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Global Supply Chain Risk Mitigation Written by David Wolski Not for Copy or Distribution without written approval

from David Wolski In todays world, Global Supply Chain Risk Management is becoming more important than ever (cost, surety of supply, quality). Sure, supply chain professionals have always attempted to manage risk but its becoming more and more critical to have structured risk management programs in place. In the last 20 years, supply chains (and business in general) have become significantly more global. At the same time, the world we live in has become more complex and fraught with risk especially in the past five years. The global recession, including the economic climate in the United States, has obviously contributed to increased risk. U.S. business bankruptcy filings have increased by 63%* the past three years (2009 2011) vs. the previous three years. Additionally, the percent of bankruptcies which are Chapter 7, where all operations cease, has also increased significantly over the past decade. In Europe, everything from currency fluctuation and recession - to austerity plans and the possible collapse of the Euro have significantly changed its risk profile. Although doing business in Europe has never been risk free, the biggest risk up until a few years ago had been related currency fluctuation and supply chain responsiveness. Now you have to wonder what could happen to your strategic partners if the Eurozone really does start to unravel. China is still the leading low cost manufacturing center for the world but inflation and currency have definitely clouded the picture. Inflation is on the rise and the foreign exchange rates alone have made it nearly 20% more expensive to import products from China in just the last 5 years. Companies who are fleeing Asia would love to take advantage of Mexicos low cost labor and proximity to the United States but the drug-related violence has dampened their enthusiasm. Many employees of U.S. companies either dont want to risk going to Mexico or their managers have put a moratorium on traveling south of the border. And lets not forget natural disasters. The tsunami that hit Japan in 2011 was a horrible tragedy and also a wake-up call to businesses across the world about how vulnerable they are to this type of event. Electronics, automotive and chemical industries are still recovering from loss of capacity and disruption to their supply chains. No matter where you look, its simply more difficult to manage global supply chains than it was several years ago. Many companies attempt to manage these risks by aggressively altering their supply chains as global conditions change. Some relocate entire plants to Mexico for cost considerations. Some look to pull out of Mexico due to the drug-related violence. Others transition production or suppliers to China. Some are now pulling out of China and moving production and suppliers to other Asian countries, Mexico, or back to the United States. In an attempt to mitigate risk, they

are essentially just shifting their risk to a new region and spending an enormous amount of time and money to do so. It can take months or even years to relocate a few large suppliers. I liken this type of action to that of a nervous investor who makes wholesale changes to their portfolio whenever they sense a major shift in the economic climate or if one particular investment yields disappointing results. You might be successful with this approach but always chasing the market often results in missed opportunities and subpar performance. If you know that the new & evolving conditions will exist for the next 20 years youre justified in making semi-permanent changes. But who knows what the world will look like in 20 years? So, how should we manage risk? I advocate following similar advice that many financial planners gives their clients diversify across asset classes (geographic regions), diversify within these classes (suppliers), monitor results, and fine-tune as needed including ebbing and flowing a certain percent of your portfolio into the best performing asset classes (regions) as circumstances warrant. The trick is being able to do this without launching a multi-year effort that consumes every available resource at the expense of your other high priority strategic projects. Of course this is easier said than done and legacy supply chains and supplier portfolios may give you a heavily skewed or difficult starting point. That said, it does become easier once youre able to establish a certain level of redundancy within your supply chain. In certain settings, redundancy implies inefficiency or unnecessarily complex in this case, redundancy provides Flexibility. Flexibility enables you to manage risk and take advantage of favorable regional market conditions when they exist and easily shift away from those regions when circumstances dictate. In my opinion the most effective way of creating this redundancy (Flexibility) is through Dual Sourcing and Blended Make/Buy programs - within a portfolio of suppliers that are Globally Diversified. Lets examine how these simple strategies can help you manage risk. Dual Sourcing is the notion that you have multiple active suppliers for purchased parts, raw materials or finished goods. Although it may not be practical to have Dual Sourcing for all purchased items the more the better if youre trying to reduce risk. At a minimum, strive to reduce situations where there is only one approved supplier for any critical part. In the simplest example, Dual Sourcing provides a back-up in the event of a supplier bankruptcy or other catastrophic event. In more advanced scenarios, you can manage the share of spend between these supplies as regional dynamics change (e.g. foreign exchange rates, labor costs, logistics capacity, etc.). Its certainly easier to reallocate spend between two existing suppliers (e.g. one in Asia, one in the U.S.) than attempt to find a new supplier and completely transition your supply base. Blended Make/Buy is similar to dual sourcing but your own manufacturing capability acts as one of the suppliers. For example, you may have a product that youve outsourced to a supplier. Lets say this supplier is in China and the economics make this a good decision. The risk in the

equation may be the outsourced suppliers ability to quickly react to demand swings. Even if they can react theres a good chance that the lead-time will make this a difficult situation to manage. By utilizing a blended make/buy strategy, you may be able to allocate 80% of the production to your supplier, to leverage their cost advantage, while still producing the remaining 20% in your own plant. In this case, your own plant handles the variable piece of the demand while your Asian supplier continues to knock out the predictable 80%. Since youre still producing a portion of the total you also have a built in back-up for other catastrophic events. Of course, both of these strategies can be employed within a Region but they become even more powerful when theyre part of a specific plan to diversify your supplier portfolio across the globe. The global flexibility enables you to capitalize on favorable regional conditions while mitigating risk associated with suppliers, economic conditions, or political events. Imagine the benefit of being able to easily shift your spend between two suppliers from 80% / 20% to 20% / 80% as currency and regional economics change, and then change back again when conditions warrant. Building this flexibility isnt easy, but once you start to develop the flexibility the benefits will be substantial. In most cases, your benefits will be easily quantifiable in other cases there will be significant cost avoidance or the elimination of prolonged supply disruptions. Thankfully, the decision support needed to help guide your supply chain rebalancing is more available than ever. Whether you monitor your supply chain through your ERP system, best of breed supply chain application, or Share Point metrics the important thing is to monitor performance while also keeping abreast of global dynamics that could either create an opportunity to shift spend towards an advantageous situation or reallocate spend away from a region with deteriorating conditions.

by David Wolski David Wolski is the founder and president of Avon Point Advisors, LLC, a Sourcing and Supply Chain consultancy located in Avon Lake, Ohio. Dave is a former partner from Accenture and has led the sourcing and supply chain organizations for three multinational corporations.

*Source: Table F-2 for the years indicated from the Administrative Office of the U.S. Courts Located on uscourts.gov, judicial business by year. Accessed June 6, 2012.