Real story of a Risk Management sucess

Before I start the balanced score card article on risk management, I recalled a situation I am in few years back.


A key supplier run into financial difficulties and bank has decided to liquidate the company!


If these issue cropped up a few years earlier, we are "dead-meat" and will have gone into serious issue ourselves. We will failed all our customers order and unable to ship the order until a new supplier is found and deliver the parts to us. The end result is customers will be extremely unhappy and start to look for alternative supplies. We will suffer severely!

But not  us luckily or rather we have the foresight to manage the RISK .

Prior to this incident, I manage to run a thorough evaluation of the supplier profile and discover that this company has only ONE REAL customer and that customer is us. When a supplier have only one major customer and that customer is you, one will work hard to make sure that this supplier really be contributing to your organization growth, It what we term as a Partnership relationship.

True enough we were working together in many projects together from quality issue to developing new product. This relationship was sustaining for more then 8 years. It the type of supplier you were looking for if we were to look from the plus side alone.

However like all things in this world, whenever there is a upside, there will also be some downside of things.

Question I am asking prior to this incident were:-

a) What will happen if one fine time forward, we have to diversify and our concentration of product purchase from them will be reduced?
b) What the minimum order we need to issue to this company for them to cover their their bare minimum overhead?
c) Is this partnership beneficial to us? What is the negative aspect of this?
d) Is the supplier investing time and effort to ensure the improvement we need are genuinely done?
e) What happen if we becoming over reliance on them that we become helpless?

These are risk management questions and analysis using Proctor 5 forces and SWOT is necessary.

From the analysis the findings were:-

a) The supplier will run into operational issue due to cash flow if our order are reduced and if one day our customers decided to switch some supplies elsewhere (this is a real possibilities no matter how comfortable we were), this supply operation will take time to adjust and causing disruption to supplies
b) Anything lower by 20% of the level we provided, they will not be profitable (based on guesstimate after running a cost analysis of the material we purchased)
c) The partnership is more beneficial to supplier as their cost cannot match overseas supplies, especially from the China suppliers and there were a number of occasion we lost out on  tender due to this issue
d) Yes, they are investing time and effort to correct and improve process but the progress was too slow moving
e) We will be over reliance on them and our negotiation power will be reduced severely if we need to do a real cost down and no back up on alternatives.

I am not stating here a real Partnership is no good. Partnership with suppliers are extremely beneficial but partnership with a supplier which has it own strength will be better. Partnership may begin with a growing supplier and underachieving supplier but there need to be progression on both side in order for it to be bring real benefit, provided the progression does not threaten each other competitiveness.

Another important aspect of partnership is that the cost side of the product has to be extremely competitive. If this is not, one of the key rule of partnership is gone.

Going back to the issue of RISK management, I decided to review most of the product with this particular supplier with another supplier which I managed to source out through a trade expo. We go through the necessary process of review including running an process audit, visiting the factory twice in a space of few months to make sure of thing.

Another check done was to find out who their major customer, and as always, I love supplier who can be honest with me. Honesty show sincerity in the process of qualification and future dealings. We discover that one of their customer was a major competitor but they assured me that since they can afford to tell us all these, it show to us that they have no worries. THEY DO NOT SHARE CUSTOMER SECRET WITH ANOTHER CUSTOMER

They willing to sign a legally binding confidentiality agreement as well on our products.

From then on, we tested the new supplier with few order of less importance and they pass with flying colours.

However, our partnership remain with the key supplier until the day the bomb drop on us.

We manage to switch most of the product immediately to this new supplier and we sailed through the crisis almost unscathed except for burning few thousands dollar on air freight of very critical product which we need almost immediately.

Risk management do not always eliminate risk but it help to cushion and reduce impact  and keep business flowing.








 

Risk Management - What to look for?

I am particularly interested in risk assessment subject.

