I've been busy this week...setting up my own supply chain. What...have I suddenly started buying and selling goods, you ask, but no, I'm talking about the supply chain of my main blog or website, husdal.com. While it has been more of a technical than a logistical challenge, the paralells to real-world logistics is strikinggly similar, as you may discover when you read on.

 

A years ago or so I wrote about the supply and demand side of a blog, and even set up a model framework for the supply chain of a blog. However, focusing primarily on the chain itself, I did not pay much attention to how the outgoing flows were delivered. In logistics lingo, I did not pay much attention to the carrier. I should have.

 

The delivery network is as important to a blog as it is to any business. It is important to have the right infrastructure, and what matters most as in much of real-life logistics, is delivery speed. Of course, initially, it may seem that the delivery speed for blog content depends primarily on the infrastructure on the reader side, i.e. the individual Internet connection, the current Internet traffic in the vicinity of the reader, the reader's device (PC, Mac, iPhone, Blackberry or whatever) and even which browser the reader is using, but not quite. In fact, it also depends on how I serve my readers.

 

Now, very few bloggers will use 1PL, that is serving the blog from their own computer in their own home or office. Most bloggers will use 2PL, that is hosting their blog with some webhost, where the actual blog resides somewhere on some server, most often in the US, as it is in my case. More correctly perhaps, this is 3PL, as you have little or no control or say in type of server or Internet connection from that server to the reader. In logistics terms this is a centralized warehouse.

 

As a rule, your server will also host many other blogs, so you will have to share resources with those, and if they have more traffic than you do, your 3PL, is likely to give them more priority, or you will at least have to queue until it's your turn to send out what the reader wants. This can be abated by securing a dedicated server that only hosts you, making sure that you are the preferred customer. That way you can make sure that you will not have to compete with others for the server's scarce resources. Ok, done that, my warehouse is now my own and not shared.

 

The reason why this is important is that a website served from a server is built on a Make-To-Order basis. The reader asks for a certain post or page, and the server assembles it on the fly. There's nothing on the shelf. However, things can be improved by using Make-To-Stock. In blogging lingo that is called caching. A cache will essentially preload or preassemble your posts, and when a reader requests them they are sent off in one go, much faster than making to order. That is very useful since the server doesn't have to assemble posts again and again, but can simply deliver what is in the inventory. Ok, done that, but still not happy.

 

Coming back to speed and the reader side, while caching delivers content en bloc, and thus improves reader experience, if the reader sits far from the server there will be some lead or lag time, even more so if his or her Internet connection is not up to par. While my post travels on a ten-lane freeway while still in the US, in some remote village in India, it may have to follow a narrow and winding dirt road. That said, considering Internet traffic, an empty dirt road can be much faster than a clogged freeway.

 

This is where decentralized warehousing can help, or in blogging lingo, Content Delivery Network, or cloud computing to use another word. Not only is it possible to have my posts made to stock, I can also predistribute them as close to the intended reader as possible, which means they may not have to travel the whole globe before reaching my reader, but can take the shortest and fastest path. This ensures timely and reliable delivery of my blog posts to any reader, wherever he or she may be. Ok, done that, and is it any good? Yes. In fact, it may even save me from a supply chain disruption, should my web host go down. Using a Content Delivery Network or CDN thus ensures flexibility and agility.

 

Is this 4PL or still 3PL? Not sure. What's your say?

 

So that is what I have been experimenting with this week, make-to-order versus make-to-stock and centralized warehousing versus decentralized warehousing. Judging by the performance meters, the latter won in both cases, and while my US readers on a broadband connection are likely not to see any difference in speed of my blog, I am sure that it will matter to my far-and-away readers. Because, in the end, like all businesses, I too must evaluate my customer base, i.e. reader base, and make sure that I serve them the product they ask for when they ask for it. Looking at my reader base, not all of them are in the US, but many of them are actually in the so called emerging countries, and I want to serve them just as well as I serve my American clientele.

Cocoa trading at a one-year high...a nuisance, but not worrying. Coffee trading a 13-year high...ouch. That'll hurt Starbucks and alikes.Sugar trading at a 30-year high...wow. That's definitely going to have some impact. In much of today's food chains, particularly in the modern and industrialized world, these are three staple ingredients, and if these prices go up, that will feed through the entire food supply chain, let alone the economy.

