Supply Chain Is A Risky Affair

“Fire at Lite-On plant affects more than 50% of LCD monitor production capacity” (source: emsnow, Feb 06 , 2008)

“In 2002, the International Longshore and Warehouse Union was locked out, shutting down ports along the West Coast of the United States for 10 days. The lockout was estimated to cost the US economy up to 2 billion dollars per day. The lockout closed several factories including a joint venture between GM and Toyota.” (source: cnnmoney, Oct 3, 2002)

“Nike Rebounds: How (and Why) Nike Recovered from Its Supply Chain Disaster” (source: CIO, Jun 15, 2004)

I was doing a little research on Supply Chain disasters and came across many examples that were eye opener. SupplyChainDigest has published a list of top Supply Chain disasters that resulted in businesses going bankrupt or CEOs having resigned or sunk investments.

And a recent example of milk adulterated with melamine that killed or seriously sickened babies in China.

I wonder how many of the supply chain leaders take into account such risks in their decisions and have mitigation plans. When it comes to sourcing cheaper and thereby getting a perceived savings in cost, we turn a blind eye to such risks. However there are few exceptions like HP’s Procurement Risk Management Program that works out possible scenarios and shares both risks and rewards with their suppliers.

Let us analyze the factors that have resulted in greater need for focusing on supply chain risk management:

Global Sourcing : Lot of sourcing has shifted to low cost producing countries. Other than challenges of increased lead times, lack of visibility & communication problems, the risks of supply failure, quality & environment related issues have increased manifold. There have been cases of high toxic contents in the plastics used for children toys and recycled leaking batteries. Such incidences have the potential to spoil the reputation of company for ever.

Demand volatility : With current recessionary trends, estimating demand reasonably well has become virtually impossible. The risk of producing excess stocks that may have to be either discounted or written-off. On the other hand potential of losing sales to competition if a pessimistic view of demand is taken.


Cash Flow : Despite all governments announcing revival packages & pumping liquidity in the market, the credit crunch continues. To achieve sales targets, some companies may extend credit to their customers. As a result cash flow and therefore business sustainability is severely impacted.

Single sourcing : We all grew up in Supply Chain learning the advantages of single sourcing and supplier collaboration. The current situation calls for a review of the single sourcing strategy. I am not advocating to start developing second source for every item, but have a review of the assumptions for single sourcing.

Currency Risk : Indian rupee has depreciated by 25% in last one year. RMB has been artificially kept low against USD despite balance of trade in favor of China. There will be a day when China sourcing will not be as lucrative as it is today.

Geopolitical Risks : The governments are under tremendous pressure from local population to put trade barriers to encourage domestic business. Obama has come out against outsourcing of services to low cost countries. Many countries are putting safeguard duties on imports to protect domestic industries against global competition.

Supplier Sustainability : The entire supply chain is not under control of a single entity. You have suppliers as well as suppliers’ suppliers. They are all part of your value chain. What if any of these suppliers follow illegal practices, pollute environment unlawfully? It can be a big risk not only due to disruption of supplies but also the dent in the reputation of the companies associated with such suppliers.

Well, there are other risks as well e.g. unrest, terrorism and natural disasters, which is beyond anyone’s control.

Every Supply Chain Manager should start analyzing and prioritizing risks to their business, as part of Supply Chain Strategy and make a plan for risk mitigation. The risk management involves three key steps:

Assessment : Identify key vulnerabilities in supply chain and the potential risk alternatives. Quantify the potential economic impact of current supply chain risk profile.

Analysis: Through analysis, make a business case that identifies, quantifies, and prioritizes critical supply chain risks and potential alternatives.

Roadmap: Develop detailed plans needed to implement the changes required to achieve organization’s future state risk profile. Institutionalize risk-mitigation into the supply chain planning and execution and measure process effectiveness and results.

AMR’s supply risk management guru Mark Hillman said, “The greatest risks are the day to day operational risks that can detract from shareholder value and performance. You need to focus on high probability risks that you can control, such as supplier failure or market risks, and take steps to mitigate these.”

Cost Pressure : Are we complaining?