Almost everyone in the supply chain operation or any other industry will understand what is risk management is all about. Under the latest ISO 9000 revision, risk assessment is one of the key issue to be tackled.


There are common analytical tools that we can use to mitigate and manage risk management. Let go into briefly each of the concept.

Proctor 5 forces model

This  model look at the potential threat and opportunity through analysis of  (a) Buyer Position (b) Competitor power (c) Potential Competitors (entrant to the industry) (d) Suppliers Position (bargaining power of suppliers) (e) the total industry status

It a general outlook of the whole business structure which may not able to pinpoint an accurate picture but will help organization to prepare to macro strategies to counter any potential threat beside using it to configure organization advantage over area they have good positioning.


SWOT analysis

This is another analysis which look into the strength, weakness, opportunity and threat.

PEST

PEST is a short acronym for Political, Economic, Social & Culture and Technological analysis.

Similar to the other two models. It view the outlook of the external forces which may beyond the power of organization.

It has to do with external forces which may influence how business are run based on political, economic and environmental issue, social outlook and technological advancement.

DMAIC model

This model is actually from lean management concept and it stand for Define, Measurement, Analysis, Improve and Control action.

PESTLE analysis

An extension to PEST in that it also include Environment and Legal issue. It analyses the whole external threat to a business organization.

It can be use as defining the problem or potential threat coming up, measurement of the potential threat (what impact this will create to businesses), analyses the overall situation, follow by seeking solution to avoid the potential issue and then implement and control the issue from escalating.

The models above act as the common tool we should able to utilize in risk management. Then, the next question is what to look for?

This sometimes akin to finding needle in the haystack syndrome. To be able to do so, the leadership in the industry must able to recognize the threat long before it becoming a real problem. The evaluation skill and the ability to have the foresight is long recognize to be the basis of risk management success.

Some of the regular question one have to ask oneself over and over again may seem very straight. Example are as following:-

•  Is the supply of materials from a particular supplier or from a certain geographical zone will be an issue over a period of less then 5 years?
•  Will the commodity your organization rely upon for production will have changes in term of key players moving in or out from the industry?
•  Who will be the major players?
•  Will the technologies your industry in will undergo changes in less then 3 years?
•  Is China slow down will generate a bigger threat to the industry in term of price war for larger market share?
•  Will the retirement of a key management member impact your company functionality?
•  Are you over reliance of a single supplier or customer?
•  Have your organization ever analyses the impact of a supplier supply base been burned down or impacted by long term strike? What will you do?
•  Is there any potential of a key supplier becoming your competitor?
•  Are your company prepare for relocation in the event of a political crisis in certain geographical area? How will you manage the customer issue of unmet deliveries?
•  Are you prepare internally to counter the threat of a key sales person switching to competitor and bring your customer along with him or her to the competitor zone?

The detriment factor will be  (a) which risk you will survive if it impact you now (b) which risk you will most likely be impacted but able to survive (c) which risk you will be destroyed if it attack you now

To do so, understanding your strength in the industry and ranking your risk severity level will be needed.

Are your supply chain controlled by external forces?

LET IMAGINE THE FOLLOWING......

What if we are not in control of our business supply chain? What if  the front line is decided by your suppliers stronger positioning? What if  we are at the whim of the logistics  companies servicing our movement of materials? What if our customers do not communicate to us and send order in with short lead time and expect you to deliver or the lack the necessary forecast we need to have in order to maintain some sanity?

These are the worst nightmares and  nobody wish to be in this situation. But what are the chances of one of the above scenario will occur?

Let look at the key situation which can actually happen.

• Scenario on Supplier

Imagine one day of the blue, a key supplier call up and inform that they are going out of business in the next one month and you have about less then 4 weeks to find a suitable supplier.

OR

An order to a supplier and on the day the material due to be delivered, they call and inform they cannot fulfill the contract.

