Uncertainty, uncertainty, uncertainty

According to Jean V Murphy of SupplyChainBrain, the title alludes to “choke points” that can jeopardize an organization’s ability to provide value

The root cause is the way that supply chains have been redesigned and reconfigured over the last decade in response to outsourcing, off-shoring and customer/vendor empowerment.

While some good has come from globalization, the downside is that it significantly increases the organization’s exposure to uncertainty, but not all managers are aware of this, let alone the 1o “laws” that govern any business venture.

Globalization: the hidden culprit

Gary Lynch picks up on a notion that I highlighted on this blog last year, namely the 2008 Global Report by the World Economic Forum, where the hyperoptimization of supply chains and the resulting supply chain risk was put forward as a major contributor towards the global risk scenario.

All for one, one for all

In supply chains, everyone is connected. It is impossible to separate the supplier from the company or the company from the customer. The only way the supply chain can work is one for all, all for one.

Click image for larger version

This book shows you how everyone is involved in the supply chain itself, often on several levels at the same time, how the chain is exposed to an infinite number of constantly changing threats; how weak links in the chain represent threats and vulnerabilities, to profitability, continuity, safety and health; and how these threats can be mananged, reduces and eliminated.

The Ten Laws

According to Lynch, these are the ten basic laws of SCM:

• If you don’t manage and lead change you have to surrender to it.
• The paradigm should destroy the parasite. Begin by defining the paradigm, not by fighting the parasite.
• Manage you business DNA in a petri dish of evolving risk.
• In supply chain risk management, demand trumps supply.
• Never set up your supplier for failure
• Managing production risk is a dirty job. Focus on managing the endless risk of manufactured weakest links.
• The logistics risk management rule. Managing the sum of parts does not equal managing the whole.
• Mitigation: If supply chain risk management isn’t the solution, it will soon become the problem.
• Financing: The best policy is knowing what’s in your policy.
• Manage the risk as you manage your own: Your supply chains are all interdependent but unique.

Much of what it comes down to in risk management is just common sense. But in the day-to-day business of managing operations and logistics, the oversight and wider implications of one’s actions are often lost.

Four key points

Again, back to Jean V Murphy, four key points pervade Lynch’s thinking:

• Everyone, without exception, is part of a supply chain.
• No risk strategy is a substitute for bad decisions and a lack of risk consciousness.
• Get the details right but see the whole picture.
• People always operate from their own self interest.

Lynch certainly manages to hammer inn this message, but gently. A longer interview with Gary Lynch can be found on the Kinaxis Blog, where he explains some of his views and ideas.

Conclusion

This book is full of universally applicable real-life examples, obviously written for the practitioner and supply chain professional, and perhaps not so much for the scholar or researcher.  Nonetheless, considering the highly affordable price, this is a book that definitely should be in you bookshelf.

Reference

Lynch, G (2009) Single Point of Failure. Hoboken: John Wiley & Sons

Author link

• marshriskconsulting.com: Gary Lynch
• blog.kinaxis.com: Getting Supply Chain Risk Management right

Publisher link

Visit our partner Wiley.com to save 15% on your entire online order. To save, enter discount code AFF15 in the Promotion Code field as you’re checking out. Click the Apply Discount button so your savings are calculated.

• wiley.com: Single Point of Failure

amazon.com

• Buy this book from amazon.com: Single Point of Failure
  (It’s cheaper, and also available as Kindle)

Related

• husdal.com: The new global risk: Hyperoptimization of supply chains
• husdal.com: Are you the weakest link in your supply chain?

Deja vu

Unfortunately, the chapter doesn’t say much more than what has already been said in the above articles. This book chapter follows more or less the same structure as the Global Supply Chain Risk Management article, it even uses the same figure, but it is better written and more geared towards the practitioner, with examples of how to put the model into use. Personally I find the book chapter preferable to the article.

Copyright note: The figure above is taken from the book chapter.

But -  there is a very good reason to look closer at that chapter, it’s the figure above, illustrating how a risk matrix can be put to use when assessing supply chain risk.

