Supply chain risk management (SCRM) is the hot topic at conferences, the blogosphere, and in many supply management circles. Supply risk experts, pundits and wannabes are shouting supply risk warnings from every rooftop, inundating us with webinars, talks, and articles, a veritable group of naysayers predicting the end of the world. Yet, it seems that the excitement with which it is touted isn’t being matched by swarms of interested supply risk groupies ready to move forward to defend  (or mitigate, as we risk geeks prefer to say) against this scourge that is rocking the supply chain world. How could that be? Here are a few thoughts I’d like to offer.

1.       They sound a heck of a lot like insurance salespeople. Insurance is just plain boring. “Hey mister, the supply chain part of the sky is falling down. Wanna buy a supply chain risk protection policy?” Yawn. By the way, this is no coincidence. Some supply risk experts ARE insurance industry folks. And while there are insurance solutions, they are largely inadequate.

2.       The origins of risk management are in the financial services area. And we know where their risk management techniques took us and our whole economy. Perhaps the SCRM crowd is afraid to go there.

3.       How motivating is continual doom and gloom, even if it is of the more exotic supply chain risk variety?  SCRM sounds like Chicken Little and people get inured to it after a while.  Sound the alarm too many times and people begin to ignore it. Or at least try to hide their heads in the sand for a while until a risk event comes by to bite them in the keister.

4.       How many times do people have to hear the name of an unpronounceable volcano invoked in the name of supply chain risk before they book a trip to Iceland out of curiosity to see it, drink some Reyka vodka and totally forget about the supply risk part?

5.       SCRM seems too challenging. One person or one department (i.e., Purchasing) can’t adequately address supply chain risk management by themselves. But Purchasing is where people turn to and where SCRM typically begins.  SCRM requires the usual suspects:  senior management involvement/support and cross-functional participation.  This means convincing C-level execs of SCRM’s value and ROI.

6.       Most senior executives know they need to do something. Awareness is the first step. But as usual, it’s the early adopters who actually DO something. SCRM is still in the early adopter phase.

7.       What can you actually DO about supply risk? You can wring you hands in despair. You can buy software. But many companies have not yet reached the level where they can address supply risk organizationally, let alone use a software solution to address it.

8.       SCRM has ROI. Both addressing the risk and NOT addressing it cost money. However, it needs to be figured out and demonstrated for a particular firm’s supply chain situation.  And for the impatient crowd, ROI isn’t realized overnight.

9.       There is too much emphasis on the bad things that can happen and not enough on how to address supply chain risk.

10.   There are currently two silos in SCRM:  supply risk “tree” people (those who focus on risky suppliers) and the supply risk forest people (risk in the supply chain, but not individual suppliers). SCRM needs to address not just the trees, but the entire forest including the trees. Current tools are inadequate.

Hopefully both business practices and risk management tools (software and other) will evolve further and become more accessible, and firms will turn fear and awareness into action.

-Sherry R. Gordon

On June 17th, 2010 at midnight, someone got by PR Newswire’s vetting process and issued a fake press release about cereal maker General Mills. The press release falsely claimed that President Obama was launching an investigation into General Mill’s supply chain. The press released was confirmed to be a hoax and immediately retracted. The Wall Street Journal reported that investors and shorted sellers have previously used false rumors as a means to manipulate stock prices. But it is still unclear how this hoax actually occured or who did it.

Several aspects of this situation are interesting. One is the use of a false rumor about a major corporation’s supply chain as a means of harming that corporation. This event illustrates how important the integrity and functioning of supply chains have become to the overall success of a company. But what’s even more interesting is how universal the understanding of a supply chain’s importance has become. Until the last few years, when various supply chain events such as food, drug, and consumer products contamination and other failures became widely known,  supply chains were a weird term that only some manufacturing and purchasing geeks cared about. If you mentioned that you were involved in supply chain management at a cocktail party, people would nod politely, glaze over and change the subject. The general public’s personal interest has increased at least in terms of awareness about how a tainted product might make its way to them or their children. Now the public knows that somehow supply chains make the world go round.  They are recognized as providing an essential, competitive advantage and their failure as causing disastrous results for consumers and corporations alike —  plus a public relations nightmare for corporations.