• Scenario on Logistics

The contracted transporter decided that they cannot arrange the logistics that you needed due to an unforeseen circumstances

OR

A strike call by union to demand better benefit and end up with undelivered materials

• Scenario on Customers

A major customer placed a unplanned order and demand that this must be fulfill as per agreed delivery plan even if this order is 100% above normally ordered quantity

OR

A email from a customer who inform you that from next month, their order will be reduced by 50% and the inventory in your warehouse are piling up as the concept of push supply chain sttrategy.


What will you do to stop these from happening? Mitigating risk need to be always on supply chain practitioner "to do list".

Strategies need to be in place and among them are as following:-


PREVENTIVE STRATEGIES


Conduct Risk Assessment on the Supply Chain - a annual risk assessment is highly recommended and analyses potential landmines. Using DMAIC technique (Define, Measure, Analyses, Implement and Control) may be useful.  Using this technique, we may stimulate a potential problem, or an existing issue and review what can be done to improve the situation. Other technique which will be useful will be SWOT, PEST and Proctor 5 forces model.

Engagement Policy - keep communication channel active all the time even when there seem to be lack of activities on some of the account. It help to anticipate issues.

Stratification system in place -  suppliers can be group by critical or non critical categories for example. Further breaking it up into by geographical location, lead time of supply, stability of each operation. Strength on this strategy allow us to see from a bird eye view of the overall picture.

Always have a backup plan - when planning for efficient running of the total operation, spend a few minutes to ponder what can we do if the plan collapse. Where the plan B? But not all issues can have a plan B but it is wise to have alternative plan for major decision just in case it does not work out.

Stimulating the worst case scenario -  it help to determine how prepare the operation if the worst occur. It actually a tool to confirm if we are ready for any eventualities.

Have a reliable intelligent report -  no, we are not going to run the business like CIA or some security apparatus. But intelligent report on the market and your supplier movement and situation and your customer official standing to the relationship is critical. If for example you have a customer who begin to negotiate with your competitors for deals, these are serious sign indeed for concern and arrange appropriately what to do next.

PESTLE Analysis - run out a political, economic, social, technological, legal and environment analysis to look into the various issue which will impact the supply chain.

SWOT analysis - produce a strength, weaknesses , opportunity and threat analysis specifically on the overall supply chain operation and look into issue which may impact the efficiency of the operation

No plan will be fool proof but it is better then no plan at all to prevent an incident.

LACK OF PLANNING IS THE CAUSE OF MOST FAILURE!

INNOVATION - The Way Forward

I was wondering this evening about how some entrepreneurs managed to stay ahead of competitors. How they managed to create a blue ocean strategy within the industry? Imagine swimming in a sea of red ocean and they successfully managed to swim ahead using different strokes and stay untouchable.

I have the advantage of experiencing an organization who has been a leader ending up been a follower in the very same industry they have managed to head for sometimes and  also gratefully been in another organization who are able to sustain their leadership advantages despite the challenges from competitors throwing all sort of spanners toward them. Again i thought, how we managed to do it?.

The topics of discussion I am into is very relevant in today industries.

INNOVATION

In 2009 when i was in China on business trip, my company Joint CEO was invited by me to join me on this trip. Both of them was delighted and fly over from our company HQ in France to join me on the week long trip starting in Shanghai. Meeting over dinner, I said, "Innovation is the way forward now boss!"

In my mind, I am very conscious to the fact that without innovation, a leader will be irrelevant. Without innovation, a company business will go out of business in matter of few years. Without innovation, you will become a follower instead with your competitor taking over the leadership.

Innovation is a term which meant "creating new ideas in product, process or new way of doing things"

The key to sustainable growth in any organization. That is what it meant and that it is.

In an aggressive sustainable economic growth country like China, innovation is the key to ensure leadership sustainability.

Some innovation are inherent. I.e. it is there naturally. For example a cheap labor market, the availability to abundance resources available with the knowledge to use this to their advantage is a kind of innovation. Many countries have the same resources but yet remain poor for centuries!