Comprehensive

As to the rest of the book, it is to say the least, comprehensive, filled with 600 pages of intensely condensed knowledge, covering everything about Global Supply Chain Management from A to Z:

• Understanding Global Supply Chains
  • Global Supply Chain Management Strategy
  • Assessing the Global Environment
  • Value and Customer Service Management
  • Demand Management
  • Knowledge Management
  • Process Orientation
• Managing the Functions
  • Marketing and Sales Management
  • Product Management
  • Operations Management
  • Integrated Logistics Management
  • Inventory Management
  • Transportation Management
  • Warehouse Management
  • Supply Management
  • Personnel
• Managing the Resources
  • The Lean Supply Chain
  • Financial Management
  • Risk Management
  • Interpretation Systems: Knowledge, Strategy, Performance
• Managing Relations
  • Relationship Management
  • Logistics Outsourcing
  • International Sourcing
  • Negotiating Throughout the Supply Chain
  • Interfunctional Coordination
  • Intercorporate Coordination
  • Global Supply Chain Control
• Making It Happen
  • Supply Chain Innovation
  • Global Supply Chain Security
  • Diagnosing the Supply Chain
  • Change Management

More detailed information on the chapters can be found using the amazon.com “Look inside” preview.

Conclusion

The book comes with a hefty price tag, but reasonably priced used ones are usually available. Although I have focused solely on the chapter on risks,  I did browse the other chapters, and I must say they are equally solidly written. It is  handbook indeed, allowing the reader to focus on one area of investigation at the time, while never leaving the whole chain out of sight.

Reference

Manuj, I., Dittmann, P. J., & Gaudenzi, B. (2007). Risk Management. In J.T. Mentzer, M. B. Myers & T. P. Stank (Eds.), Global Supply Chain Management (pp. 319-336). Thousand Oaks: Sage Publications.

Author links

• utk.edu: John T Mentzer (Died on 26 February 2010)
• dcvelocity.com: J Paul Dittmann
• unt.edu: Ila Manuj
• univr.it: Barbara Gaudenzi

Buy this book

amazon.com: Handbook of Global Supply Chain Management

The commodity crunch

This year’s map includes a Commodity Crunch Exposure Matrix, which identifies the countries most vulnerable to political instability in 2009 if commodity prices continue to fall, as has been suggested by some forecasters. According to Roger Schwartz, senior vice president of Aon Trade Credit,

Volatility in global commodity prices contributed to political and economic instability in a number of countries in the 1970s and early 1980s. Countries that until recently benefited from very high commodity prices may now suffer as they fall. The types of commodities we are talking about include oils, metals and minerals.

Interestingly, Norway makes an entrance on this list, with a medium to medium-high risk. Should I be worried?

Understand – Identify – Mitigate

According to strategicrisk.co.uk, Alex Hindson, head of enterprise risk management at Aon Global Risk Consulting, says:

The key to managing supply chain risk is to gain an understanding of the risks. Mapping key supplier dependencies is the first step in taking control of the risk exposures. By identifying single point failures and quantifying exposures, organisations can take conscious decisions to mitigate exposures. Mitigation might include multiple sourcing, safety stock holding, consignment stock or business continuity plans based on rerouting manufacturing through alternative manufacturing facilities. As always plans needs to be put in place and tested prior to the event to be any guarantee of supply chain resilience.

Downloads

• aon risk map here: Aon Political Risk Map 2009

Global Risks

In 2008, the Wordld Economic Forum published a report on Global Risks 2008 that highlighted the risk potential that global supply chains have, and the report on Global Risks 2009 even put whole countries at risk.

Related

• husdal.com: Global  Risks 2009
• husdal.com: Global Risks 2008

Supply chains?

Supply chains not mentioned anymore, simply because the risk scenarios have changed so dramatically since the last report. Nonetheless, the report does highlight the risk of underinvestment in infrastructure, an important asset in any supply chain.

Links

• World Economic Forum: www.weforum.org

Downloads

• Global Risks 2009: Download the report

Related

• husdal.com: AON Risk Map 2009
• husdal.com: Global Risks 2008

More than just tourists

While all modes of transport are used for cargo transport, there is high differentiation between the nature of the cargo, and the mode (rail, road, sea or air) chosen for its transport, and air freight has become more and more common for products of high value. While less than one percent of world transport by volume is by airline, it amounts to forty percent of the value. Many companies have set up sophisticated supply chains, where low-cost bulk items are shipped by sea with long lead times, whereas high value components are flown in according to customer demand. Frankly, I do not know the value of goods shipped by air from Bangkok, but I would imagine that the shut-down of the airport has created some minor (or major) havoc around the world.

