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Shifting Supply Chains: Are today’s​ risk strategies and programs up for the challenge?

“We cannot direct the wind but we can adjust the sails”  Dolly Parton

Supply chains will shift, will the organizations risk programs and strategies keep pace?

Facing the prospect of a 31% EU tariff, Harley-Davidson must choose between a $2000 per unit or bike increase or dramatically reduce production costs.   Of course, Harley-Davidson is not alone.  The food, drug, agriculture, industrial manufacturing, automotive, mineral and mining, and energy industries all face a similar challenge.    The profitability implications of the global trade wars are being driven by a variety of geopolitical actions such as tariffs, taxes, quotas, banning products, social media propaganda that aim to shift sentiment, and contractual and permitting obstacles (delays).  All these actions impact the supply chain, forcing leaders to seek relief in their supply chains.   For Harley-Davidson, it could result in a shift in manufacturing operations from the U.S. to the EU.

The shift will happen quickly and introduce new processes, technologies, relationships, and players (both internal and external resources).  

Will a “program based” risk strategy keep pace and adapt to cultural, societal and political influences? 

Let’s assume for a moment that the supply has shifted.  Let’s also assume that there are new “local” suppliers or supply networks, transportation and logistics partners, manufacturing facilities (or at least an expansion), regulators and regulatory agencies, warehouses and distribution centers and networks, and on and on.

What is the likelihood that the supply chain related risk programs would be updated in lockstep?  This includes risk programs such as insurance (property, marine & cargo, etc.), supplier risk, supply chain resiliency/continuity, emergency management, safety, security, disaster recovery, crisis and event management, and product recall.  What level of effort and investment will be needed to adapt, adjust or recreate these programs?   How fast can these programs be applied and where on the long list of operational priorities will they rank?   In theory, the operational change and risk management program refresh should occur simultaneously.  In theory! If you are like most organizations, you’ll eventually get there in one to three years.

Why wait?  A change represents an opportunity as well as a risk, correct?  Leading organizations such as Apple, Toyota, Cisco, Biogen, Amgen, JPMorganChase, Amazon, GM, Rockwell Automation, Boeing, and many others rely on a data-centric strategy to support an operational dialogue about performance and risk trade-off decisions.  They rely on historical data and descriptive analytics (the past), augment with real-time market and operational data and predictive (future) and prescriptive (action-oriented leading to  ML/AI opportunity) analytics.

What are some of the ingredients of a Data, Dialogue, and Decision based supply chain risk strategy?

  • consider an investment of time, management priority, resource, and capital to collect the end-to-end product/family related supply chain activity data.  Leverage existing franchise sources of data including the Bill of Materials, ERP systems, sensor data, and numerous functionally maintained spreadsheets that do a darn good job of profiling necessary skills, application software, physical assets (including inventory), warehouse info, critical 3rd parties. Don’t forget to tap into your event, insurance and supplier management SaaS systems. Collect it once and connect to your change management process.
  • aggressively tap into your data scientists (or leverage external resources) to design the data management (architecture, pools, platforms, etc.), data feeds (threat and event categories and vulnerability analysis groups – e.g. switching costs), and algorithms for analysis and dialogue.  This is the first step on your way to applying machine learning and artificial intelligence to managing risk in the supply chain.
  • consider adopting a profitability, value-based strategy for navigating uncertainty and managing risk in your supply chain.   This will require greater knowledge of the industry value chain and your place in it.  It will also require a deeper dive into the financial, information and material flow by product, category, or group level.  This will be important in preparation for the operational effectiveness/performance and risk trade-off dialogue and decision (e.g. should we qualify a second site or supplier, how much safety stock/inventory should we hold and where do we place it, how much insurance coverage do we need, etc.).

Bottom line:   A program approach to risk management is an essential base-level defensive strategy to get the masses to manage risk as dictated by the leadership of the program.   Adopting an aggressive data-driven risk strategy to exploit the opportunity and minimize risk in real-time is needed to compete on risk.

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Apple’s Cobalt Play: A Lesson in Competitive Strategy, Navigating Uncertainty and Securing the Supply Chain

female hand holding white phone with low charged battery screen on table laptop

Another Apple Trifecta?   If recent reports of Apple being engaged in discussions with cobalt suppliers are true (and I bet they are) then we are about to witness another  lesson in how to gain competitive advantage as Apple simultaneously executes competitive strategy, uncertainty navigation and supply chain risk management.

