Do you know what risks are hiding in the dark and dreary basements of your supply chain? Are your suppliers using sweatshops that will ruin your image if they are discovered? Did your primary supplier build the only factory that can provide you that custom make chip on the ring of fire? Do floods threaten to wipe out supply routes over low-land sub-sea level plains? Does civil unrest threaten to close off borders? Is your primary carrier on the verge of financial bankruptcy? Are you sure? Really?
Risks in your supply chain are not like the Ravenous Bugblatter Beast of Traal -- they're worse. They don't assume that just because you don't see them coming that they can't suddenly appear and swallow your organization whole. They are there, and for four out of every five companies, they are going to materialize over the next year and send shockwaves that reverberate and echo through the entire supply chain, causing millions of dollars of loss and damage along the way.
And, even worse, it seems that the risks are multiplying. A quick review of the eighth annual risk report from the World Economic Forum (Global Risks 2013) gives one the impression that, like memes, risks have learned to mate and multiply at a pace more rapid than ever thought possible. (Even LOLCats will soon be left in their wake if risk management continues to be ignored in 2/3rds of organizations.)
You need to be aware of sub-tier risks in your supply chain and, more importantly, you need to know how to assess them. If your supplier of corrugated cardboard goes out of business, that's no big deal as there are dozens of corrugated cardboard suppliers. But if your custom control chip manufacturer can't produce your chips because of a rare earth shortage, you need to know well before the shipment doesn't arrive and you have to shut down an entire automotive production line.
For every relevant risk, you need to be able to get a grip on both the consequence of the materialization of the risk and the potential cost of the disruption it will create. There are likely more risks than you can enumerate, but there are only so many likely to happen, and only so many of those with dire consequence. As long as you can properly identify, assess, and develop mitigation plans for those with dire consequence, you can rest assured that, whatever happens, you will survive the storm. But if you can't ...
So how do you identify and assess sub-tier risks? We'll get to that in a series of posts on visibility that will begin this summer, but if you want a leg up on your competition, I would suggest that you strongly consider the forthcoming webinar on Assessing Sub-tier Risks by Resilinc, who will be doing a deep dive into a proper process, the benefits it will produce for your organization, and the high cost of doing nothing in today's global economy.
You can Register for the webinar, which will take place on June 19, 2013 @ 11am PDT / @ 3 pm EDT, at your earliest opportunity.
The webinar will be hosted by Reslinc's founder, Bindiya Vakil, who has a Master's of Engineering in Logistics from MIT with a thesis that addressed Design for Logistics, Planned Obsolescence, and Recycling long before Supply Management realized the importance thereof and the need for visibility in order to achieve these goals. (the doctor knows this first-hand as he has been preaching this, mainly on deaf ears, since the beginning of SI -- see this early post on Design for Recycle from back in 2007) As a result of this work, and work since, Bindiya has found that visibility is not only key to long term supply chain viability, but also to resiliency in an age of rapid supply chain globalization and the risks that come with it. In this webinar, Bindiya will share what she, and Resilinc, have learned over the last decade about assessing, and managing, risks in your supply chain.
It's a good question, and it needs some good answers. As a result, I was drawn to Bill Young's two-part blog (Part I and Part II) over on Procurement Leaders earlier this month as I have some ideas, but wanted to see if they matched up with the insights of others.
Most of his observations were correct, namely that:
However, the observation that I believe is closest to the truth is the one pointed out by readers who noted the
As far as SI concerned, the primary reason that SRM under-delivers is that it is not embedded in a category management lifecycle. Because it is misunderstood and because there is a huge skills gap in the average Procurement professional where SRM is concerned, it tends to be pigeonholed into the "procurement" part of the category lifecycle (which is phase 6 of the 9 phase strategic category management lifecycle), driven off of a balanced scorecard, and managed by a SPM (supplier performance management) solution. However, as pointed out in Part II of the strategic category management post, formal supplier management starts as soon as the contract is signed and doesn't stop until the last unit of product is recovered or returned. And formal supplier management is only part of Supplier Relationship Management which starts with the first reach out to a potential supplier in the supplier identification phase and continues until a contract award phase where the supplier fails to win any additional business from you (and you brief the supplier as to why in an exit briefing).
In short, it's underdelivering because it's under-applied, undermanaged, and mis-understood.
It should be. Why? The top three challenges you are likely to face this summer are the exact same as the top three challenges you faced four years ago in 2009. Back in 2009, Kelly Thomas, Group Vice President of Global Accounts at JDA and a regular contributor to JDA's Supply Chain Nation blog published a guest contribution in the Supply Chain Digest on the Top 3 Supply Chain Challenges This Summer, which are also the Top 3 challenges your supply chain is going to face again this summer because, as we all know, the economy is cyclic and some cycles are faster than others.
