This is such an important and timely body of research. I strongly recommend picking up the report but only if you are seeking practical, action oriented advice. Stay safe!
Supply Chain Management – Are Your Suppliers a Risk? ZURICH
As we are currently witnessing, risk in the supply chain can be triggered by an infinite number of events. The coronavirus virus and cyberattacks on industrial control system demonstrate why the approach should address four critical categories of assets that support the creation, sourcing, production, movement/logistics, and servicing. They are human capital, digital assets, physical assets, and third party relationships. Over the past decade working with global orgs, I’ve found that applying an activity-based framework across the life cycle of a product/category helps accelerate and organize the data gathering, manipulation, analysis, presentation, and later Managment of risks across the supply chain. It’s taken me more than a decade and several dozen large scale projects to develop a process, tools and a platform to become efficient and thorough in this process. Bottom line, managing risk is a data driven process and those who relentlessly pursue the data will not only minimize exposure but will also create competitive differentiation! Thanks for sharing!!
I got a kick reading the recent articles about the CO2 shortage in the UK and the impact on the beer industry supply chain during World Cup fever (pardon the weak attempt at humor). According to the MetroUK, beer supply chains are being constrained by a “shortage of food grade CO2 due to a shutdown at ammonia at plants that manufacture fertilizer”. Apparently, at least five suppliers and their plants are shutting down for summer maintenance at a point of peak CO2 consumption. And the exposure is not limited to the food and beverage industry. As typically is the case, many industries use CO2/carbon dioxide for oil recovery, fire extinguishers, wine, and in medicine as it is added to oxygen for stimulation of breathing after apnea.
Those in Supply Chain Management and Procurement are well aware of how the little things that are seldom thought about can cause great pain. Whether it’s a shortage of a $1.50 piston ring that caused a 70% of Japan’s auto production was shut down for more than a week or a scarcity of sawdust/wood waste which impacted poultry, drilling, auto-part manufacturers, and even the wine industry. The list of what could quickly impact your supply chain, profitability and market share is a long one: the bankruptcy of mega-toy distributor Toys-R-Us, a shortage of production capacity for the blockbuster Ford line of pickups due to a fire at a supplier, and yes, who can forget the shutdown of KFC stores in the UK due to a change in logistics provider that resulted in the lack of chicken of gravy. More recently there was an explosion at a UPS facility, a fire in a major wood pallet warehouse in Texas, a rogue employee and corporate espionage at Tesla, and a shortage of Boeing aircrafts’ fuselages.
A Call to Action
Why does history repeat itself? Why are some organization repeating the mistakes of their peers? A decade or two ago industry lacked the necessary tools and awareness. However, today there is the widescale availability of advanced data gathering and management software, monitoring and warning systems, and descriptive, predictive, and prescriptive analytics.
Here are three assumptions that could be causing you unnecessary exposure in your supply chains.
- Product supply chains and associated activities are unique. It’s true, you’ve seen one supply chain, you’ve seen one supply chain. What drives profitability and the activities that create superior value matters!! Sure it’s important to view your supply chain through the asset, functional or process lens. But it’s not as important as conducting the analysis of risk from the customer or industry value chain inward. Generic business continuity and resiliency programs fail to recognize the value of the trade-off between performance and risk. Begin with what matters most at a business segment or divisional level. What product(s), product families generate profitability (current or future). Begin your mapping from the customer back through origination. In today’s digital world, don’t forget to simultaneously map information and financial flows.
- Supply chains do not stand-alone. It’s no secret that today’s supply chains are not chains at all but rather an intricate, constantly shifting network of resources. The relationships amongst these resources are complex both financially and operationally. Switching can be difficult, uniqueness can be a barrier to diversification. Understanding who you are competing with for profits is not limited to competitors. Michael Porter’s work on Competitive Strategy and Advantage can help here. Understand the industry value chain and competitive forces. You are competing with suppliers, producers, potential new entrants, customers, and competitors. Understand their needs, leverage, and the dynamics of the market.