Indian Retail sector is crumbling under economic crisis & looking ways to cut cost. The other day I visited one of the famous retail outlets in Gurgaon. The kind of waste I saw over there didn’t indicate that there was any cost pressure on the company.

The most obvious was the indiscriminate use of plastic bags. The goods were already packed by manufacturer, which went into smaller plastic bag and many such bags into a bigger plastic bag. On an average they would be giving 2 big plastic bags per buyer (assuming smaller plastic bag is unavoidable). Assuming 5000 buyers per day & 100 gm weight per bag, they would be using 1 T per day of extra plastic and 300 T of extra plastic per year. That is a wastage of Rs. 20-30 million waste per year per store. This is apart from the disastrous impact on environment these plastic bags have. How can the highly experienced & sought after Supply Chain managers of these retail chains ignore such a leakage of money?

On the other hand , we have an example of Wal-Mart’s sustainability measures specifically focusing on packaging not just in their stores but even at the suppliers’ end. It has set a goal to reduce packaging in the supply chain by 5 percent by 2013. Reaching that goal would prevent 660,000 tons of carbon dioxide from entering the atmosphere, a feat equal to taking roughly 200,000 trucks off the road every year. It would also save the company more than $3.4 billion. General Mills is a leading example of the changes: straightening its Hamburger Helper noodles meant the product could lie flatter in the box. This, in turn, allowed General Mills to reduce the size of those boxes. The move saved nearly 900,000 pounds of paper fiber every year, reduced the company's greenhouse gas emissions by 11 percent, took 500 trucks off the road and increased the number of Hamburger Helper boxes on Wal-Mart shelves by 20 percent.

Wal-Mart has unveiled a packaging scorecard in 2008. It will help to evaluate the sustainability of its suppliers' packaging. The company's buyers will then use the scorecard to make more informed purchasing decisions.

I am yet to see any effort by any of the retail chain in India, to reduce, recycle or reuse plastic bags. This economic crisis is an opportunity for the retailers to take initiative, not only within their own chain but also involving suppliers & customers. As a retailer, involving consumers into sustainability efforts will only strengthen their ties with brand. Consumers can be encouraged to reuse or drop in the collection bins placed near the store. Many consumers park their cars in the parking lot & carry the trolley to the car. At that point they can discard the plastic bags & deposit in the bin placed nearby. One can visit http://www.plasticbagrecycling.org/00.0/ to have access to resources that would help to take an initiative in this direction. I liked this toolkit http://www.plasticbagrecycling.org/00.0/images/toolkit.pdf with very clear direction for plastic bag recycling.

Let us not blame the economic crisis but think out of the box to eliminate “waste chain” in the supply chain.

Global Recession : Are We Becoming Wiser?

Recession, business cycle, bubble are not new for this world. Right from 1930's onwards, there is an ample record of economy movements & major recessions, their causes & impacts. Have we learnt any lesson from each of the down turn or just become good at analysing it post facto? With so much of experience, knowledge, sophisticate modeling capability or merely improved common sense, why can't we see it coming? Why do realize it when we are only deep into it?

These questions are difficult to answer and many experts may claim that they saw it coming but as a collective human race, we have been again fooled by our psyche. Just a few months back the whole world was dancing to the tune of growth. Oil & commodity prices crossed the limits of any imagination but the greed of producers continued to grow without any limit. They kept on increasing prices to make a hay while sun shines. Same was the story for the real estate sector fueled by strong consumer demand that soon turned into a bubble with entry of investors colluding with builders. The sensex, having crossed 10000 mark did not look back, with every increase sharper & faster than before till it touched 20000 mark. Experts even forecasted sensex crossing mark of 30000 in near future.The stock market sharp rise was nothing but another bubble being built by FIIs pouring dollars into a stock market. Rupee sharply rose against dollar & analysts forecasting further strengthening of rupee.

While the experts were building castles in the air, the US economy was getting into troubled waters right from beginning of 2008. Japan was already on the edge of recession. There was increasing unemployment in US resulting in lower consumer demand. In the middle 0f 2008, alarms were raised on sub-prime concerns with many banks declaring losses. Experts failed to read the signal & assess the impact. This was another bubble waiting to burst. The experts strongly believed in it's not over until the fat lady sings.The sharp increase in food prices was attributed to food shortage due to increased consumption in India & China..... another cover story to ignore the reality.