But having this type of advantages without further investment for further improvement will also be risky to the sustainability.

Let leave this behind and look at organization. We can have many examples in the corporate world about companies losing leadership due to lack of innovation. Remember NOKIA who refused to follow the trend in moving to androids platform? Let look at APPLE computer. Apple is a classic example of what innovation can do for organization. Leader....to follower and now back to leadership role in industry. We think Microsoft has been monopolizing the IT industry for far too long. Why? The answer is simple. They never stop developing new product based on the original product introduced decades ago. I.e. innovate to make it better.


 KEY to INNOVATION

a) Listen to your customer- when your customers commented or demanded certain features or a new product, do not ignore them. I know of companies who eat humble pie later. Customer feedback is important to all innovation.
b) Listen to your employees - employees feedback from the sales and operation are sometimes ignore by top management due to their own confidence level on the products that they have. But these feedback can made an impact as employees has the "feel from the consumer perspective".
c) Review your process - accept the reality why your competitors can sell better quality and cheaper products. Check what your organization can do to change process with new innovation out of the box thinking to make your process more reliable and efficient. Change is difficult and some employees may think it as unnecessary but to stay ahead, management need to brainstorm it out.
d) New Design Development - cutting back on R n D is bad for business. Striving for new product design and idea is always the way forward
e) Look at your Supply Chain - Is your supply chain get bogged down and increase in cost? Is your suppliers working together with you? Sometimes, the best innovation comes from your suppliers if the collaboration and partnership are well oiled. Your supplier may have ideas how to make thing better in term of material quality which will help your process. They may introduce a new process in their own production to ensure you have a high quality product which in turn increase your efficiency level.
f) Understand the market -  The failure of NOKIA in moving to new technology is their own downfall in the mobile phone segment. The failure in understanding the market needs and new consumer behavior. If they can fail, any organization who fail to understand the market will suffer as well.
g) Create an "open" organization culture -  Most employees will be suffocated in a close system. Reluctant or unable to send messages or suggestion will stifle growth. Creating an open system will definitely help.
h) Venture to new area of business -  innovation can also meant diversification. Innovate to reborn your organization in a new market area. Some failure of business are also due to the reluctant to move to new territory. This could be due to lack of information, knowledge and a team of capable employees. Involving in down stream or upstream business is innovation in itself. Thinking of way to expand your marketing net.
i) Moving human capital - there always a statement about the importance of retaining useful human capital. I totally support this. However, it is and will remain a reality forever that allowing our human capital to move around or away and welcoming of new resources is never a bad strategy. It energizes new ideas to making thing happen. 

Innovation in business is a blue ocean strategy. Make use of the asset organizations has to full advantage. The cycle of innovation can be never stop. What is a new strategy today will be obsolete tomorrow.

Leadership in your market area today do not guaranteed the same tomorrow. It just like sport. Tiger Woods was a leader in golf for more then a decade. Yet he has to give way now. The spirit of innovation has to continue and repeated over and over again just like we having breakfast every morning. The menu can and will change.

BUYER MANAGED SUPPLIER SYSTEM Part II

In 2012, i wrote an article in this blog about B.M.S - acronym for Buyer Managed Supplier System.

First of all, isn't  all suppliers are managed by the buying team to ensure conformance and reach the expected performance all organization strive for? Why this is different from the convention?

My answer was, you damn right, there is no difference and you are also wrong because in B.M.S, buyer take the challenge to develop a supplier from ground Zero and against all common convention, the procurement management choose a supplier which do not fit at all.

If an audit is carry out, this type of supplier will have almost nothing in the system you expect them to be.

- ISO standard? Zero
- Quality system? Almost do not exist beside them knowing this is OK and that is Not OK bases on "feel"
- Production method? Let visit a farm in Timbuktu which have some level of standard, just maybe
- Cost? EXCELLENT! Perfect!