So what are the challenges?
1. Cost Containment
Costs are soaring again. As SI has stated repeatedly, there are no more savings to be had in this type of inflationary market. The best you can hope for is cost avoidance, and in some categories, containing costs to reasonable year-over-year increases. With staple food reserves still low, burgeoning demand for energy and metals in Asia, and a slowly recovering global market, costs are going up -- and can be expected to do so for some time. The time of net zero inflation is over. The best we can hope for is we don't return to the 80's. While those of us who have been around for a while may have fond memories of the 80's as the decade that gave us PCs and Pac Man, we also have not-so-fond memories of rapid inflation at the start of the decade (which we try to forget). Containing costs is going to take your fanciest footwork (so let's hope your old timer purchasing pros who weathered the storm in the early 80's are still around to give you some advice) and may not even be possible if you don't have a good handle on
2. Risk Management
Considering that, as SI has been pointing out for over a year now, at least 80% of organizations are vulnerable to a major supply chain disruption, every company should have someone responsible for managing risk. However, two thirds of company's don't. This is one of the reasons risk, and risk management, continues to be high on the challenge list. But I have to be honest. It's going to be hard to get a good grip on risk if you don't have a handle on your number one supply chain challenge this summer, which is
Supply Chain Visibility
Let's be honest. In today's multi-tier, multi-national supply chain, it's hard enough to get a handle on this at the best of times. But during the summer, where it's likely that there won't be a single day where there isn't at least one key person vacationing somewhere unreachable and not watching that everything is going as it should, something is going to get missed. Something is going to go wrong. The only question is whether the screw-up is minor, such as shipping 1000 units instead of 1100, or major, such as shipping merchandise intended for the US to Europe instead and having it seized and destroyed because it violated WEEE or some other environmental regulatory act that is stricter than what it is currently in the US.
Considering the complexity of the modern supply chain, the speed at which it is operating, and the costs associated with even a minor mishap, this is one area where you definitely need a software solution to help your organization keep a handle on things. One such solution is that offered by Resilinc, which is covered in these recent posts:
Probably not. Should you be?
Probably not yet. But it should be on your radar.
A recent article over on Inbound Logistics declared Africa an attractive target for foreign exploration, especially in Europe and Asia, due to abundant natural resources, a growing labor force, and its proximity to the European and Asian consumer markets. And while I agree that it looks attractive from an exploration perspective, I don't think its ready from an expansion perspective. For starters, there's the social unrest, the need for more government collaboration, and the (utter) lack of logistics infrastructure (in many places), as pointed out in the article. In addition, there's the rampant piracy (which appears to be a sanctioned activity and standard operating practice in the Somali government who jailed a US pilot for bringing money into the country to secure the release of foreign vessels held by Somali pirates), the child and slave labour along the Ivory Coast (especially in the chocolate supply chain), and the constant (civil) conflicts in many of the African nations.
Simply put, Africa just isn't ready to join the global economy on the main stage, and won't be for at least a decade (or two). Unless you have a large bank account and are willing to build your own infrastructure, hire your own private security army (of soldiers to hire), and set up your headquarters somewhere where there is no Foreign Corrupt Practices Act (FCPA) or Bribery Act because you will have to grease the hands of the local (underpaid) civil servants to get anything done, you're probably not going to succeed.
In other words, if you're not a Global 500 multi-national that has already conquered China and India to the extent possible and needs to start preparing now for the 2025 African conquest, it's too early. The only exception SI can see is if you're a Chinese or Indian Company and believe that you need to outsource to lower costs. Then, since the rest of Asia is in the same cost bracket, Africa is the only place left that potentially has lower labour and overhead costs. The article states you should also be looking at Africa if you need gold, diamonds, precious metals, timber, oil, coffee, cotton, and cocoa -- but all of this you can get elsewhere. There are big Diamond mines in the North (with Russia being the largest producer and Canada finding new deposits in the arctic as well). Australia is the second largest Gold producer in the world (as well as the third largest diamond producer). Everyone knows that Canada has rocks and trees, so you can get your timber in the North too. China controls the precious metals market. And nine countries produce more oil than Nigeria, the biggest oil producer in Africa. (They may tap out some day, but there are lots of oil sands and tar pits in the North that can be tapped.) Get your coffee from Brazil or Venezuela or even Vietnam. China and India are the world's biggest cotton producers. Cocoa? Africa, and the Ivory Coast, leads here but the Republic of Indonesia is the second largest producer and Brazil is the sixth. Ramp up production in those countries. Grow a few less soybeans if you have to. ;-)
Obviously you'll need to be in Africa someday if you're big, but not in the next decade. Let the wealthy global multinationals pave the way and make the mistakes and expand when the economy is ready for it. For now, you still have to get Asia under control.