One week or more

And even if the shut-down eventually ceases, it may still take a while for the airport to be fully operational, maybe as much as one or even two weeks. Fortunately, there’s more than one airport in Thailand, while we wait for Bangkok to start working again, but the focus of the airlines is probably more on getting people out than getting boxes and crates on the planes that are leaving via the other airports.

Environmental risk

Supply chains can be crippled by many events and political unrest falls into the category of environmental supply chain risk, as defined by Christopher. However, I doubt that a peaceful demonstration locking down an airport was on the list of possible scenarios for environmental risks.

Links

• Dagbladet – Over 100000 kommer ikke hjem
• VG – Oppstart vil ta minst ei uke
• BBC – Empty planes leave Bangkok

Related

• husdal.com: Oslo airport shutdown – lessons learned

Global strategy

The paper was written at the onset of globalization in 1987, when the buzzword of the day, “global strategy”, was still an emerging, but already very popular concept among managers of multinational corporations. One of the driving forces in any company is the desire to gain competitive advantage over its competitors. “Going global” is (or in 1987 still “was”) one of the means to achieve this. Today, it’s hard to imagine any corporation not being multinational in one way or the the other, or having at least some parts of its supply chain stretched around some parts of the globe. In his paper, Ghoshal provided a framework for selecting appropriate strategies when going global, and risk management was one of the strategies he looked at.

Competitive advantage – means and ends

In a multinational or global setting, competitive advantage  can be gained from three sources (means): 1) Exploiting national differences in the countries the company is involved in, 2) Benefiting from economies of scale, and 3) Exploiting synergies from economies of scope, created by the diversification of its activities. The strategic task of managing globally is to use these three sources to achieve these three strategic objectives (ends): 1) Efficiency in current operations, 2) Risk management, and 3) Innovation, learning and adaptation. In the following I will deal with managing risks only.

Managing risks

A multinational corporation faces many risks, some of which are endemic to all firms, and others which are unique to organizations operating across national boundaries. Ghoshal (1987) divides the risk into four broad categories, the same four categories that 20 years later are picked up by Manuj and Mentzer (2008).

Macroeconomic risks
- random movements in the economic environment (wages, interest rates, exchange rates, commodity prices)

Political risks
- policy actions from national governments (legal and regulatory actions, nationalization, war)

Competitive risks
- uncertainty about competitors actions or development of competitive technology

Resource risks
- lack of human resources, technology or capital

One important issue with risks is that they change over time, and the strategic task is to consider these risks jointly in the context of particular strategic decisions. It is the risks that cannot be diversified in a global environment that should be of most concern.

Conclusion

It is interesting to note that a paper written more than 20 years ago still holds true today and still provides ample inspiration for today’s research. The reason for this may be that Ghoshal managed to synthesize the existing ideas and techniques of his time. Since then, globalization has taken many steps forward, but some aspects of globalization, like the framework in this paper, will definitely stand the test of time.

Reference

Ghoshal, S. (1987). Global Strategy: An Organizing Framework Strategic Management Journal, 8 (5), 425-440

Author links

• wikipedia: Sumantra Ghoshal

Related

• husdal.com: Global Supply Chain Risk Management
• husdal.com: Book Review: Handbook of Global Supply Chain Management

A dire prediction

The report said, in these words:

From a relatively positive picture of the stability of the world economy in early 2007, the world is entering 2008 under conditions of considerable economic uncertainty. The possibility of a US recession has undoubtedly increased, but there is considerable debate as to how this would impact global prosperity.

I don’t think there is much debate anymore. The impact is being felt worldwide, and has dominated the news headlines during the last weeks, each day revealing an ever-worsening picture of the crisis, even in my own country, where the Norwegian government today announced drastic measures.

The IMF to the rescue?

Even the International Monetary Fund IMF is now stepping up its actions. Normally, I associate the IMF as an institution that lends money to countries with balance of payments difficulties, i.e. low-income countries, where the money is being used especially for poverty reduction. If the IMF is stepping in to help the global economy, I reckon that things really are serious, serious enough to warrant this quote from the Global Risks 2008 report:

Should systemic financial risk lead to a serious deterioration in the world economy, the prospects for collaborative (risk) mitigation may be reversed on several fronts simultaneously as attention turns to more immediate concerns.