Competitive Strategy

CEOs and strategists often define competitive strategy as a point-of-view about the future in which they execute against.  To do so requires focus, unique value and achieving superior returns on capital investment.  One of Michael Porter’s key principles to competitive strategy is that one must thoroughly understand the industry value chain and the value creating and cost generating activities associated with it.   Note:  competitive advantage is achieved at the activity level or in this example, the supply chain resources, technology and processes.

Apple’s leadership has achieved competitive advantage over the past decade by consistently and thoroughly understanding the industry value chain as well as their own product supply chains and related sourcing activities.   As a result, uncertainty surrounding these activities has been greatly reduced thus allowing faster and bolder investment decisions.  The sourcing activity has clearly provided Apple with unique and sustainable value.  Decision making about the future of essential materials, such as Cobalt, are viewed simultaneously through a market and operational lens, then linked to financial performance.

For example, in 2011, Tim Cook revealed that he had entered into long term component supply contracts worth $3.9 billion over the next two years. Apple had locked up 60 percent of the world’s touch panel capacity, creating an industry-wide shortage and making it hard, if not impossible, for competition to release new products or keep the shelves filled. Not the first time, or the last, Apple leveraged its deep insight into the market, strategic suppliers and “timing” opportunities throughout its materials-to-customer supply chain to separate themselves from the competition. They exercised similar prowess with batteries, NAND flash memory, LCDs glass for iPad retina display, memory chips, image sensors, and the special resins that are used to hold chipsets together. Events like these delay competitors from coming to market or keeping inventory on the shelves.  (excerpt From: Gary S. Lynch. “Uncertainty Advantage.” iBooks. https://itunes.apple.com/us/book/uncertainty-advantage/id1196773501?mt=11).

Navigating Uncertainty and Managing Risk in the Supply  Chain

As EVs (Electric Vehicles) and energy storage become more widely adopted the  lithium ion cathode battery demand and use of cobalt will shift from mobile devices to mega-industry equipment for transportation and energy.   Cobalt is an essential material in the production of the lithium ion cathode and Apple’s leadership certainly understands the potential risk.  More importantly, their view is not limited to their primary industry value chain but also competing and adjacent value chain (another Porter principle, competing for profits and understanding the five forces).

Apple once again is aggressively navigating uncertainty, clearing the obstacles ahead as the proceed down the highway.  To do so not only requires a willingness to take risk but also a commitment to gain deep insight into the broader industry value chains, the activities that differentiate their products and the competitiveness for key commodities and capacities.

Now the elephant in the room, do organizations in the healthcare, food and other industries exercise similar rigor?  Are they prepared for a potential large-scale shift in capacity or cost?    Will organizations in these industries be able to compete for supply with the mega-energy and automotive industries?  A shortage of radio-isotopes in 2009 should have been a wakeup call to the industry and strategic planners that a broader view of industry value chains that support their products and services would be needed.   It that case it was the failure of a major producer.  Now these industries are faced with a similar threat because cobalt is used in many products including:  external beam radiotherapy, sterilization of medical supplies and medical waste, and radiation treatment of foods for sterilization (cold pasteurization) – (Wilkinson, V. M; Gould, G (1998). Food irradiation: a reference guide. p. 53. ISBN 978-1-85573-359-6)

 Bottom line:  Apple continues to demonstrate the opportunity to leverage uncertainty for competitive advantage.  To do so requires relentless pursuit of the data and details while simultaneously understanding the competitive landscape both within and outside your industry.

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Toyota navigates uncertainty, manages risk by design

Interesting article from CNBC that reflects how risk is being considered as part of the design and innovation activity.

Toyota is trying to make electrified vehicles less dependent on Chinese minerals

Toyota is navigating uncertainty and managing risk by design.   As a result, Toyota may be able to minimize customer/dealer delivery disruptions of it EVs (electric vehicles) arising from changing trade policies, higher sourcing cost, and/ or geo- socio-political- events (e.g. tariffs, taxes, political posturing, war).

Bottom Line:  I don’t believe this is an isolated case but rather it reflects the early stages of an emerging trend.  Personally, I’ve recently received a number of calls from Supply Chain and Operations Executives who are seeking greater insight and risk related data.  As the discussion evolves, it is clear that their intent is to gather this data for competitive differentiation rather than defensive investment. 