While it will likely be at least twenty-five (25) years before India overtakes the United States in GDP, companies are starting to bet big on India, including Anglo-Dutch multinational Unilever that bet big on India with a US $5.41 Billion open offer for a 22.52% stake in its Indian subsidiary Hindustan Unilever Ltd. That's big, big bucks as far as India is concerned. If you look at the Global 500, and their revenues for 2012, only seven exceeded 30 Billion in Revenue (Oil & Natural Gas, Tata Motors, State Bank of India, Hindustan Petroleum, Bharat Petroleum, Reliance Industries, and Indian Oil). Five of these are in the petroleum industry, one is a bank, and one is an automobile company. None are CPG.
This is a big step for Unilever, who obviously sees India as the next China and wants to guarantee their stake. If the deal goes through, it could be the first of many. In addition to having to Mandarin-ize Your Supply Chain, you may have to add some Hindi to the mix. Are you ready?
As pointed out in our recent post on Where We Will Find Solutions to our Supply Management Problems, Denmark may have taken fourth place overall in the Global Creativity Index, but it was only 14th in tolerance. Let's hope it remembers this on the 20th anniversary of the Maastricht Treaty Referendum which resulted in riots in the NØrrebro area of Copenhagan, which was the first time since World War II that police opened fire against civilians (and injured 11 demonstrators). Protests should be peaceful -- on both sides.
Believe it or not, counter to every nerve in your body, you should be buying a portion of your freight business on the spot market! Take a minute, get those gasps out, and SI will explain why.
Simply put, for the vast majority of product-based companies, freight is the one category that is inefficient from a contract perspective. At first thought, this might not make sense as efficiencies and cost savings typically come from good planning, but this is precisely why you can often get significantly better rates spot-buying your freight than contracting it.
To see this, you have to look at the situation from your carrier's viewpoint. It is most efficient, and most profitable, when it's trucks are kept full. Your contracts keep your carrier's trucks full at most half the time. Specifically, your contracts keep your carrier's trucks full from point A to point B. Maybe it has a few pallets to take back to point A, but that doesn't fill the truck, and it's only efficient (from your point of view) if the carrier waits until the truck is full to take the pallets back. In order to maximize efficiency and profitability, the carrier needs business from point B back to point A. The chances of the carrier getting precisely this business when competing against 70,000 other carriers and only getting called to the bid on one of every 10,000 or 20,000 freight contracts being tendered are probably 40,000 to 1. Not good odds.
Plus, even if the carrier's lucky enough to get business that geographically fills, say, 80% of the route from B back to A, chances are the timing doesn't line up right and the truck ends up sitting idle for a few days on a regular basis, which also takes away from efficiency or profitability.
Because of this, and because of the fact that the carriers have to hedge their bets when you ask them to contract three, six, and twelve months out, you end up paying, on average 14%-15% more for contracted freight than you do freight purchased efficiently on the spot market (if you know what you are doing or use a good freight brokerage). In particular, even if you've done a great job on your contract, you're probably paying, on average, over $1,400 for a load that you could get for $1,300 or less on the spot market.
That's why Sean Devine and John Labrie, each with over a decade of transportation sourcing and optimization (at CombineNet, Emptoris, and Con-Way), built BuyTruckload.com -- the first automated truckload brokerage service. This service, built on an advanced real-time truckload optimization model, takes your requirements, searches their database of over 70,000 carriers (and current spot market prices) across the United States (each with an average of 4 trucks), and gets you a quote that is, on average, $100 less than you would expect to get otherwise (buying yourself with a limited selection of carriers), and $200 less than you would if you were contracting months in advance (based on an average truckload price of $1,400+ and an average savings of 15%).
It's quick, simple, and almost obvious -- and that's what makes it so useful. As a buyer, all you have to do is define the acceptable authority types (contract, common, broker), the acceptable / required equipment types (bus, van, flatbed, refrigerated, dry van, etc. -- they allow for 16 different types), the cargo authorities (private, property, etc.), the safety alerts you will (not) accept (unsafe driving, driver fitness, etc.), the required number of power units, and where you need the trucks and the system will identify the relevant carriers. Define your shipping requirements, and it will generate binding quotes. It's that simple, and if you use the right mix of contract and spot-buy freight, it could save you a lot of money.
