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NOVEMBER 02, 2009

RECESSION & SUPPLY CHAIN           

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The Who, What, Why and Where of Supply Chain Risk
Two seasoned supply chain veterans discuss the state of supply chain   By John Ford and Keith Evans Recession Impacts the Chain Meet Arup's John Ford and Keith Evans John Ford and Keith Evans work under Arup's broad umbrella of supply chain and logistics consulting, but in keeping with the company's multidisciplinary framework, which allows for building highly specialized teams to address very specific needs of clients, Ford and Evans live in different worlds. In his role as Associate Supply Chain Logistics Consultant, John Ford specializes in the planning and implementation of supply chain strategy aligned with his client's corporate objectives and market requirements. While Keith Evans is focused on what he calls "sustainable operational performance." In other words, operational performance within buildings as it relates to industrial productivity for manufacturing, warehousing, and supply chain in general, which can include human factors, organizational behavior, building design, and environmental issues. Sources of Risk from an American Perspective The situation: In a post 9/11 world, and in the midst of a global recession, supply chain risks are coming from sources we never imagined. The details: The trick to managing risk lies in knowledge of supply chain risk vulnerabilities, assessing risk factor probability versus impact, and developing a comprehensive mitigation plan.    What it means: Risk can be managed, but you have to understand where it's coming from and how it might impact, not just individual links in the supply chain, but the company as a whole.

In a conversation with Logipi's Dustin Mattison on the subject of supply chain risk management, Arup's John Ford said that long-term out-sourcing trends have led to both inherently more risky supply chains and a lack of visibility. “Out-sourcing production to suppliers located in low-cost countries coupled with increased reliance on third party providers has increased risk and limited the company’s   visibility and ability to manage that risk.” While Ford indicated that he didn’t disagree with either of those trends, both he and Keith Evans agreed that global sourcing may have been a necessity for many company’s survival. “However, this doesn’t change the operating reality of the situation”, indicated Evans.

Cost and risk perception are also driving reconsideration of the global supply model. Starting with steeply rising energy costs and continuing with the global recession, the pressure to operate with lower capital levels is driving more companies to re-consider on-shore. Ford is also seeing more interest in operating strategies that compress lead times and reduce inventory investment. He indicated that mixing off- and on-shore sourcing to simultaneously optimize cost, service and exposure to risk may become preferred by an increasing number of companies.   Out-sourcing production to suppliers located in low-cost countries coupled with increased reliance on third party providers has increased risk and limited the company's visibility and ability to manage that risk." --- John Ford and Keith Evans on Logipi

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Sources of Risk from a European Perspective When asked to weigh in on the European perspective, Keith Evans, an associate director with Arup's Operations Performance Group in the United Kingdom, said he also sees a general desire to seek sources of supply that are closer to the market. "Cheap labor in places like China is starting to dry out, because geographically, everything’s held within certain industrial zones, and so, labor is in short supply and prices are going up," said Evans. "But even if it wasn’t," Evans added, "there is a finite distance in land that you can start to push manufacturing in China before it starts to become uneconomic, and I think that is painting an enormously confused picture for supply chain professionals because it’s a case of, do we outsource? And if we do outsource to a low-cost country, what’s a low-cost country? And what are the risks involved in that?” Another challenge that goes hand-in-hand with outsourcing issues in Europe, Keith Evans said, is "carbon risk." European governments are driving legislation that will force companies to report their greenhouse gas emissions, which will eventually tickle down to the carbon footprints of individual products. That, according to Evans, presents new risks on the competitiveness front. In and of itself, calculating and reporting the carbon footprints of individual products is not the issue. Those methodologies and practices are already in place, but when consumers can distinguish between products, and choose on manufacturer's football over another manufacturer's football, based on its carbon footprint, that presents serious risk to brand reputation and marketing propositions. John Ford, whose focus is on the United States, agrees that sustainable supply chain management is more systemic in Europe. "Right now, in the United States" Ford says," sustainability is internal, market or customer-driven rather than legislated” “although he acknowledged that may change. Managing and Responding to Risk In response to Logipi's Dustin Mattison on the subject of what actions companies can take to manage risk, John Ford said, “There are clear means to assess, identify and plan mitigation of risks which are both scalable and applicable to current both current operations and applied to future planning.”  Ford also believes companies need an established framework that allows them to effectively identify risk and act in a timely manner. He cited the example of when fire broke out in an Arizona-based Philips semiconductor fabrication plant the first order of business was to communicate the situation to the plant's 30-some customers, including Scandinavian cell phone giants Nokia and Ericsson. Nokia, understanding the gravity of the situation, responded to the news by alerting its entire organization, maintaining constant communication with Philips, putting a team of troubleshooters on the ground in Arizona, and assembling a team of supply chain managers, chip designers and senior managers to source solutions in Europe, Asia and the United States. Ericsson, on the other hand, took a "wait and see attitude." Assuming the supply chain disruption wouldn't go beyond a week, lower level staffers didn't think it was important to pass the news along to their superiors. By the time Ericsson realized the magnitude of the problem, it was too late. Nokia had already commandeered all of Philip's spare capacity, and unlike Nokia, did not have a list of alternative suppliers for the chips it desperately needed. The difference, John Ford said, is that Nokia "had a programmed response; they didn't wait until the fire occurred to ask themselves, 'what should we do if there is a major disruption at one of our strategic suppliers?' Instead, they already had a response framework in place."      