- Supply chain risk is not limited to just supplier or third-party risk. It’s important to check this box, supplier risk programs and products have matured over the past five years. Implement the products, gather the data, activate event monitoring, and link the process to change management and procurement operations. Don’t stop there!! Refer to the two bullets above. Analyze the end-to-end life cycle of the critical value or product streams. Prioritize the activities that provide unique or superior value. Understand the exposure of the full set of resources and assets that support the value or product stream. For example, what are the critical/hard to replace skills; technology & data; physical assets; and relationships needed to source, produce, deliver, and service what makes you money?
Interested in finding out more? Send me an email, firstname.lastname@example.org or give me a call, 862 812 2176. Comments always welcomed!!
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.
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.
CNBC recently reported that up to 900 KFC branches in the UK faced a chicken shortage due to issues related to switching to a new delivery partner, DHL.
Organizations mitigate supply chain inventory disruptions through a variety of strategies including:
- Stock redundancy (safety stock)
- Stock diversification
- Direct ship
- Alternate sourcing
- Inventory substitution or repurpose
- Increase inventory investment within a channel
- Segmentation and prioritization (allocation)
- Salvage or repackage
However, these strategies in combination with the organization’s risk and resilience programs are typically limited to operational activities. Business continuity, crisis management, and supply chain risk programs seldom link to market intelligence and the financial rigor needed to exploit uncertainty at the onset of a disruptive event.
No chicken, no customers? Should that be the organization’s assumption when the core product or organization’s unique value evaporates? Or does this single point of failure actually represent a single point of opportunity? For example, from a market or industry perspective does the disruption represent an opportunity to accelerate the acquisition of a competitor or alternative product that will eventually lead to a broader, more appealing menu? Is this disruption an excuse to exit an unprofitable business in favor of a more promising opportunity? Or in the case of KFC, does a brief shortage represent an opportunity to promote a different set of products on their menu at a deep discount (or for free)? What did KFCs competitors do to exploit the opportunity, did their playbook include a strategy for exploiting this type of market disruption (i.e. the failure of a competitor)? The following case is provided to illustrate how GM outflanked Toyota when presented a significant recall.
Bottom line: organizational risk management fails as a strategic weapon because it ignores the most pivotal facts of the business landscape – the market and financial objectives. Markets move fast, organizations do not. Supply chain resilience programs are the starting point, however, these programs must be linked with broader contingency/opportunity strategy that includes the market and financial performance.
NEWS AFTER THE ORIGINAL POST
A case in point is a comparison between GM and Toyota in 2014. GM recalled 29 million cars worldwide in 2014, following thirteen deaths and fifty-four crashes due to a faulty ignition switch. Chevrolet Cobalt models were the culprits. The way GM handled this is instructive in comparison to the Toyota response in 2009– 2010 when acceleration problems led to recalls. In the case of Toyota, an attempt to diffuse the situation through public relations— including a denial that the problem even existed— nearly destroyed the company. The Toyota error was instructive to GM, and it reacted in a very different way. The GM focus was not on the profits impact but on markets.
As a result, sales and profits rose after the recalls, when you would naturally expect them to fall. Why? Jessica Caldwell, a senior analyst with Edmunds, explained, “You’d think it would damage their brand, but it’s actually helping to drive purchases at the dealerships.” Recalls brought people into the dealerships, of course. But GM saw this as an opportunity and focused its energies there. In July 2014, GM posted its best monthly sales in seven years despite the massive round of recalls. They sold over 256,000 cars that month alone, a 9 percent uptick from one year before. The consumer visits to the dealership as part of the recall sparked more trade-in activity that would have occurred without the recall. GM offered attractive low-cost financing coupled with employee-level pricing, a 34 percent discount from retail price.
SOURCE: Gary S. Lynch. Uncertainty Advantage: Leadership Lessons for Turning Risk Outside-In (Kindle Locations 1703-1709). Archway Publishing. Kindle Edition