Please note that the right mix is key! Even if the 15% savings are there for you, it's probably not a good idea to put all of your freight on the spot market. You need to know you have enough reserved freight for critical products (at critical times) and carriers need to know they have enough baseline business to sustain themselves. the doctor's gut is that you probably want a 2 to 1 ratio between contract and spot market, on average. In some industries and/or categories, this ratio will be higher (because, let's face it, you don't care if you get those office supplies a day late), and in others it will be lower. But a 2 to 1 ratio is probably a good starting point.
A couple of weeks ago, after running our series on Strategic Category Management (Part I, Part II, Part III and Part IV), we said Don't Forget Strategic Category Management in Your Services Categories. This was because a lot of organizations believe that strategic category management is only for direct categories or physical goods, when nothing could be further from the truth (especially when indirect spend can approach 50% in some organizations).
In this post, we outlined the nine phases of strategic category management and how they relate to services categories. Although we did not make Post Mortem a separate phase, it is still a critical part of the process. In fact, it's one of the most critical parts - because if you do not analyze how you did, you will not improve the next time around. So why isn't it a separate phase? Two reasons. One, it's a required input to the first, rationalization, phase because if you don't do a post mortem and analyze how well the last strategy worked, you can't be sure if it was the right strategy or not. (The fact that the results were not what you expect is not sufficient to declare a strategy incorrect. Maybe the team didn't follow though on the strategy as required in each phase.) Two, and this is the real reason, you should be doing a post mortem after each phase. Face it. If you're procuring discovery services for the next three years, and you wait until thirty-three months in to start the post mortem, how well can you reasonably expect to assess the job you did in the supplier identification and sourcing phases three years earlier, when half of the team has changed, memories has faded, and a lot of the details of the process has been lost? Here's what you should be doing from a post-mortem perspective at the end of each phase.
At the end of the rationalization phase, you should be documenting not only what strategy you are pursuing, but why. What are the assumptions you are making that favour this strategy? What other strategies did you rule out and why? (If it turns out an assumption was wrong, then another strategy might have been viable and you will have saved work the next time around.)
At the end of the supplier identification phase, you should document how you conducted your search and how effective you were at identifying additional suppliers. How long did it take, how many new suppliers did you uncover, what percentage were suitable to push to the sourcing phase, etc?
At the end of the sourcing and contract award phases, document the process that was followed, how long it took, what seemed to work well and what didn't, and anything you wish you would have done (differently).
During the supplier management phase, which is ongoing from contract award until the end of recovery, conduct regular supplier assessments and thoroughly document the results against well defined metrics, any benchmarks you have, and any expectations that were included in the contract. For each issue, document the root problem, what you did to address it, and what you think you could have proactively done to prevent it.
During the procurement phase, review actuals to expected at the end of every quarter. (This will be "easy button" simple if you have a decent e-Procurement system that allows you to define budgets at the line-item level.) For all line items that are off more than 20%, do a quick manual review to identify any that aren't easily explained (a payment slipped, you moved some work back, you ordered extra inventory as a precaution, etc.). Dig into these. If they can't be adequately explained in five minutes, someone didn't do a good job of budgeting or project management. This needs to be identified and documented as part of supplier management.
Then, at the end of the phase, and before you execute a new sourcing event, you need to do a more detailed analysis. At the very least you should:
This is the phase where you "close the loop" and begin to loop back to the next, hopefully better, iteration of the strategic category management cycle. If the loop is not closed, spend under management will not effectively increase and the organization will only see savings the first time. If the loop is effectively closed, then, when inflation and demand is adjusted for, the company will see savings each time through the process as efficiency, in both the buying and supplying organizations, is increased (and unnecessary fat is taken out of the margin).
During the recovery management phase, you have to document what actions you take and how well they do.
I just read the doctor's post on Sourcing Innovation (which I translated and posted on SpendMatters.nl) which noted that Scandinavia and The Netherlands are leading the world in creativity. The post, which referenced The Global Creativity Index, ranked 82 nations on their alignment between Technology, Talent and Tolerance to determine that Sweden was first, Finland was third, Denmark was fourth, Norway was eighth, and The Netherlands were tenth. While I have to admit that (being a Dutch bloke), as The Netherlands only came in tenth while the real Scandinavian countries were three of the top four, I shouldn't be too proud of the Dutch, the next thought that came to my mind was the question of whether or not I believed the conclusions were right. So I looked at my field of expertise, the (small) world of sourcing and procurement and discovered these facts:
Does this prove anything? I don't think it really proves anything, but I have to admit that there should be a good reason why, for instance, our professional development is high in relatively small countries (Sweden 8.9 million, Norway 4.4 million, Finland 5.2 million and Netherlands 16.2 million), compared to surrounding countries that are much bigger (Germany 80 million, France 60 million, Spain 40 million, and UK 60 million).