 

You could blame recent disasters like the Australian flooding for the hike in sugar prices, as was debated in a lengthy post titled Queensland could transform our view on commodities that I found on the Tranformational Logistics blog, but disasters decimating crops are only part of the picture. More to blame (although "blame" is  obviously the wrong word here) are the emerging economies and their  rising demand for food and energy. Imagine, in 2010, for the first time, more cars were sold in China than in the US. That hasn't happened since Henry Ford introduced his Ford Model T some hundred years ago.  And China has now overtaken Japan as the world's second largest economy  and is poised to surpass the US in 15 years or so or maybe even less.  India is the runner up and may overtake  Japan in 25 or so years. Now,  what will that do the world's food and energy reserves?

 

I guess it's no coincidence that the soft commodity crunch is making rounds on CNN's Quest Means Business these days. In fact, CNN has just launched a year long series titled "The Price We Pay", where they will examine in-depth the factors and direct impact of global price instability around the world and how the growing imbalance of supply and demand will affect each and everyone of us. Here are some interesting videos:

 

- Richard Quest explains the price we pay

- Why food prices are rising

- Food prices - rising or peaked

 

Looking at the World Food Situation index provided by the UN or FAO to be exact, the picture is grim: Food prices have more than doubled since 2002. If I remember correctly, here in Norway people spend around 10-15% of their monthly income on food. Double the price, and the impact is still manageable. In emerging or developing countries, it is estimated that people spend more than 50% of their income on food, in remorter areas perhaps even more. Double the prices here and you have a potential crisis at your hands, with Tunisia and Egypt being the first countries to illustrate what could happen.

world-food-price.jpg

Fortunately for the emerging Asian market is that the price of rice is only half of what it was during the peak of 2008. Interestingly, if you look at it in a longer historical perspective, the rise in food prices is even more frigthening, looking perhaps a bit like Al Gore's hockey stick of global warming:

 

world-food-price-history.jpg

Is there an end in sight? In my personal opinion, no. I think that the food supply chain and the security of supply will be one of the hottest supply chain trends in years to come. France is already putting rising food prices at the top of the G-20 agenda, the Wall Street Journal reports.

Jim Fulcher had an interesting blog post on the Supply Chain Expert Community the other day, when he wrote about Volatility, uncertainty and their effect on the supply chain. In his post, Jim referred to the Tompkins Supply Chain Consortium survey, which said that companies in the future must become highly flexible while remaining efficient so they are able to react to changes quickly and efficiently.

 

This reminded me of a journal article that came across my own desk recently: "Supply Chain 2.0": managing supply chains in the era of turbulence, by Martin Christopher and Matthias Holweg.  The paper questions the established approach of supply chain management and argues that in the  light of increasing turbulence a different approach to is needed. What is needed is an approach that builds structural flexibility into the supply chain. Many companies only appear to have flexibility in their supply chains, but this dynamic flexibility is very different from the structural flexibility that Christopher and Holweg advocate in their article.

 

The traditional approach to variability and uncertainty in the supply chain has been to add measures of control and stability. This has given rise to operational practices such as Lean, Six Sigma, push-based production, vendor-managed inventory and many more strategies. Firstly, although seemingly effective, these are very specific strategies geared towards certain industries and/or certain products, but what is needed, so the authors say, is a generic strategy that anticipates, rather than reacts to, turbulence. Secondly, although many companies have managed to build dynamic flexibility into their supply chains by being able to quickly reacting to changes, these are more like contingency plans than  actual structural changes to the supply chain.

 

Structural flexibility implies the use of the following strategies:

 

- Dual sourcing

- Asset sharing with other companies, including competitors

- Separating base demand from surge demand

- Postponement of final product assembly

- Flexible labor arrangements

- Rapid manufacturing of small batches

- Outsourcing and contract manufacturing

 

So what exactly is structural flexibility? Well, according to Christopher and Holweg it refers to the ability of the supply chain to adapt to fundamental changes in the business environment. This, so they say, is done by first and foremost designing the supply chain for flexibility, not for efficiency, which is the case with most supply chains today, where flexibility is a sort of added option. In a structurally flexible supply chain, flexibility takes center stage, and efficiency becomes the second violin. I find that an interesting thought.