The story of India is very peculiar. The economy was growing at 8-9% and expected to touch double digit oblivious to what was happening to commodity prices until inflation started hitting both the industry as well as common man. When crude oil prices crossed USD 100, government had no option but to increase fuel prices. Prices of common items, food and vegetables went up 30-40%. The government that was gung-ho about growth had to resort to practices of reducing liquidity in market & restricting exports but failed to make any dent on inflationary trend. That was a swing to completely opposite extreme. FIIs pulled money out of stock market to meet US financial crisis and Indian investors pulled money from real estate to face stock market crash. As a result real estate bubble also burst. Now government has reacted to recession by swinging to another extreme of loosening credit in the market. The impact of the additional money in the market is yet to be seen.

Coming back to the key issue i.e. why we didn't see it coming and took proactive steps. We became victim of our own success. Who is responsible for this? Banks, who over sold the mortgages in US? Or commodity producers who kept on increasing prices assuming demand is not sensitive to any level of price? Or investors flush with funds, who kept playing with stock & commodity prices in the market? Clearly, it is all of them. They all belong to a new sect of unregulated free economy that doesn't mind killing itself for the short term gains. They not only kill themselves but harm the entire mankind the way it hurts the most. They are a greater threat compared to any other foreseen dangers to mankind.

Are we learning a lesson & preparing to tame this sect so that we do not face similar situation in future? Hope the world will gain wisdom, amend policies, put in place some basic regulations in the free market. economy.

Role of Supply Chain In Riding Over Financial Crisis

The US economic crisis has taken all the economies, big or small, by storm. Or should we say a "Typhoon" with no signs of receding in near future? Financial liquidity has tightened & credit dried up, especially for the small businesses. In these troubled times, it is very important to be able to keep head above water. It is critical that not only you but your business partners, be it customers or suppliers, are able to survive the crisis.

Supply Chain Managers can play a very critical role to help the businesses ride over the "Economic Tsunami". Here are few suggestions, based on my own opinion and that of some of the experts:

1. Go lean on Inventory. Availability of Cash is the biggest need of the hour to sustain the business. Building inventory for strategic or speculative reasons, under these circumstances can be a disaster. Even if it means keeping your capacity or manpower idle that would erode margins, is a better option than keeping inventory for an uncertain demand that would block cash needed for meeting operating requirements of the business.

2. Don't push Inventory to Customers. It is like shooting in your own foot. There is a general tendency to push inventory to customers to achieve sales target numbers. It only converts your inventory into higher credit in market or outstanding from customers. The financial risk goes up if your customers are facing liquidity crunch and some of them go bankrupt or don't pay at all. By pushing inventory to your customers, you are not only increasing your own risk but may kill the customer with high debt.

3. Plan, Replan & Replan. In a scenario of uncertain demand, do not pre-commit resources & materials in advance. Build visibility into your demand chain and align your supply / production more frequently than you have been doing in past. Catch the demand signal early & do not hesitate to change the production schedules, even if it means more changeovers or setups on production lines.

4. Stop producing slow moving or not so fast moving items against the forecast. Rely more on the actual demand signals than on the forecast. Or best agree with your customers to produce/ assemble these items against their orders. It may lead to increase in response time but unlock the capital blocked in such items.

5. Service efficiently. It doesn't mean service at lowest cost or cutting corners. Redesign your network that can service smaller lots and at a higher frequency to your customers. If your network cannot support frequent & smaller deliveries, use a reliable 3PL. Consolidate number of service providers & shipments. Evaluate alternate modes of transport e.g. Railways, multimodal shipments that are economical as well as reliable.

6. Form alliances. Taking a cue from the alliance reached between Jet Airways and Kingfisher Airlines, it is not a bad idea to share assets wherever synergy is feasible. Join hands with others, including like mind competitors, to find collaborative ways of saving costs in manufacturing, servicing and logistics. Remember, recession is a bigger threat compared to your competitor.