The biggest risk: Asset price collapse

I should have seen it coming. The aforementioned report shows a risk matrix of the 26 core global risks, indicating their likelihood and their severity of impact. An “asset price collapse” is tanked as having more than 20% likelihood, and the impact is estimated at more than 1 trillion US$. Is that 1 trillion globally or 1 trillion in the US alone. The latter seems more true than the former these days.

I can only hope that the global financial turmoil does not translate into a global supply chain turmoil. Considering how interwoven supply chains are, it is not unlikely that some companies will experience a collapse in their supply chain as a result of financial instability.

Link

• 3E Intelligence: Another Cassandra call? WEF’s pessimistic outlook for 2008

Related

• husdal.com: Hyper-optimization and supply chain vulnerability: an invisible global risk?

Four major challenges for 2008

Global Risks 2008, a report prepared by the World Economic Forum, maybe an unlikely source of information on supply chain risks, or maybe a particular source of information in this era of globalization,  looks at global risks from a range of different perspectives.

The report focuses on four emerging issues that are shaping the global risk landscape:

• systemic financial risk
• food security
• supply chains
• energy

Supply Chain Risks for 2008

On supply chains, the report investigates a hidden set of vulnerabilities in the global economy and their affect to supply chain disruption:

Let me highlight some excerpts from the report concerning supply chain disruptions:

All companies and governments dependent on external suppliers are exposed to the risks of
disruption in their supply chain. But the extent and complexity of current global supply chains mean that the problem of supply chain management is not limited to a single enterprise or industry: even a relatively small supply chain disruption caused by a global risk event may ultimately have consequences across the global economic system.

Akin to the infamous “Butterfly effect”, your minor disruption could have major and global implications. Or conversely, some other company’s disruption may affect you severely, even though you in no (business) way are connected to said company.

However, despite their importance both at the level of individual enterprises and at the level of the global economic system, vulnerabilities to the supply chain are generally poorly understood and managed. This is partly because the risks in the supply chain are obscured, as enterprises and governments may be indirectly exposed to a global risk disruption through
a complex range of sub-supplier arrangements. But in some measure this is due to the range of possible global risk disruptions – from geopolitical risk to a natural catastrophe to pandemics. A US- or European-based company which sources key components from Asia will indirectly face risks that they may never encounter domestically, as well as very different cultural approaches to the management of risk.

As supply chains grow more and more complex and intertwined, the risk of cross-contamination from risky supply chains to secure/safe supply chains increases, and managing risks, and in particular disruptions, can become very difficult, if cultural barriers add to the confusion and lack of common understanding and consensus of what should be done:

The fragmentation of ownership of global risks and the complexity of interdependencies will make equitable and sustainable management of global risks hugely
challenging.

The looming financial crisis

The report was published early in 2008 and given the current global economic state and fears of economic recession as of July 2008 I could not help but notice this:

Should systemic financial risk lead to a serious deterioration in the world economy, the prospects for collaborative (risk) mitigation may be reversed on several fronts simultaneously as attention turns to more immediate concerns.

Does this mean that supply chain disruptions are likely to increase now, as companies and governments are struggling to keep the economy afloat?

You can read the full report here: Global Risks 2008

Reference

World Economic Forum (2008) Hyper-optimization and supply chain vulnerability: an invisible global risk? In: Global Risks 2008 – A Global Risk Network Report, REF: 090108, World Economic Forum, Switzerland.

Related

• husdal.com: AON Risk Map 2009
• husdal.com: Global Risks 2009

The Top Ten

1. Internal organisational barriers
2. Choosing the right location
3. Choosing the right supplier
4. Cultural compatibility
5. Procurement of hardware and software licences
6. Loss of control and knowledge transfer
7. Data security
8. Building a retained organisation
9. Controlling cost overruns
10. Service providers failing to deliver

Let me briefly recap his main arguments for each of the 10 challenges:

Internal organisational barriers
Any offshoring initiative inevitably leads to internal organisational debates on whether to offshore or not. If
such debate is not managed properly it can quickly lead to the dismissal of the offshoring initiative without proper consideration being given.

Choosing the right location

Some customers sign contracts with service providers in offshore locations without fully understanding the risks associated with each location: geopolitical issues, skill availability, local labour competition, legal and intellectual property-related issues, wage inflation, attrition or currency fluctuation.

