsourcing?  Comment back and let me know!

The Toyota quality problems have disappointed me.   I learned about the Toyota production system when I was studying Industrial Engineering in college.  At that time, it was held up as the future in manufacturing - a model that other manufacturers around the world should follow. It still is.  At Toyota, defects are considered to be MUDA (waste) when they occur, the root cause is found and eliminated. This is the cornerstone of their system.   Since then, my studies in lean manufacturing have taken me deeper into the Toyota manufacturing system and my faith in the quality of their products has only improved.

I expect better from Toyota…and I suspect Toyota feels the same way.

Toyota has made mistakes: first the error that caused the problem in the first place, then the shoddy handling of the first incidents (which could be the result of disbelief that the problem could be caused by a manufacturing defect).  They seem pretty confident now that they have the problem figured out.  Let’s hope so.

What got me thinking is this…  Here is this vaunted company, renowned for the fine quality of its products, with systems specifically designed to prevent quality problems from happening and especially from getting out of the factory.   Yet, this company is running into some serious quality problems.

Think about Toyota and their processes.  Think about your company and your processes.  Which company do you think would be less likely to run into this type of problem? What processes do you have in place to ensure that this doesn’t happen?  Here’s something more interesting.  On February 1st, Toyota announced that they had figured out the gas pedal problem.  On February 11th, I had my car in for an oil change and they told me they had the kit to fix the accelerator pedal so they would do that while my car was in.  Toyota had the parts to address the sticking pedal recall days after announcing the fix.  How long would it take your company to respond?

I’m not trying defend Toyota.  Like I said, they made mistakes – and it’s costing them.  What I’m trying to do is to have us learn from what Toyota has done wrong, and from what Toyota has done right.   Who knows…  The next time it might be your company facing a problem of this magnitude.   Will you have the capabilities in place to respond?

What do you think?

Image via Wikipedia

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 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?

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!

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?

‘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!

### 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.