-Sherry R. Gordon

Supply chain failures seem inevitable these days, but are especially disconcerting when they indicate a larger systemic problem in critical equipment that is supposed to save lives. The U.S. Army just announced a recall of 44,000 Advanced Combat Helmets (ACH) manufactured by ArmourSource LLC (formerly Rabintex) due to concerns that they provide substandard ballistic protection. Another similar recall of 34,218 ACHs manufactured by Gentex Corp. occurred in May 2009. The Army did not reveal exactly how they discovered these defective helmets and what led them to quarantine some of the inventory. This recall affects about 4 percent of the one million ACHs in inventory. The helmets do not meet Army specifications. According to an announcement by the Army, “There is evidence that ArmorSource and Rabintex ACHs were produced using unauthorized manufacturing practices, defective materials and improper quality procedures which could potentially reduce ballistic and fragmentation protection.” The Army is not sure about either the exact risk to soldiers wearing the recalled helmets or whether any are being worn in a war zone. In the Gentex recall, the company alleged that a subcontractor had falsified certificates of compliance for the steel screws that it supplied. The exact nature of the ArmourSource recall has not been reported yet.

This situation highlights supplier management and supplier performance issues that the Army needs to address and raises more questions than answers. Some of these questions are:

• How does the U.S. Army in particular and the U.S. military in general determine whether suppliers are meeting its specifications and meeting its quality standards on an ongoing basis?
• How will the Army determine that the defective helmet problem is not more widespread than reported, particularly if so many aspects of ArmourSource’s manufacturing practices and process seem to be out of control?
• What is the Army doing about sub-tier supplier risk? What processes and practices are companies such as Gentex using to manage their suppliers and ensure that these suppliers are complying with their standards and government standards? How are these standards communicated to suppliers?
• How does defective sub-tier supplier material get into the product in the first place? And how do these quality escapes to the end customer, our troops, occur?
• How does the military track and trace products in the field? In the case of products critical to the lives and safety of U.S. troops, why is there no traceability? Soldiers have been give instructions about how to determine whether they are using a defective helmet so that they can exchange their helmets, but there seems to be no tracking system in place to know immediately where defective product has been deployed.

While the suppliers in question are saying that the defects affect a very small percentage of the helmets, why did it take the customer, the Army, not these prime contractors, to discover the defects and in this case, long after the fact? And how did these suppliers allow the defective product to escape to the customer? The supplier management and supplier quality systems do not appear to be in control, and the chances of more widespread problems are very high. The Army needs to do a thorough investigation of its procurement, supply management, and quality processes and practices and uncover how such situations can occur and potentially overhaul its approach to supply management and quality management. Then, it needs to take the necessary preventive measures to avoid these risks in the first place. Quality should not be left to the end user, our troops, to uncover defects in the equipment that their lives depend on. The recalls and finding solutions to these problems are costly to all. But no one should have to pay with their lives.

For more information on sub-tier management, here are a few of my previous posts:

Supply risk: the sub-tier or multitier challenge

Sub-tier supplier challenges loom even for the savvy

Sub-tier risk factors: trying to control the uncontrollable 

-Sherry R. Gordon

On Wednesday, April 28 at 9 am, Jason Busch, Editor of Spend Matters and I are giving a presentation on the software solutions side of supply risk at the ISM Conference in San Diego.  Our session is titled “Understanding and Choosing Supply Risk Solutions: Software, Content and Analytics.” Jason just posted a reminder about our session on his blog with some details about what we are going to cover, so I’ll refer you to his writeup.

This track is the most organized and carefully thought out series of presentations that I have ever participated in at ISM, thanks to Richard Rich, Sr. Risk Management Management at Seminole Electric Cooperative. Participating in this track are 3 Shipman Award winners, including Richard himself, Dr. Robert Kemp, and David Nelson.  The Shipman Award is the highest honor that the Institute for Supply Management gives to one individual each year. The quality of the presenters and presentations in this supply risk series at the conference has been outstanding so far. Jason and I hope that our presentation on Wednesday is equally valuable to participants. We are honored to have been selected to participate in the ISM Risk Track.