I’ve included several examples in my recent publication, “Uncertainty Advantage:  Leadership Lessons for Turning Risk Outside-In” including an excellent example of how Rockwell Automation incrementally improved their risk and resilience investments from defensive to offensive weapons (Chapter 7, pages 242 – 244).

UA 3D 1 on 1 to Left

 

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Vendor (3rd party) Risk: Who will win the platform wars?

Over the past seven years we’ve witnessed extensive growth in the vendor risk management cloud-based solutions market (also commonly referred to supplier and third-party risk).   Two major events in 2011 accelerated market expansion; the Tohoku earthquake and tsunami and Thailand floods.  The market for vendor risk assessment and management solutions shifted from a concept (stuck in the chasm between early adoption and the early majority) to reality as many automotive, electronics and other manufacturers realized the need for greater transparency and monitoring of their upstream supplier network.  Vendor risk management regulation (e.g. HIPAA, OCC 2013-29, MMOG/LE, ISO 9001:2015, IATF 16949:2016) and pressure to comply with more stringent vendor risk assessment requirements by the large hi-tech, automotive, energy, chemical companies requirements led to further market expansion.

The law of physics applies here as well; what goes up must come down or in this case, markets consolidate as solutions become more widely accepted and less unique.  The commoditization phenomenon leads to acquisitions, roll-ups and yes, even the demise of the weak.

What are the implications to your current vendor risk management program?

The big question, which general platform will thrive and which will just survive.   Let’s take a quick look at the market for solutions.  Here’s one way to view the market of direct and indirect solution providers.

  • ERP (Enterprise Resource Planning) and operations platforms that include vendor risk management capabilities as well as APIs to integrate data feeds (e.g vendors such as SAP, Oracle, IBM, QAD).
  • Procurement, Sourcing and Vendor Management platforms that are managed by the CPO and sourcing functions and dedicate entire modules to vendor risk  (e.g. vendors such as Ariba, ProcureWare, Gatekeeper, Ivalua, HICX).
  • Risk Driven GRC, Supply Chain Risk and Data-Risk platforms that are typically managed by sourcing, procurement, enterprise risk management, and/or supply chain risk management functions.  (e.g. vendors such as Resilinc, RiskMethods, Lexis Nexis, D&B, Rapid Ratings, iTrust, Hiperos, Logicgate, Navix, 360 Total Solution, SupplierSelect, Virima)

All provide valuable intelligence to decision makers on how to anticipate and react to vendor risk in the upstream supply chain.  However, the risk driven platforms (GRC, Supply Chain Risk and Data-Risk) platform) market will be the first to see consolidation, acquisition and exiting.  History has demonstrated that risk-based solutions in the technology space ultimately succumb to the OEM providers of performance (firewalls, anti-viral software, desktop and network security hardware/software).   The ability for the risk-based platforms to operate as a stand-alone market for an extended period of time is highly unlikely; market penetration and working capital (or investment) is minuscule in comparison to the activities of the ERP an Procurement platform providers.  All ships rise with tide and eventually, many of the advanced risk monitoring and assessment features will be standard to the broader operational platform offering.

Now is the time to begin assessing how the shift will impact your vendor risk management program.  Questions such as: where is the vendor data maintained and how easily can it be ported or exported to another platform?  Will the same level of risk rigor and associated features be maintained if the risk platform is integrated into and ERP or Procurement platform?  Organizationally, who will be responsible for the conversion, integrity and sustainability of the new/modified solution?  These are just a handful of the many questions that you will need to begin thinking about as the market transforms.

What do you think?  Please comment or send me a note to discuss further.

 

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SPoF – Infrastructure change accelerates the demise of the combustion engine. Supplier risk|opportunity increases

Combustion engine suppliers buckle up!  The auto industry value chain continues to morph.   Here’s an example where Norway’s policy and infrastructure change results in a further shift of the automotive supplier’s supply chains.  For providers servicing the industry, it presents both a liquidity and operational challenge and they may be forced to carry parallel inventories of potentially obsolete supply for an extended period of time.

Factors, such as  EU emissions regulation,  will further accelerate this risk and opportunity.

#spof #disruption #resilience #supplierrisk #automotive #insurance #management #sourcing

The country where a luxury Tesla has become the budget option

https://www.cnbc.com/2018/01/30/norway-where-the-electric-tesla-has-become-the-budget-option.html