 

dynamic-structural-flexibility.jpg

In the efficient supply chain, the focus is on control and the aim is to reduce too much variability. In the adaptable supply chain the focus is on volatility and the aim is to develop a superior ability to adapt. The former sees turbulence as bad for business. The latter sees it as unevitable and thus creates adaptable structures to accomdate it. While the efficient supply chain tries to eradicate turbulence, the adaptable supply chain embraces it and works with it.

value-of-flexibility.jpg

I think Christopher and Holweg are on the right track here. We should not fight volatility, we should perhps not welcome it, but we should not view it as an enemy. Rather, it is an opportunity. And no, I am not thinking about the Chinese sign for crisis here, because contrary to popular misbelief, it does  not mean opportunity. The most important lesson for business concerning volatility is that it challenges the mindset of economies of scale as being the most efficient manufacturing strategy. It is most certainly not the most efficient strategy for dealing with volatility. Responding to volatilty requires small numbers and the ability to fill niches. It may appear more costly, but in the long run, the return on investment will pay off.

 

Reference: Christopher, M. and Holweg, M. (2011). "Supply Chain 2.0": managing supply chains in the era of turbulence. International Journal of Physical Distribution and Logistics Management, 41 (1), 63-82.

How much product variety is too much product variety? That is the question in a recent article in the International Journal of Operations & Production Management titled "Theoretical versus actual product variety: how much customisation do customers really demand?" Here the authors challenge the common claim of "infinite variety" being demanded in the  marketplace, by measuring not just how much variety theoretically could  be produced, but also measuring how much variety that is actually demanded by the customer.

 

Take mobile phones. At the  time of my first Nokia in the mid-90s, the range of products was still  manageable and it was relatively easy to choose the phone you wanted.  Today, there seems to be a new model, slighty different from the  previous every couple of weeks or so...maybe not, but it certainly feels  that way. And it's almost impossible to choose the phone you really  really want, particularly if models are linked to subscripton plans with  special prices or offers. Not only is it hard to choose the phone you  want, chossing the right subscription is even worse. Do we really need  this plethora of models and plans?

 

Perhaps  mobile phones should come like cars or like Dell computers, with a few  basic models or shells, which you may then configure as you wish. At  least then you would be able to assemble a phone with the functions that  you really need. While I do love my Nokia E52 which I bought a year ago and which by now is hopelessly obsolete, I  have never used most of its functions, but I wanted a phone with integrated e-mail,  that easily syncs up with Outlook, that has Internet and WLAN, and GPS for navigation. What I didn't need  were all all the options for personalization and hundreds of ringtones or  whatever. But such is product variety these days that if I want to have some functions I need to buy a phone that has a c..pload (pardon my French) of other and to me uneccessary  functions as well. Why is that so? And why does Nokia have some 100+ models to choose from in Europe, but only 20+ model in the US?

 

I remember when I bought my first car in the early 80s. Back then cars came with a limited range of choices, both enginewise and interiorwise. Usually there would be an austerely fitted basic version, a  somewhat acceptable mid-range version and a  all-you-want luxury version, perhaps even a sports version. There were very few, if any, optional extras, and more often than not, only available if you had already bought the luxury version. Today, my new Skoda Fabia, while having merely three possible lines and only seven possible engines, has a list of no less than 50 factory-fitted or dealer-fitted extras. Is that too much? A friend of mine, also a Skoda driver has been waiting for more than six months for his new car because there are less then 20 people worldwide desiring his particular configuration and the Skoda factory is not producing a configuration until there are at least 20 orders for it. Perhaps a sign of too much product variety?

 

And indeed, it is the automtive industry that is at the heart of the article I mentioned at the beginning of this post. The article analyses production and sales data of 226,106 passenger cars,  comprising of three models of one vehicle manufacturer sold across four  global market regions. The authors propose and validate product variety measures based on  actual customer orders, and empirically demonstrate how these measures  can be used to assess the impact of late configuration and option  bundling strategies. Moreover, the paper highlights how actual variety differs from theoretical variety  in practice, which in turn co-determines the effectiveness of  mitigation strategies applied by firms.Obviously, having too much variety is not a good thing, if this means a wide range of flexible solutuons to accomodate this variety and a whole battery of contingency plans in case these varieties cannot be supplied. Product design does have an impact on supply chain risk.

 

Perhaps I should consider the lessons learned in this article the next time I decide to buy a new car? My friend, the one I mentioned above, is already regretting his choice. Not the choice as such, but the consequences it had for the lead time for this new car that he is stil waiting for. Anyone with similar experiences?