Since supply risk is such a hot topic, it will be continued at next year’s ISM Conference in Orlando. Richard Rich is organizing an ISM Supply Risk interest group as well.

-Sherry R. Gordon

A few weeks ago I was attending a meeting of my local ISM chapter. I was speaking with the purchasing manager for a local college about supply risk and mentioned the risk track and the session at the ISM Conference in San Diego in April, “Understanding and Choosing Supply Risk Solutions: Software, Content and Analytics” that Jason Busch (Editor, Spend Matters) and I are giving on April 28th. He replied that he didn’t have the budget to attend the conference nor did he have the resources even to think about buying a supply risk software solution. Was there anything someone in his situation can do? I told him that there are still things a smaller organization can do to address supply risk, even if they can’t buy a software solution. The key: know your suppliers.

Here are some of my suggestions about the most important things small businesses can do to reduce supply risk are:

• Make sure you have a good process for selecting suppliers
• Determine who your critical suppliers are
• Develop closer business relationships with those suppliers and get to know them
• Understand their business issues and challenges
• Measure and understand their performance

For a small business, none of the above requires fancy software. And none of those items cost anything other than time. Sure, it would be easier to have a supplier performance management system to measure supplier performance. Being small can (and should) mean fewer suppliers to get to know and track. Just the vital few; that is, the 20% of suppliers who have the most impact on your business. Understanding their performance can be done with a few simple metrics and even using Excel spreadsheets to track them. Or simple survey tools on the Web to ask your internal stakeholders about how suppliers are doing. Understanding supplier performance is probably the best and most underrated way to prevent supply risk.

Being a smaller business can give the advantage of not being stuck in an airless silo and not knowing what’s going on in the other silos or the rest of the business. You may have to wear more hats and therefore have a broader perspective on the business than your large-company compatriots. And as long as you don’t let suppliers turn into an airless silo unto themselves, then you can reduce the chances of a risk buildup that can explode unexpectedly.

-Sherry R. Gordon

As a supplier, has a buyer ever tried to sell you dreams of a long-term relationship, repleat with lots of business opportunities and a harmonious partnership? You hear all the right key words: long-term, partnership, mutually beneficial, increased business, trust, win-win.   It goes something like this: we may be beating you down on your customary price because it will be worth a lot of business in the future. Is this a pitch or a partnership? Then you realize that the dreams may be based on an ugly reality — the buyer wants to trade for partnership futures. How about a deal where the customer wants to sell inventory back to the supplier for cash, and not even its own inventory, for a promise of future orders?

In the case of jewelry chain Zales, the deal is too good to be true — but for the customer, not the suppliers. A recent WSJ article, ”Struggling Zales Looks to Suppliers for Cash“ described how, in a bold and desperate move, the struggling company is trying to get its vendors to buy back inventory, including inventory that these suppliers did not even sell to Zales in the first place.  And what do these suppliers get in return? The opportunity to sell 2 times the amount of product back to Zales over the next near. Not surprisingly, it’s a deal with no appeal and a risky non-starter for the suppliers. The oddest aspect of the situation is that Zales is trying to get rid of inventory before Valentine’s Day and Mother’s Day, holidays that account for the most jewelry sales after Christmas. Talk about trying to initiate a downward spiral. If the supplier inventory buyback were to occur, there would be little to attract customers into the stores, and sales would surely continue to plummet. Just the suggestion of such a buyback from a vendor who is close to bankruptcy would make suppliers head to the exits. Suppliers would be putting themselves in a risky financial situation, if their boards or creditors would allow them to enter into this type of agreement in the first place. Word of financial distress could spread through Zales suppliers like a brush fire and no one may be willing to ship to Zales, not only pushing Zales into bankruptcy, but putting suppliers themselves at risk and potentially impacting the more successful jewelry chain such as Signet Jewelers, owner of Kay Jewelers and Jared the Galleria of Jewelry.