Planning for Risk Beyond One-Off Events Keith Evans pointed out that risk management and planning extends beyond "catastrophic and one-off events like fires, but covers the whole area of risk." Unfortunately, he said, very few companies think strategically or put any serious thought behind supply chain risk. What he'd like to see companies do is examine their entire supply chain with an eye toward all types of risk, and then develop plans for tackling each one. "For example," Evans said, "what if oil goes to $200 a barrel. Everybody's paying the price, right? But what if you're the guy in the marketplace with the longest supply chain, the largest amount of transportation, or the highest cost of manufacturing because of the way you do things?" It's important, he said, for companies to identify risks that may be unique to their organization as opposed to following what their competitors are doing. Being proactive about risk management also gives companies the advantage of identifying new processes that could be applied before an event happens by creating an open environment where continuous improvement is valued. "I’m constantly surprised how many Blue Chip companies are very, very shortsighted in terms of their planning horizons and payback horizons, and I think that creates its own risk as well," added Evans.

Insights and Innovative Ideas
Risk Mitigation Framework For John Ford and Keith Evans, a common risk planning process consists of utilizing a framework to: • Identify risk factors • Identify probability of the associated event occurring • Attach an impact cost to the event With the two variables probability and impact - associated with each factor, it’s easy to group risk factors accordingly and prioritize where mitigation strategies are most needed. "The risk factors you address first are in the upper right-hand corner of that quadrant - high probability and high impact," said Ford. “Effective risk mitigation strategies are completely achievable, however they are dependent on the organization’s ability to identify risk factors in the first place”, John Ford believes. "The challenge for many organizations is to identify supply chain vulnerabilities, particularly when they don’t have a great deal of visibility into out-sourced supply chain activities..”  Assessing Supply Chain Risk from Insurer’s View Ford indicated that companies should seek external sources for insight into supply chain risk. Using the analogy of auto insurance, Ford said, “Insurance companies understand the impact of safety and theft-protection devices on the probability of accident or theft and provide incentives to their customers to purchase vehicles equipped accordingly.” The basis for this is accident, theft and claims data that permit insurers to quantify the benefit of specific equipment.”  Similarly, insurers that provide certain classes of insurance, including business interruption insurance, are well-positioned contribute insight into both factors that contribute most to claims and the most effective mitigation strategies. That, Ford said, is the idea behind a partnership between a major insurance provider and Arup’s Risk and Security Group. “Assessing supply chain risk with a view towards avoiding or mitigating the elements that often contribute to claims also provide for better risk management”, maintains Ford. “While many of the claims stem from low-impact events, they may be indicative of underlying risk factors which can and should be addressed. Basically, this is providing the means to mitigate risk on the basis of events that have effected other companies.” The Bird's Eye View and the Drill Down Keith Evans says the culture at Arup is one of modesty, but he's clearly very proud to work for an organization that takes a "holistic approach" to supply chain risk. That may not sound new and innovative, but Evans says he has complete faith in Arup's ability to bring people with diverse skills and depth of experience to the table... and that's only half of the Arup equation. Because every project, and every client, is unique, Arup's discovery process begins by taking a bird's eye view of the entire supply chain, and then drilling down to the smallest details, which Evans believes is the only way to gain complete knowledge of how processes, practices, procedures, technologies, equipment and people work together. "It's amazing to me how many companies don't really know the finite details of what they do. Maybe one or two people know bits and bobs of their organization in great detail, but many don't see the bigger picture and how it all fits together," said Evans. "In contrast," Evans said, "the approach we take is a complete drill down to the nuts and bolts. We want to know how that machine runs and why it makes one hundred and twenty widgets an hour, and not two hundred an hour, or say sixty widgets an hour. We want to understand all the processes and pressure being applied to that piece of molding equipment, for example. We want to know why you're making widgets, and how they fit into your company's overall philosophy and approach to customer service, and how it all fits into your supply chain. We need to understand every detail to be able to back flush it through to the holistic picture and the other way around at the same time. We're highly skilled in the areas of being able to translate details into the holistic picture and the holistic picture into details." Risk as a "Front Burner" Supply Chain Trend Arup's John Ford says that supply chain risk is very much on the "front burner". In the end, managing supply chain risk is a business management issue and will be best managed by those organizations with process-oriented supply chain management organizations in place. “They are best positioned to be able to manage and act – both internally and in collaboration with suppliers and customers”. Keith Evans concurred, and added, "There are huge branding issues, customer service issues and financial issues tied to supply chain and supplier risk, and companies are becoming increasingly aware of that. It's not just about having the sexiest products and the best marketing and sales team; having the sexiest products and selling them is one thing, but actually being able to supply them is vitally important too." About John Ford Associate Supply Chain Logistics Consultant Arup / New York NY USA John Ford is a management consultant based in New York. He has a wide range of supply chain management experience in companies ranging in size from the Fortune 500 to less than 100 employees. Client assignments have included projects for a wide range of manufacturers and distributors. Prior to joining Arup in 2006, he was a management consultant with an international supply chain consulting firm. John is certified in lean six sigma (CLSSS) and production and inventory management (CPIM).   About Keith Evans Senior Distribution / Supply Chain Consultant Arup / Edinburgh Scotland UK   Keith is a specialist logistics consultant based in Edinburgh. He has a range of experience across manufacturing, distribution and commercial sectors. Keith's particular area of expertise is in supply chain and operations planning. He has experience of a wide range of distribution and operational models covering commercial, automotive, consumer goods and industrial sectors, including pan-European manufacture and distribution planning for highly seasonal products. He has experience of operational activity planning for distribution centers, including material handling equipment and procurement of services and products.      

About Arup Established in 1946, Arup has grown into an international group of multi-disciplinary practices with over 10,000 staff in 92 offices in 37 countries. Arup’s Operation Performance Consulting Group focuses on helping clients develop and improve their business operations. As a firm, Arup represents a tremendous concentration of technical and strategic knowledge and is committed to an approach that embodies quality, a concern for the environment, and fair dealings with its staff and its clients. Copyright 2009 Logipi Corporation. All Rights Reserved  
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