 

Reference: Thomas Stäblein, Matthias Holweg, Joe Miemczyk, (2011) "Theoretical versus actual product variety: how much customisation do customers really demand?", International Journal of Operations & Production Management, Vol. 31 Iss: 3, pp.350 - 370

Egypt is in turmoil. After Tunisia, now Egypt is rocked by a popular  uprising, and the outcome of the so far peaceful protests is still  uncertain. With the country more less not running at all for seven days straight, they are now starting to run out of...everything. The repercussions could be even worse than what we have seen so far, and there is even a chance, albeit unlikely, that the Suez Canal may close. That would be a serious blow to global supply chains.

 

Such political risks are not often debated in the supply chain management literature, but every firm with a supply chain that sources globally or operates  internationally is exposed to political risks that may be very different  from what they are used to domestically, where political risks often  limit themselves to de-regulations and re-regulations of business  sectors, tax cuts or tax hikes or sudden environmental measures or  security enforcements following major events or changes in government.  On the international scene such and  perhaps even worse changes can come  abruptly and without warning, not because they cannot be foreseen, but  because the firm usually lacks the tools and the knowledge it needs to  anticipate and react coherently to political risks. Recently I reviewed Political Risk, a book by Robert McKellar that deals exclusively with political risk and how businesses can prepare for and manage political risk.

 

Closing the Suez Canal is such a political risk, but it is not unprecedented, and closing the Suez Canal is nothing new. In fact, the Suez Canal was closed during 1967 - 1975, following the Six day War:

On 5 June 1967, at the beginning of the Six Day War, Egypt closed the  Suez Canal. The closure was sudden and unexpected – fifteen cargo ships  known as "The Yellow Fleet"' were trapped inside during the closure. At  the end of the war, the Egyptian and Israeli armies were stationed on  either side of the canal and the prospects for reopening were very  uncertain. The canal remained closed until the end of a second conflict –  the Yom Kippur War – and subsequent peace negotiations, eight years  later.

This lead to a considerable drop in trade between countries that now faced a near doubling of the distance between them, as described by James Feyrer, Professor of Economics at Dartmouth College writes in his essay on Lessons for trade and the trade-income link:

For these countries, the closure caused an average fall in trade of over 20%  with a three to four year adjustment period. Trade between these pairs  recovered completely after the canal reopened eight years later with a  similar adjustment period. A 10% decrease in ocean distance results in a  5% increase in trade.

Two years ago, when attacks by pirates had became more than a few incidents in the Gulf of Aden, the BBC ran a short story on the impact on European supply chains if shipping companies should decide to take the longer route around Africa to avoid pirate attacks and what that would mean to the average consumer. A sudden closing of the Suez Canal now would perhaps have a similar effect. North Sea Oil has already risen to $100/barrel in fear of such a closure, the BBC reports. And the Egypt unrest is already threatening Egypts status as rising outsourcing star, according to cio.com.

 

If there is a major supply chain disruption in the near future, Egypt will be part of it, for sure. Reuters is already reporting that cargo disruptions are choking Egyptian ports. What's next?

My personal blog on supply chain risk (not this blog) does not go unnoticed in the book publishing world, and from time to time I am approached by publishers and authors who would like me to review or even endorse their book, and I have become aware of - or rather made aware of - many books on risk and supply chain management that I didn't know existed. I take such review requests as a compliment for my writing style, and those of you who follow my personal blog will know that I do not shy away from criticism where criticism is due, and conversely, I also give praise where praise is due.

 

Currently I am working on the "Gower Short Guide to Business Risk Series", a collection of small books that deal with all sorts of business risks, so far covering topics such as

 

- procurement risk,

- reputation risk,

- political risk,

- fraud risk,

- ethical risk,

- customs risk,

 

and with more topics on the bedding, including

 

- operational risk,

- compliance risk,

- kidnap and ransom risk,

- corruption  risk,

- equality risk, and

- how to facilitate risk management,

 

there is more than enough to work on. Nonetheless, while working on this, I keep asking myself, is there really this much risk or is it just scaremongering? And how does all of this this relate to supply chain management?

 

Well, in todays globalized and outsourced business world supply chains are increasingly getting longer, more complex and more difficult to manage, and the manging side is located further and further away from the postential source of problems. Consequently, businesses are less and less in control of risk sources, but more and more in control (or perhaps not) of risk impacts or consequences, and I don't think that risk will ever run out of fashion.