While so far suppliers don’t seem to be going for this inventory buyback deal, it sounds like there is no silving lining to the situation. Either way, the suppliers may lose.

-Sherry R. Gordon

If you didn’t think space exploration was dangerous enough, here’s something else to worry about. NASA has been looking into outsourcing parts of the space exploration program to outside suppliers, reasoning that this is the best way to speed up rocket development and to save money. They reasoned that private contractors would be able to provide the rockets that would carry astronauts into space much more efficiently and cost-effectively. A recent Wall Street Journal article reports that the Aerospace Safety Advisory Panel, an outside safety watchdog for NASA, has cautioned against this approach. They questioned the safety of this approach, especially the technical challenges that private firms would have to overcome. Many of the potential suppliers have rockets that are unproven and still on the drawing boards. So the advisory panel has recommended that  NASA stick with government-run rather than privately operated manned ventures.

Space contractors Boeing and Lockheed Martin are lobbying NASA not to outsource more of the space program. Interesting that Boeing in particular, which has a huge self-interest in keeping its share of space contracts, is playing the “don’t outsource” card. Boeing’s own outsourcing missteps with the Dreamliner are testimony to the issues inherent in outsourcing a complex system, although I’m sure that Boeing is not  going to emphasize their own supplier management challenges in relation to the the NASA outsourcing issue.

What are some of the important factors in making a decision such as this one?

• Outsourcing does not reduce the responsibility for managing the process or the outcomes. There is still a mangement and coordination function that would need to be performed. NASA would need to make certain that its subcontractors’ product development and other key business processes are robust and can produce the required outcomes.  NASA would need to be able to orchestrate supplier schedules and input so that the project comes together as planned. According to the WSJ, the advisory panel members have expressed concern about NASA’s “hand-off approach” in allowing development of private cargo spaceships. Outsourcing does not mean hands off. Successful outsourcing, especially in real mission-critical products, must be decidedly hands on.
• Contracting in this environment would be extremely complex. Liabilities seem problemmatic. Who is responsible if a rocket blows up and kills people? But on the other hand, if the private contractor is not liable, can NASA take on the liabilities for unproven technologies and unknown supplier performance to contract?
• Sole source issues. What are the incentives to a private firm to invest in technologies so specific to NASA that they might be totally captive to it and might be driven out of business by changing political winds (if the program is reduced or disbanded) or by having no other customers of its products. Or, if NASA finds a subcontractor incompetent or not meeting expectations, how can they fire them? What would be the alternatives?
• Protection of intellectual property. How can NASA be certain of not losing any of the intellectual property and technological capabilities to entities outside the U.S.?

Whether or not NASA outsources, the buck still stops with them. They still need the skills to manage the development of complex technologies, either internally or externally. It just seems that the risks are higher if these activities are external. The public sector has always held the private sector as the role model to be emulated when running a business. Recent events in the financial sector have again proven that idea a myth. Boeing’s challenges in managing its suppliers in a technologically complex product design, development and manufacturing scenario should provide a cautionary tale to NASA and the government about taking on such technologically challenging and complex outsourcing.

-Sherry R. Gordon

Boeing recently announced that it was planning to replicate all 787 parts built in the Puget Sound area in a new facilities being built in North Charleston, South Carolina. According to a recent article in the Seattle Times,  Boeing machinists are seeing this as the first step toward moving all parts out of Boeing’s Puget Sound plants. The two-month machinists strike in Boeing’s Commercial division in 2008 seriously disrupted production. It was one in a series of glitches that has forced Boeing to postpone the 787’s inaugural test flight and deliveries to its customers five times. Boeing is now over two years behind schedule. The cost and penalties to Boeing are in the billions of dollars in addition to a huge loss of credibility. Boeing  is claiming that it is expanding production and not duplicating production to move away from unionized machinists.  However, their spokesman cited strikes as a major reason for doing so. South Carolina plants will not have to contend with the International Association of Machinists.