When the west desired cheap product in the 1980s to early 2000s, they procured many products from country like China and Far East. Unless they set their own plants there, and thus have a real system in place, let think how the procurement management function.

B.M.S is still valid till today and it take a lot of collaboration effort, partnership and micro management system in place.

I am not telling you out there that this system is useful for all spectrum of industry. Neither am i saying it is not impossible. There are RISK involve.

It can be useful for non critical industry or item. Definitely not for spaceship or part which put life at risk.

In this system, organization use cheap labor and cheap cost of product to their advantage and it involve tedious works and follow up and meetings.

If we inspect the 7 profile of supplier, this kind of supplier will be a Newbie or a poor Follower.

Buyers will have a high upper hand as the party most needed this collaboration will be the supplier as your volume and value will be high.

Supplier development will be the key strategies and focus on the performances, quality and relationship, the three key element of crucial supplier management but in that particular order.

Procurement team are hard press all the time for lower price, highest quality standard and production line have the minimal line stoppages. Achieving this from established suppliers on quality and delivery performances will not be an issue but the purpose of business it to make profit and sadly the demand for higher margin and lower purchasing cost to consumer is the only consideration.

With B.M.S, the function of R & D lies on the buying organization. The setting up of process and quality control are also decided by the buying team and this includes the delivery deadline. Supplier will be monitored closely and reporting from suppliers to the buying team will be like a production department sending report to top management.

The key principal of a B.M.S system is as following:-

a) Cheap source of product
b) Quality are determine via close monitoring, monthly to annual auditing, third party inspection
c) Close reporting of information like  rejection rate, output, material quality report on daily to weekly basis
d) Costing of products are jointly developed and in some instances, prices are predetermined by buyers

Do not confuse this with sweat shop strategy, this is unethical and cautious to the buyers to ensure the cost of production do not translate to a sweat shop phenomenon.

To ensure this do not happen, ethical standard to be jointly develop from minimum acceptable wages, working hours, rest day and employee living condition.

It is not easy to manage but it is  workable.










 

SUPPLIER MATRIX - THE 7 TYPES OF SUPPLIER PROFILE

As promise.......

These suppliers which i mentioned on my previous blog, I will want to measure their relationship from the perspective of :-

- Supplier Relationship Management
- Innovation and Development


These two categories are viewed from the perspective of a customer angle, i.e. if these are my suppliers, how should i view them in term of asset value to my organization.


 High Relationship / High Development Matrix 

The Leader type 1 - i broke down leader into two type of leader. There will be leader who build their leadership in the industry based on close collaboration with customers. For them, customers are a treated equally as important and valuable and they tend to view customers as "king maker" and paramount importance.

The Innovator type 1 - again i also view there are two types of innovator, These are the supplier who will innovate their process in partnership with their customer. They used their superior knowledge and asset in the industry they are in to develop customers products.


High Relationship / Low Development Matrix

The Newbie - as new comers, they will build up relationship for long and short term access to the market. However, since they are new, they tend to be also a follower and thus have disadvantage in development of new package for their customers

The Follower - been a follower, i tend to rate them as a little of  a "copycat" and a good example will be the many companies set up in China nowadays and in the previous decade to capture the market based on copying competitor ideas. We can see how i able to link the Newbie and the Follower in one space.

Low Relationship / High Development Matrix

The Leader type 2 - they controlled the market by almost a monopoly and care little for customer needs. The only thing you will appreciate such suppliers is that they will provide the material or technology you needs and instead of they go to you, you as the customer will go to them because they are the leader and controlled their industry segment.

The Innovator type 2 - a typical technological company which innovate non stop and people will go after their product like a nothing like it before. They send information and knowledge to the public as a public relationship cum advertising program. Non existence eye to eye contact per Se.

Low Relationship / Low Development Matrix

The Protected -  since they are like the term i branded them, little motivation to build relationship, They may have the technological background but they will only develop what they need to market and not based on what their customer really need.