I find risk a fascinating subject to work with and to blog about, from the highly academic writings on how to define risk, to the more hands-on practical handbooks on how to manage risk, although I do prefer the latter over the former.

 

One of my my most recent acquaintences in risk is David Simchi-Levi's book "Operations Rules". This book is about the principles, frameworks and processes that enable  the aligning of a company’s specific customer value proposition with its  operations strategy. Now, that sounds very supply chain and operations management only, but lo and behold, it is one of the very few books on supply chain mangement that features an extensive chapter on risk mangement. It is perhaps not fair to judge the importance of a chapter by its  length, but fact is that the chapter on risk mitigation is 30 pages,  while most other chapters are 15-17 pages, and it is not because this  chapter is full of figures. It is, but so are the other chapters, too.  To me this is a clear indication that Simchi-Levi sees risk mitigation  as an integral part of operations and supply chain management.

 

The   book is built around 33 rules that cover all possible aspects of   supply  chain operations and management, and that are placed throughout   the  eleven chapters of the book, hence the title. Simchi-Levi is a true well of knowledge as far as supply chain    management is concerned, and it shows. Not only are his rules based on a  plethora of examples and anecdotes of firms that succeed or failed in  their risk management, the examples themselves have a broad scope, in  geography, in impact and in industry. Simchi-Levi has  done his homework with this one. There is hardly a point made that is  not followed by an example, e.g. CEMEX seeing risk management as a core competence or the very different strategies of Nokia and Ericsson in handling the Philips plant fire.

 

In conclusion, I think there's hardly a business decision that is not wrought with risk, one way or the other, and the sooner risk management becomes integrated with supply chain mangement, the better.

How far does corporate social responsibility go? What should a company do if the authorities in a foreign country are clearing away residential areas (and removing residents without any compensation) to make room for industrial development that may allow said company (and other companies in the same location) to expand its offshored manufacturing facilities? Interfere? Do nothing?

 

This question was posed in today's edition of "Dagens Næringsliv" (DN), the Norwegian equivalent of the "Wall Street Journal". Unfortunately it's only available in the printed edition, otherwise I would link to it. That said, there probably wouldn't be too many Norwegian-speaking readers in this forum anyway. The article centers around an alleged quote from Milton Friedman, "The business of business is business", a quote that is often seen as the direct opposite of social responsibility. While corporate social responsibility looks good on paper, how far are companies willing to not just talk the talk, but also walk the walk when push comes to shove?

 

The hypothetical example cited in DN actually referred to a ship owner, and the foreign authorities were harbor authorities, who were expanding a harbor in order to modernize its operations. While looking forward to a more efficient harbor, the company has just learned that the residential areas to be cleared are the homes of the poorest of the poorest who are simply removed without giving them any new place to live or any form of compensation. Add to that, the hypothetical company has just joined Global Compact, a UN strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. From this it would follow that the company should protest against these expansion plans. However, a formal protest may harm business, as the harbor authorities may react negatively to it and purposely (but not offcially) delay the loading and unloading of the company's vessels, leading to increased costs and lost time. What should the company do?

 

Øyvind Kvalnes, the article author who asks this question is Associate Professor at BI, the Norwegian School of Management, actually posted this question to his Master students, who most of them were in favor of that the company should actively deal with this issue, both from an ethical point of view, but also from a long-term economic perspective, as the market would be likely to reward action more than re-action, and because today's young people would want to work in such a company.

 

Underpinning his views, Kvalnes cites an old paper by Archie B Carroll from the University of Georgia, written in 1979: A three dimensional model of corporate social performance. In the paper, Carroll describes four possible reactions the company can use in this case: React, Defend, Accommodate and Lead.

React:

Deny any social responsibility, do nothing, saying that this is the local authorities responsibility, not their's.

 

Defend:

Admit that it has responsibility, but do as little as possible, just enough to maintain its reputation.

 

Accommodate:

Accept responsibility, and follow the advice of pressure groups and lobbyists who want the company to take action.

 

Lead:

Be responsible and take action before the media gets wind of the story, and go further than what is expected.

In addition to these four strategies for incorporating responsibility into business operations, Caroll also lists what he calls the four social responsibilities of business: Economic, Legal, Ethical, and Discretionary responsibility.

Economic Responsibility:

The first and foremost social responsibility of business is to produce goods and services that society wants and to sell these at a profit.

 

Legal Responsibility:

Society expects business to fulfill its economic responsibility, but within the framework of legal requirements.