Choosing the right supplier
In order to fully understand service providers’ capabilities and differentiators it is essential to constantly evaluate their performance over a sustained period of time and to build a good working relationship with them.

Cultural compatibility
Cultural compatibility is one of the most evident challenges of offshoring. It includes compatibility at a corporate level, process level, and on a day-to-day interaction level.

Procurement of hardware and software licences
Offshoring often involves the procurement of hardware and software licences, which could be challenging as the contracts are procured from offshore locations.

Loss of control and knowledge transfer
Offshoring involves the handing over of considerable process control to the supplier and consequent transfer of knowledge. Such transfer of knowledge and control can be perceived as a loss of overall control and, therefore, present internal challenges.

Data security
Often offshoring entails allowing access to critical customer data and information to offshore suppliers and any breach in data security could severely impact your business and your customers.

Building a retained organisation
To ensure sustained benefits from offshoring it is critical to put robust governance models in place operated by a highly skilled and experienced retained organisation.

Controlling cost overruns
The majority of offshoring initiatives that fail do so because of the inability to realise the perceived or anticipated cost benefits. The key reason for perceived cost overruns is that most business cases are simplistically built on the basis of the wage cost arbitrage rather than a complete assessment of all
elements that contribute to costs – both direct and indirect.

Service providers failing to deliver
The failure of service providers to deliver on time could have a severe impact on your bottom line. Offshoring makes it more challenging to monitor performance.

Links

• equaterra.com: Sridhar Vedala
• equaterra.com: A risky business? The top 10 challenges of offshoring

The article starts off with a brief recap of the development of supply chain management, and why supply chain risk management has become increasingly important. A supply chain is essentially a network consisting of suppliers, manufacturers, distributors, retailers and customers. The network supports three flows, requiring careful design and close coordination, if risk is to be avoided:

• Material flows
• Information flows
• Financial flows

These flows are sometimes referred to as the “3Bs” of supply chain management:

• Boxes
• Bytes
• Bucks

Traditionally, the boxes have received the most attention, but all three flows are equally important, since disruptions can occur in any of them, thus halting the supply chain.

The flows, in turn, are supported by three pillars:

• Processes
• Organizational structure
• Technologies

Supply chain risk management must address both the flows and the pillars the floes rest on.In essence, the article differs between two types of risk:

• Supply-demand coordination risk
• Disruption risk

In battling these risks companies normally draw upon three approaches:

• Supply chain design
• Contracting
• Risk management systems

Supply-demand coordination risks can be addressed using

• Three dimensional concurrent engineering
• Dynamic supply-demand balancing
• Closed loop supply chains
• B2B exchanges

In terms of managing disruption risk, the article looks at

• Purposeful triggers
• Accidental triggers

So far so good, but this is where the article suddenly drops in usefulness. Whereas supply-demand coordination is dealt with in detail, disruption risk only receive a cursory review. Terrorist attacks or changes in regulations are seen as examples of purposeful triggers, and accidental triggers are near misses or on-site accidents like fires or chemical spills. Admittedly, these risk should be of major concern to any company, however, I fail to to see their significance as disruption risks. On the other hand, the article does suggest multi-level exercises at each link in the supply chain as a method to uncover vulnerabilities and to find ways to mitigate or respond to these vulnerabilities. In addition, the article also makes a point in underscoring that supply chain design decisions should not be done purely on the basis of cost and revenue determinants.

In conclusion, and this is where I agree with the authors, the basic challenge is finding the right balance between the leanness and the robustness of supply chains, and thus increasing the overall returns in global supply chains.

Reference

Kleindorfer, P. R. and van Wassenhove, L.N. (2004) Managing Risk in Global Supply Chains. In: The INSEAD-Wharton Alliance on Globalizing – Strategies for Building Sucessful Global Businesses. Eds. Gatignon, H. and Kimberly, J.R., pp. 288-305. Cambridge University Press.

Author links

• upenn.edu: Paul Kleindorfer
• insead.edu: Luk van Wassenhove

Link

• upenn.edu: Managing Risk in Global Supply Chains (read the article in full)

Related

• husdal.com: What’s so special about Paul Kleindorfer?
• husdal.com: Global Supply Chain Risk Management Strategies
• husdal.com: Global Supply Chain Risk Management
• husdal.com: Book Review: Handbook of Global Supply Chain Management
• husdal.com: Strategies for managing risk in multinational corporations