7. Follow lean processes. Tough time is also an opportunity to re-engineer your processes. Evaluate your processes, cut out wasteful activities and minimize wastage in the supply chain. Order processing time, inventory idle time, supply lead times are some of the few candidates that would need a very close look. Inventory inaccuracy or leakage in warehouse, transit damages, storage conditions would require stricter controls.

8. Pay your suppliers on time. Don't push your liquidity crunch to your suppliers by delaying their payments. The suppliers sustainability is as critical as your own business continuity. Incentivize your suppliers to reduce lot sizes & implement JIT, Vendor Managed Inventory / Replenishment. Consolidate suppliers & shipments for economy of scale. Renegotiate the contracts & shift to "value" suppliers, wherever possible.

9. Motivate people & upgrade their skills. The economic scenario can dampen the spirits of SCM people due to pressures from suppliers, customers & internal stakeholders. It is important to help them overcome difficult situations, upgrade their functional & leadership skills. Motivate them to take difficult decisions that benefit overall business.

10. Network with Supply Chain professionals from similar or different industries, learn how they are coping with difficult situations, share your learning and help each other in solving the problems.

What are the key priorities & right approach for Supply Chain Skills development?

In my pursuit to get a wider view on Supply Chain skills development , I launched a survey through Linkedin . It is my pleasure to share the results of he survey. As promised, I am not going to disclose the names or the individual responses. However, I would welcome feedback & comments & continue to refine my study.

First question was, “What are the key priorities for Supply Chain skills development?” The participants were expected to rate each of the given priority as High, Medium or Low. Based on collective response the priorities have been rated in descending order.
A : Need for preparing the SC Organization to meet future business challenges.
B : Ability to assess the gaps in skills for meeting existing business requirements.
C : Need of reviewing or redefining roles & responsibility within SC organization.
D : Fill gap in Soft Skills in SC organization.
E : Fill gap in Technical or Functional skills in SC Organization.
F: Need for developing structured approach to arrive at the skill gaps.
G: Focus on continuous skills development for strategic organization development.

Clearly, building Supply Chain organization to meet future challenges is the topmost priority followed by skills needed for existing business needs. Development of soft skills scores a slight edge over the functional skills (will detail these skills as specified by the respondents).

The second question went on to ask each respondent to specify soft skills. The list was quite long, so I am including the most commonly expressed ones.

Soft Skills for Supply Chain Organization :
1. Effective Communication : Looking at the number of responses for this skill, it sounds like a “mantra” for Supply Chain. There were various forms of this skill mentioned e.g.:
· Communication with peers
· Communication with internal & external customers
· Intra-departmental communication
· Written communication
The importance of communication in Supply Chain effectiveness is well known to everyone, yet it continues to be biggest gap in all SC organization.
2. Collaboration & Coordination, not only within the organization, but across the extended enterprise ( suppliers & customers)
3. Inter-personal skills, Transparency, cooperation with stakeholders , Trust
4. Business acumen & Market understanding : I would take a liberty to expand this a bit more. Most of the SC professionals tend to be specialists and not the business managers.
5. Proactive approach & Sense of Urgency
6. Ability to analyze problems & think out of box

Functional Skills for Supply Chain Organization:

1. Sales & Operations planning, Forecasting, Inventory Management
2. Understanding of entire value chain (including constraints in each part of chain) starting from customers to suppliers
3. Supply Chain network optimization
4. Negotiation
5. Knowledge of integrated IT / ERP tools and ability to quickly adapt to enabling technologies.
6. Risk Management & Disaster Recovery
7. Project management
8. Customer Service

The final question on the skills gap was to check at what level these gaps exist & to what extent. The respondents were asked to pick up one of the level (Senior, Middle & Staff) for the soft & functional skills. The results are:

Soft Skills: 62% felt the need at Middle Management level, 30% at Senior Management Level & 8% at staff level. It is well understood that the largest need for soft skills development is at middle management level because this group plays an important role in managing ground level operations and it is also needed for them to move to senior management roles. Interestingly, many felt the need at senior management levels as well. It means many Senior Managers also lack some of the soft skills.