The Complacent - a typical organization who have little planning on their part. Satisfied with the number of account they have and often do not invest in program for improvement or expansion of capacity. They will be content to do the current products and will only wake up if feel threatened bur very often too late.

The Competitor - as the name sounded well, no need to elaborate. Why your competitor will collaborate with you? (to know why we have competitor in your supplier list, refer to yesterday blog)


Which type is your preference?

Actually suppliers can move in all direction depending on the maturity of the relationship. A newbie can be a leader tomorrow and so does a leader can be a follower.

SUPPLIERS - TYPE OF SUPPLIERS YOU NORMALLY FIND AROUND THE WORLD

Here i am back again active to my "old forgotten" blog. The season of sharing comes back to my thought again.

The other day i was busy preparing a new presentation for my upcoming program and it struck me right to my nose and slap me in the cheek the thought on my current curiosity. Suppliers!

How they behave and how they react to situational challenges and changes reflect on our own organization behavior when come to treating our own customers.

For one i do notices that there are currently (the list may grow, up to you guys out there to think for me now!) 7 types of profiling i can create.

a) The leader - a supplier which we all want to keep and we want to emulate ourselves, a type which take all challenges and issues in the strides and move along and solve it and make their customer happy. Example of such supplier on a global scale will be companies like Microsoft. They lead from the front and all issues from the global view are tackled straight on and they control the market share of their industry.The set the standard for other to follow.

b) The Innovator -  these type of supplier are in the Apple or Samsung category which always invent the new wheels to keep up with competition. They are less caring to their customers compare to the leader. By keeping up with new innovation, they keep consumer on their heels and made them greedy for more and more. The evil of capitalism is the greed for new and better product and keep the hunger for more and the angel are these companies who generate more profit. However, these two companies are the extreme, but i will be glad to take in any supplier who are in this stage. Innovator not necessarily control the market they are in but what i need is suppliers who willing to think and reinvent for customers.

c) The Follower -  these are supplier which will follow the competitor lead and even follow your needs as a customer, i will anytime keep them if they perform of course as a supplier. Follower philosophy are more conservative in thought then the other group of suppliers. It may be a safe bet they will strive for customers need.

d) The Newbie - as the name sound, these are new player in the industry and their only aim is not profit but penetration. A terrific example will be in the smart phone industry where cheap Chinese phone is competing with Apple and Samsung for the market share. They will be glad to bid their time to be less profitable or even marginally on the negative side just to get on board. I will generally very cautious to slightly optimistic to such suppliers. They will and may offer good pricing but quality and performance is another issue altogether. Their appetite will be very big but their tummy is only that small. 

e) The Protected -  The reason is they are there not due to their talent but a cell grown out of bureaucracy and politic. Such companies normally in the market due to government intervention to protect self interest. Another reason of their existence due to their been in the right place at the right time and serve the needs and unfortunately only them have a control over the industry, Example are a plenty. National oil companies, nationalized power companies, nationalized airline and shipping companies. As a corporate leader, if a majority or a big bulk  of your expenses are with them, god bless you. They do not behave like a supplier, more like giving you instruction what to do and assure themselves you will pay them first.

f) The Competitor -  these are suppliers which seem to be "lost into your track" and becomes your supplier. They actually are also either directly or indirectly your competitor. One wonder what the hell you are doing to engage such suppliers? Reason can be from what you do not have and you need from them. Remember the relationship between Apple and Samsung? They are in a supplier  - customer relationship before till now i think as Samsung are the world largest producer of chip needed for smart phone!

g) The Complacent - this is the worst of the lot frankly or equaled to the Protected. They got your account and they feel secure until the next review and they do not even to ask you anything or service you except assuming they will have your orders. They will sink and when they realize it will be too late. I know as i experienced such supplier head on before.

On my next blog tomorrow, i will share the supplier matrix.

Regards