Spend Matters welcomes this guest article by Art van Bodegraven.
What, Another Crisis?
In the ever-growing department of “what's old is new again,” risk management and mitigation have been rediscovered. For the past couple of years, the topic has popped up increasingly in conferences, forums, workshops and webcasts in the supply chain management arena.
The subject is worthy, judging by the appearance of Captain Obvious impersonators at all these events. But, Massachusetts Institute of Technology’s Dr. Yossi Sheffi covered the basics in his 2005 work, The Resilient Enterprise. And, enlightened organizations were actively and creatively working the issues decades ago.
You see, the crux of the effort is not merely interruptions in supply chain execution, annoyances, some late shipments, a few shortages, triage in service among customers or needs for substitutions. Ultimately, in the farthest extensions and worst cases, it is elemental business continuity that's at stake.
Sheffi's work outlines a comprehensive, nuanced and stratified approach to the cosmic issues involved and takes them down to granular solutions. The process – it's need and it's very existence – are counter-intuitive in Western enterprises. We think that every plan will work, that what can go wrong won't, that we can never die and that even taxes might be partially optional.
Because we, in the main, cannot deal with negatives, every enterprise needs someone who can think the unthinkable, imagine the unimaginable and conceive the inconceivable. And the field of play is nearly infinite – markets, customers, suppliers, internal factors, environmental events, geopolitical hazards – and on and on. It is overwhelming: tsunamis, earthquakes, volcanic eruptions, war and insurrection, economic collapse, religious strife, bankruptcies, design failure, contamination, unanticipated side effects, competitive actions, labour unrest, corruption, disease and more.
We can't deal with all of those in this space and in this venue, but we can start with thinking that risks often begin with sources and suppliers – and our relationships within that sphere.
Getting Organized, Getting Started
In our sourcing and procurement universe, it is essential to begin with a categorization of parts, materials, supplies, ingredients, sub-assemblies and services. Back to the future, a “Johari Window” is a useful tool for grouping the things we purchase into rational "buckets". One well-known example is the Kraljic matirx, circa 1983, that
sorts purchases by business impact and supply complexity, resulting in the identification of parts, materials, etc., as non-critical, leverage, bottleneck and strategic. These then influence how supplier relationships are constructed with, as appropriate, emphases on efficiency, competition, continuity and alliances
Picking And Choosing
Within these categories, risk management is not as simple as just ignoring low impact or low complexity categories. There are likely items within each box of the "window" that either require attention or may be safely dismissed. Therein lies a major challenge and a critical foundational effort in building risk management processes.
There will be a series of challenges in constructing mitigations. How much must you still do in-house? What must be done by suppliers? How can those requirements be enforced? How closely must they match what you would do if you were responsible internally? What are your back-ups in the event of supplier failure, collapse or non-compliance?
More Or Less Work For You?
You may be picking up on the idea that, just because much is a supplier responsibility, you are not saving any internal effort. If you did, good catch! Comprehensive, prioritized, effective risk management and mitigation is a huge responsibility, demanding resources, talent and creativity.
Not least of the tasks at hand is the requirement to have secondary sources that can step in with little notice in the event of a primary source's failure. That means, not only supplier companies, but also geographic sourcing locations. Those possibilities raise issues in quality, purity, conversion cost, transportation and finished product attributes.
Flies In The Ointment
Wait! Am I telling you that butter, for example, is different in New Zealand than in California or Ireland? Yep. And apples from Chile aren't the same as those from Washington or Michigan – , even if both are Granny Smiths? You betcha.
Natural things, things that grow in the earth, or come from animals that eat things that grow in the earth reflect the soil, the sun, the temperature, the moisture of the area. Much like grapes and the wine made from them depending on their terroir for unique or special properties, there is no substitute on the planet for Indiana melons or strawberries. Or for Michigan cherries. Or Georgia/South Carolina peaches.
And, slight modifications in alloy specs can cripple a product using substitute components, not to mention the possibility of ruin if tolerances get slightly off.
Then comes the temptation to take a couple of shortcuts in considering what is worthy of risk mitigation. Even innocent commodities cannot be taken as givens. To illustrate, humble glycerin went into extraordinarily short supply a couple of years ago, with what little was available becoming prohibitively costly. A well-known HBA manufacturer, along with a host of minor players, exited the marketplace for glycerin soaps. The big company developed and promoted the bejeebers out of other products and remains out of the glycerin soap space to this day. Meanwhile, an upstart e-commerce corporation has, with the market turning favorably, jumped in with both feet and sells a jumbo bar for a little over a dollar.
The Moral Of The Story
This is not an adventure for the faint of heart, or for dilettantes. It demands thoroughness, thoughtfulness, comprehensiveness, imagination, creativity, global literacy and constant attention to keep fresh – and ahead of the wave.
Here is where it pays to be part of an integrated supply chain, rather than an independent function within a siloed operations organization. You can do a lot to head off disaster in working with suppliers. But, all your hard work, even genius, can be tarnished or destroyed by risks outside your purview. Think West Coast port calamities and failures to get merchandise to retailers in time for new seasons or major events. Someone else in the enterprise is responsible for planning when to pull the trigger on diverting shipments to alternative points of entry or using air freight to save the season. You'll need to be more than friends with that person; you'll need to be joined at the hip in planning and communications – constantly.