Functional Skills: 40% felt the need at the Senior management level, 33% at Staff level & 27% at Middle Management level.
It shows that need for development & understanding of Functional Skills is there at all the levels .

TRAINING & DEVLOPMENT
The second section analyzed the priorities for training in Supply Chain organization.

A : Need for continuous training programs for retaining talent in the Supply Chain.
B : Need for training & development support available outside organization (consultants, institutes etc.).
C : Need for training & development support available from within organization..
D : Satisfaction with the quality & relevance of the existing training programs to the job
E : Extent to which the existing training programs use Games, Simulations tools to reflect near reality scenarios.

Type of Training : 80% of the respondents felt that combination Class Room Training and eLearning is the best possible way to make training effective.

Need for external consultants : 55% of respondents are open to engaging external agency or consultants for Supply Chain training.

RECRUITMENT AND RETENTION
The last section analyzed the priorities in the recruiting & retaining talent in the Supply Chain organization.


A : Level of pre-assessment of candidates & filtering of resumes by placement
B : Ability to attract good talent in Supply chain.
C : Satisfaction with the recruitment services provided by placement consultants.
D : Attrition rate in the Supply Chain compared to other functions in your organization
Major reasons of dissatisfaction from recruitment consultants:
-Lack of Supply Chain domain knowledge
-Focus on quantity than quality
-No pre-work / whetting done on matching the job & person’s profile
-Lack of communication
-No accountability

I thank all who took time to participate in the survey & gave valuable inputs. I feel that this study will help Supply Chain Leadership to make right decisions about supply chain skills development.

Where should Demand Planning Report: Sales Organization or SCM Organization?

We had an informal meeting of small group of supply chain professionals representing various companies. One of the issues that came up incidently for discussion was, "where should Demand Planning report : SCM or Sales organization?" Everyone had very strong views about it & also a solid justification for the option selected. Then I posted the same question in Linkedin networking site and received about 25 responses on the subject during one week. The analysis of the responses is:

· 50% believed that Demand Planning should strongly report to SCM
· 23% believed that Demand Planning is one of the core responsibility of Sales & Marketing
· 18% were neutral & felt that it didn’t matter as long as accountability and processes are well defined
· 9% felt that direct reporting can be to either SCM or Sales but dotted line to the other function

Irrespective of the option chosen, all emphasized the need for collaboration to make demand planning successful.

After reading the responses I realized that it was a provocative question touching a sensitive issue. One of the respondents accused me of compartmentalizing the Demand Planning process between the functional silos. The responses included people’s personal experiences and also strong emotions about what they believed. The fact that question was posted in SCM section & responded by SCM people, it was not a surprise to receive highest number of responses in favor of “Strongly SCM”. Here is summary of the justifications given by each respondent, for each of the option:

Strongly in Favor of SCM
- Demand Planning should happen in function that is responsible for working capital management, customer service, product availability which is a SCM responsibility.

- Demand Planning is part of integrated planning process that happens in SCM function.

- Only SCM can challenge and take a balance & objective view of the demand forecast, without any influence of internal factors e.g. targets.

- Sales perspective of demand planning is to get sufficient stocks, since they are not responsible for working capital.

- Knowledge of statistical models is a core competency in SCM

- Keeping Demand Planning within SCM helps to avoid blame game

- Demand Planning needs to take into account inputs of Production, Finance, Procurement through consensus / collaborative process that is best done in SCM.

- Planning Process discipline in SCM better than Sales.Along with these justifications, there was a strong recommendation for the ability of Demand Planner to have good understanding of ground realities of market & competition.

Strongly in favor of Sales
- Demand Planning is truly a cross functional effort within an organization, but it should start with Sales driving the need for better, more accurate forecasts and demand plans.

- The role of demand planning is essentially SALES function based on different forecasting models, however its SOLE objective is to provide inputs to SUPPLY CHAIN and other stake holders (such as manufacturing, finance and HR) for both PRE Production (raw material and other manufacturing planning & execution) and POST production (distribution & logistics planning and execution).

