Global Supply Chain Risk Management

Stephen DeAngelis

February 24, 2014

If you’ve ever watched ABC’s Shark Tank, you have probably heard one or more the sharks (i.e., angel investors) press entrepreneurs about reducing the per piece cost to make the items they are trying to hawk. Before jumping into a deal, the sharks want to ensure that they can obtain the largest possible profit margins for their investment; which means they are looking for the lowest possible piece price. For decades, China has been the go-to place to find cheap labor. Mark Michaels, chief commercial officer at Damco, claims that is changing. “Many companies are looking beyond China to less developed nations for sourcing,” he told the staff at SupplyChainBrain. [“Assessing and Managing Risk in Global Supply Chains.” 22 January 2014] The article continues:

“Customers that have been sourcing goods in China increasingly are looking further afield in Southeast Asia and in Africa for new locations, says Michaels. Countries like Myanmar are opening up, but these smaller sourcing locations are less developed and so have a lot more complexities and more risk, he says. ‘What might be a lower piece cost could end up costing quite a lot more if companies underestimate the cost of extra transit times and other added complexities,’ he says. Non-compliance risks also can be pretty significant in less developed areas, he says. ‘If a company runs afoul on compliance issues or doesn’t understand the materials content of products, for example, the risk can be quite grave, with major penalties.’ Additionally, there is a lot of risk associated with anti-corruption laws. ‘In a lot of these newer sourcing markets, local companies may not be aware that what is allowed under one importing country’s foreign corruption practices act may not be permitted under a different country’s rules,’ Michaels says. Anti-corruption laws are a particularly tough issue because laws on the books in a lot of countries are not necessarily followed in practice, noting that as a part of Maersk Group, Damco has a directive to work with governments and to point out to them when laws are not being followed. Additionally, customers need to be very aware when going into new countries that certain local practices may be followed that technically are not allowed under U.S. regulations, he says. ‘It is very important for companies to understand these differences when making policy decisions,’ he says. Damco fully supports its customers who have a ‘zero tolerance’ for any deviance from the rules, Michaels says, but they need to be aware that not following locally accepted practices could result in shipment delays.”

The kind of complexity described by Michaels is one reason that I believe that cognitive computing systems are going to find a welcoming home in global supply chains. Such systems will be able to ascertain regulatory and policy differences between countries, make judgments concerning transit times, delays, and/or other issues that might arise and then alert the necessary decision maker to the potential problem in time for them to take action before the situation deteriorates into a crisis. Beyond compliance issues, cognitive computing systems can fold in weather, political or labor unrest, sourcing, and any other significant factor that could impact the supply chain. These systems won’t eliminate humans from the risk management arena, they will make decision makers better at what they do. And executives should never forget that risk management isn’t activity that can be isolated from other business operations. If things get out of hand, the entire company will be affected and not in a good way. The more you know about risks, the better your mitigation efforts will be. For example, Jason Busch asserts, “Procurement teams can dramatically improve the way they manage and mitigate supply risks by understanding the various types of supply risk, assessing the probability and impact, and improving their supply risk management capabilities.” [“Supply Risk Management: Tracing Different Risks to Common Drivers,” Spend Matters, 16 December 2013]

Actionable intelligence (i.e., data made understandable through analysis) is the ultimate objective of performing Big Data analytics. As I’ve pointed out before, all data is dumb. It just lies there waiting for someone (or something – like a cognitive computing system) to unlock its potential. Fortunately, companies seem to be learning that lesson. Perry Rotella, supply chain group executive at Verisk Analytics, told the staff at SupplyChainBrain that “data-based predictive analysis that helps companies anticipate global catastrophes and model potential supply chain disruptions is playing an increasing role in risk management.” [“Using Data to Mitigate Risk and Build Supply Chain Resiliency,” 24 January 2014] The article continues:

“In addition, data plays a critical role in building resiliency in the supply chain, [Rotella] says. Basic data essential to risk management includes knowing who your suppliers are – not just tier one suppliers, but also tier two and three – and where their production facilities are located, says Rotella. ‘If your supplier’s plants are in a hurricane zone or a zone that is prone to flooding, then you can factor in that risk and build resiliency into your network, whether through redundancy or contingencies,’ he says. Verisk Analytics has been doing catastrophe models since 1987, Rotella says. ‘We model earthquakes, typhoons, hurricanes, tornadoes, floods, fires, pandemics and terrorism in about 100 countries. Using those probabilistic models we can help companies understand potential perils that can impact their supply chains.’ Corporations’ awareness of the need to do this type of modeling has been heightened by recent disasters such as floods in Thailand, the tsunami in Japan and Hurricane Sandy in the U.S., he says. ‘It is an emerging area but interest is rising. The challenge is in putting a dollar value on the risk.’ Verisk also has systems that track other risk elements, such as those associated with global sourcing and extended supply chains. ‘We do what we call risk adjusted optimization,’ Rotella says. ‘It is not good enough to have an offshore component of the supply chain that optimizes costs. You also have to account for the risk elements, and we introduce those as part of the optimization.’ These risks include geopolitical events, says Rotella, noting that Verisk focuses on predictive modeling. ‘When you get a news feed about an event it is almost too late to react, so we look for data sources that can be correlated to other elements to predict potential unrest or problems before they happen.’ These correlations are not necessarily obvious. ‘The key is to gather as much data as possible and let data scientists see where there may be correlations.’ There are tremendous amounts of data out there and plenty of methods to glean insights from them, says Rotella. ‘But it’s critical to put the data in context; that’s when you get really powerful results.'”

I agree with everything Rotella says. Managing the complexities of the global supply chain can be daunting. Fortunately, companies like Verisk are helping make the challenge more manageable. Robert Cowan insists that you really can’t separate risk management and supply chain management. [“Supply Chain & Risk Management Go Together Like Peas & Carrots,” EBN, 27 January 2014] He writes, “The buzz around supply chain risk management recently is that there is ‘lots of talk and little action’.” It’s a sentiment with which he doesn’t agree. He believes that risk management teams are trying hard to do their job right but struggle because of a lack of visibility deep into the supply chain. He writes that is it like “trying to work while wearing a blindfold.” He continues:

“What happens when our attempts for optimization exceed our risk tolerance, and we inevitably fall off the razor’s edge? Or what happens when a natural disaster takes part of our supply chain out of action? This is where a vital part of risk management comes in – continuity management. We can be very good at optimizing at the tactical supply chain level based on our appetite for risk, but if we don’t recognize the importance of implementing and practicing strategically focused supply chain resilience and recovery processes, we are missing a big part of the opportunity. … The cost of not having such recovery processes set up can put your organization out of business, and the opportunity for the supply chain that recovers the quickest can make your supply chain the market leader.”

I agree that “opportunity” and “risk” are often different sides of the same coin. If your company isn’t prepared to deal with the situation, regardless of whether heads or tails turns up, it’s not likely to flourish in the long run. Done correctly, risk management costs money. But the investment is worth it. Lack of investment or failure to exercise risk management plans can end up costing a company everything.