I see a lot of similarity between the people in these countries in the way we approach our colleagues, our superiors and others. We like to discuss everything and our goal is to get consensus before we act. We like to do things, because we want to and not because our superiors are telling us to. The open, direct and confronting way of doing business and having meetings takes us a lot of time. This really differentiates us from the more hierarchic Germans and the more polite Brits. Therein might lie the difference. The Nordics do not think hierarchically and are more tolerant. So yes, I do believe that a lot of creativity can be found here, but I also believe we need the people in North America to get the work done, otherwise we will just keep on talking in an effort to be more creative.
As per yesterday's post, we are the biggest supply chain risk. So, how do we become the biggest supply chain solution? By fixing the problems we created. Then the risks will be minimized, and so will the disruptions. Fortunately, the solutions are easy. Unfortunately, the decisions to implement them aren't always easy from a business, or should I say, capitalistic, point of view. In the short-term, they can be expensive even though, done right, they pay off considerably (and often in multiples) in the long-term.
Today we will review the other seven problems we overviewed in our post on the biggest supply chain risk and illustrate how they can be solved.
When you get right down to it, all methods of government have the potential for good as well as evil. A country will flourish under a great monarch and fade into darkness under a poor one. Socialism, implemented without corruption, can create a state of security and well being for all. Democracy only works when the will of the people is implemented by the representation. If the representation caves to lobbyists (and bribes), it's not much better than a stifling dictatorship. The real issue is social and economic disparity. If great strides in these issues were made in the areas of greatest unrest, the unrest would considerably lessen and that could allow the government to evolve into the appropriate one in an organized, productive manner. (Or not. But it's important to understand the reason for the unrest and solve the problem before trying to inject a miracle cure.)
Dependence on Information Technology
If you absolutely can't live without a piece of technology, make sure you have backup systems in place ready to activate at the flip of a switch. Otherwise, it's game over. And make sure that you have a backup power supply as well. If your data center is in a building on a grid serviced by only one power provider, and your "backup" is an industrial strength UPS that will last thirty minutes, or just enough time to shut all the systems down safely, and you need these systems 24/7, you better get a backup (diesel) generator and be prepared to produce your own power as long as necessary.
Government Financial Crises
Financial crises are avoided with sound financial decisions and policies. Who are often the best at analyzing the (potential) value of a financial decision? Talented, trained, and technologically equipped Supply Managers. We see the big picture, so it's time to start advising the finance guys of the downstream decisions of their funding and purchasing policies. While this is not a complete solution, injecting more analytics, forward thinking, and common sense into the economy as a whole will go a long way!
Government Social Policies
When you dig in, this is one of the problems we've created that is hard to identify a solution for. Everyone has different ideas as to what services the government should provide and as to how to administer those services (so they are administered fairly). the doctor is not going to even attempt to define what a government should provide and how it should administer what it provides. This is one of the few problems that has no obvious solution.
Global Economic System Disruptions
Global economic crises and system disruptions are avoided with sound economic policies and frameworks. However, we rarely understand the full extent of the models we propose or how they will be applied (and manipulated) under real world conditions. There's no easy answer to this except to say that we need to apply common sense, and if a model doesn't seem to be working as expected, we need to pause, step back, analyze the data, determine the cause (and not just the correlation), admit our mistake, and try again.
Social Media Threats
The reason for this is the same reason for the push for global democratization -- people are not content because of a (perceived) inequality that they feel is an injustice that has to be corrected. So they make threats and, sometimes, take action.
Global Mega Cities
If we stem population migration, we will minimize the need for additional global mega cities.
That's it. We're the biggest problem, but we know most of the solutions! Do we have the courage to do them? As Supply Managers, we determine who we buy power from, who we source from, where we source from, how we source, and what we value in our suppliers. We can directly influence the rate of climate change, globalization, and our ability to recover from information technology failures. We can indireclty influence social inequity, gender imbalance, population migration and, thus, also indirectly influence the push for democratization, social media threats, global mega cities, and the treatment of the aging population by adopting values and choosing partners that share those values, hire people in rural areas for jobs that don't have to be urban, pay fairly, tolerate different people with different views, retain the wisdom of the elders, and push their peers to do the same.
There's not much we can do directly or indirectly to prevent financial crises, social policies, and economic system disruptions -- but we can use our skills to monitor the global market place and predict where, and when, they are most likely to occur and avoid sourcing from those regions at those times to insure the organiation is able to continue its operations uninterrupted. And as for the population explosion issue, that is a truly global problem.