- Sales is responsible for generating, improving and building-in the revenues / turnover of the organization.

- Sales is closest to the external customer & has first hand feel of the market demand.

- APICS state clearly that demand planning is a sales and marketing role.

- Demand planning reports directly to Sales for the simple reason that Sales manages the forecast. Organizationally, it is more efficient since the demand planner can directly communicate with Sales especially on sudden change in the market behavior. Demand Planning can focus on realizing the best mix as it directly gets input from the Sales Team.

Neutral
- As long as process happens the way it should and with clear accountabilities, doesn’t matter where it belongs.

- Demand Planning is not an exact science, so needs COLLABORATION

- Depends on the quality of people, size, type & maturity of organization.

- Let S&OP forum drive the Demand Planning process (integrated with other planning processes).

- Focus on Extended Enterprise to integrate customers & suppliers in planning processes.

- Identify critical touch point i.e. is it more critical (or complex) to drive sales to consensus or integrate consensus demand plan to operations. In former case, it should report to Sales & in the latter to SCM.

Dotted line to either Sales or SCM
- Since the Supply Chain processes are cross-functional, Demand management has to be strongly integrated with the Sales organization.

- Demand Planning Role should be a solid line reporting to Supply function from where it gets all the support and alignment for timely supplies and clarity on potential supply issues and risks. However the role should also be a dotted line reporting to Sales for the ownership of forecast and timely intimation of change in market dynamics causing a change in forecast.

These are views expressed by respondents coming from different geographies, companies & professions but all are connected to SCM profession.

I, personally, would go with the option “Neutral” (not the most popular option) and very much convinced with the justification given. While the type, size & maturity of organization is one of the factor for deciding, Demand Planning will work (irrespective of function it reports) only if :

· The rigor & discipline of S&OP is in place.
· The accountability of Demand Planning accuracy is clearly defined.
· Supply Chain configuration & design takes into account the Demand Planning capabilities or limitations
· Demand Planning is not considered as an end by itself but as a mean to achieve optimal balance between customer service, cost & working capital.
· Mixes well the science ( statistical forecasting etc.) & market intelligence through collaboration or consensus
· The information flows fast through the value chain & enables quick response to any change triggered by market or customers.

At the end, I felt it was a very involved & intense discussion as it is one of the grey areas in Supply Chain.

Building Supply Chain Competency

Every time I come across with a CEO / COO of any company, I see a tacit discontent with their Supply Chain performance written on their face. When I ask them about efforts being put on skills development of Supply Chain people by their companies, they draw a blank surface. "Yes, we send them for trainings", is the common answer.

Sending people for trainings is not same as developing skills. This holds true more for Supply Chain because of its vast overlap with many functions & far reaching impact. Skills development starts with assessment of Business & Supply Chain needs for today & future. This is then followed up defining various skills for different levels of positions, roles & responsibilities, linking it to the Key Result Areas for each. Next step is to get into detailed assessment of gaps in skills & performance for each individual in the Supply Chain. Only then the development plan can be worked out & training is just one of the way for development. There are many questions related to the kind of trainings e.g. whether customized or generic.

What makes the whole process complex is the lack of understanding of various supply chain skills, as they are not well defined. For example, is Demand Planning a skill for Sales or Supply Chain? Similarly, what role should be played by Supply Chain in product design or process design, is not clear to many. As a result, deliverable & skill gaps in Supply Chain are seen in a narrow context. In many cases, the effect experienced in the Supply Chain is caused by an event on which Supply Chain had no skills to influence. Companies keep beating around the outcome without understanding the cause & effect relationship.

Sending people to short term training courses or workshops is not an answer to address the skills gap. It can at best help to show your good intentions towards people development. The real training is a continuous process and has focused deliverable. It requires clear linkage with the real life situation & the job a person is handling. It focuses more on the addressing the cause, irrespective of the fact which part of organization it lies in.

In a nutshell, addressing the skills development in Supply Chain is a quite involved process and any simplistic approach could be counter productive. The ROI of hiring an expert over a long run could be very attractive.

Take a brief Survey on Supply Chain Skill Assessment.