As a company that has experienced failures in its supply chain in the production of the 787 Dreamliner, this was an expected move that Boeing has made to avoid supply chain risks. When it bought the Vought Aircraft Industries plant in North Charleston, SC, it was ostensibly to stabilize a shaky critical supplier and also to avoid having to fly parts to the Puget Sound plants. Now it is clearer that Boeing is trying to avoid being at the mercy of its unionized machinists. Realistically, it is these highly skilled machinists who are needed to produce a high-quality airplane.  Boeing can’t seem to live with them or without them. It will be interesting to see whether or not using less experienced machinists in SC will prove to be a problem.

The other big supply chain risk that Boeing has experienced is in its poor selection and management of its global supply chain, which may be an even greater risk than machinist strikes. For a company that practically wrote the book on supplier certification, their losing control of their supply chain has been mystifying. There may be some parallels to the “too big to fail” mindset or “the left hand doesn’t know what the right hand is doing” situation that occurs at such a behemoth corporation. Even when processes such as supplier performance mangement are world class, they don’t do much good if they aren’t used.

As of this writing, Boeing is on track to meet its deadline of having its first Dreamliner test flight before the end of the year. It’s aiming for next Tuesday, December 22nd. In the meantime, in regard to its supply chain and machinist issues, Boeing needs to fix the problems, not the blame.

-Sherry R. Gordon

While American auto suppliers have not been directly bailed out, many have survived due to the bailout of their customers, GM and Chrysler.  No so for small Italian suppliers.  According to a WSJ article, the Italian auto industry has not received government bailout money. So the auto supply chain, comprised of much smaller suppliers than the American auto industry, is seriously hurting. As the worldwide recession has reduced auto sales and the euro has strengthened against other currencies, small Italian factories are smarting from drastically reduced sales. Interestingly, instead of blaming the government, they are blaming the banks for not extending them credit as they used to. An underground movement of sorts, using social networking and blogging, has arisen to address this crisis and put pressure on banks to allow these suppliers to continue to overdraw their accounts to receive credit needed to survive. The political pressure has supposedly caused some easing of credit among banks for these factories.

The comparison with the American auto industry is interesting. The situation here may not appear as dire, but it is still just as problemmatic as the situation for the small Italian suppliers.  Bank credit continues to be a problem for small companies here though some of the larger suppliers got a government “lifeline” of $5B in credit. And now with smaller banks going belly up in record numbers due to risky loans, banks are still unwilling to loosen up their credit for an industry whose future seems uncertain as they risk suffering the same fate as the less fortunate or savvy and now defunct banks. Auto suppliers need credit to fill customer orders and grow. Yet, the safety of betting on such suppliers in a troubled industry is uncertain.

There is one interesting difference between small American versus small Italian auto suppliers. Some Italian suppliers, like many of their European counterparts, have been stashing money in Swiss banks. So they may need to get the money out to repay the banks for previous credit. To encourage this financial repatriation, some European governments are offering a tax amnesty.  Small American auto suppliers, as far as I can tell, don’t have a stash of cash, either taxed or untaxed,  to tap into.

-Sherry R. Gordon

Yesterday I wrote a guest post on Spend Matters about the recent raid on the Gibson Guitar plant in Nashville, TN for using illegal rosewood, despite the company’s use of certified tonewood providers. I discuss the fact that  even when companies use good preventive measures to avoid supply risk, they still need to have good plans in place to deal with incidents when they do occur, as they WILL occur. It is astonishing how many companies are only reactive to supply risk incidents and not proactive about preventing and mitigating risk, and how even fewer have risk mitigation and recovery plans in place. I also reference a related situation that I wrote about this past summer regarding illegal meat and leather products from the Amazon area. Even as companies try to avoid destroying the rainforests by using certified suppliers or suppliers who pledge to use sustainable and legal sources, there are forces that frustrate these attempts.

Supply Excellence also had a post on the Gibson incident from the point of view of “caveat emptor”.

-Sherry Gordon