 

Ethical Responsibility:

Although the first two already embody ethical norms, society has non-codified ethical norms which expect certain behaviors and attitudes in certain situations and which change over time and debate.

 

Discretionary Responsibility:

These are voluntary actions, guided only by a business' desire to engage in social roles that are not mandated, required by law, and not even generally expected.

The four responsibilities can provide a useful framework for any company that decides to do business in foreign countries, where politics and ethics don't always go hand in hand and where corruption is the order of the day. Many companies have already discovered the competitive advantage of claiming to be socially responsible. But how many companies are willing to go the whole nine yards. Are you?

 

References:

- Kvalnes, Ø. (2010) Hvilket samfunnsansvar? Dagens Næringsliv, 9.11.2010, s.4

- Carroll, A. (1979). A Three-Dimensional Conceptual Model of Corporate Performance. The Academy of Management Review, 4 (4), 497-505

It's Murphy's Law. Sooner or later it is bound to happen to everybody, and there's hardly a company who hasn't had a product recall of one sort or the other, and the Chinese toy industry seems to be particularly plagued with this issue. Is it a coincidence? Is China really to blame? In 2009, Mary B Teagarden, Professor of Global Strategy at the Thunderbird School of Global Management, wrote her article Learning from Toys: Reflections on the 2007 Recall Crisis, where she contends that much of blame lies with (American) businesses themselves.

 

I'll get to that in a moment, but first, let's remind ourselves of the original "Learning from Toys" article, if I may say so. Interestingly it is not mentioned by Teagarden in her references, albeit she uses the same line in her title. Learning from Toys: Lessons in Managing supply Chain Risk from the Toy Industry was written by M. Eric Johnson in 2001, and here the toy industry is used as a showcase example for how supply chain risks could and should be managed. Product recalls do not feature in this article; it is all about matching supply and demand and running the supply chain as  cost-efficient as possible. Outsourcing keeps operating costs down, which leaves more money for brand building and advertising.

 

How different things turned out six years later. The year 2007 will be remembered as the year the toy industry was shaken by a seemingly endless stream of recalls, says Teagarden. Much of the focus has been on China and its contractors, but China is not solely to blame, as many of the  risk drivers come from the companies who outsourced the production, not the Chinese manufacturers.

Instead of simply blaming China, we must take a hard look at American issues, those that we can control, that contribute to this problem. In so doing, we will see that we are a big part of this problem. American big box retailers and their unrelenting pressure on suppliers for ever-lower prices bear part of the responsibility. American importers focusing on cost and investing in brand rather than quality and supply chain integrity bear part of the responsibility. Parents who want low-priced toys in response to their children's requests for the latest television-advertised toy bear part of the responsibility. Finally, the American government's choice to chronically underfund watchdog agencies like the Consumer Product safety Commission is part of the problem.

This may sound harsh, perhaps, but true, part of the responsibility does belong to ourselves. Moreover, you could just as well replace "American" with "European" or any other country.

 

We do not control China. China controls China, Teagarden says. Although we can do whatever we can to influence China, we must also do our best to manage our share of the problem. Teagarden points to five lessons that can be learned from the toy recall crisis:

- Corporate social responsibility is a delicate balancing act
- Size matters
- Distance matters
- Supply chain development is critical in offshore manufacturing
- Trust not, verify all

The first lesson points to the adage of he who talks the talk, must also walk the walk. Words must be followed by actions, actions that ensure full supply chain integrity, end to end. This takes us to the second point. If you want to walk the talk, size matters. Simply put, the bigger you are, the more you can squeeze your supplier. And it is not about squeezing costs, that would be counter-productive, because the squeeze is simply passed on to the next tier in the chain, until one tier has no choice but to compromise on the requirements in order to make his profit. That is the third point, distance matters, elegantly captured in the Chinese proverb of "The mountains are high and the emperor is far away". Not only geographical distance, cultural distance, too, plays in important role here. This ties up with the fourth lesson, supplier development, where a company must invest time and effort in developing not only standards and principles on paper, but must invest in building skills and abilities in the supplier network. The final point, verification, is the culmination of the four previous lessons: supply chain vigilance, meaning that you can only trust so much, in order to be 100% sure you must verify, at all levels.

 

I find this a very thought-provoking article. Whichever way you put, it is not so much China who owns the tainted product problem. We do ourselves. China is just doing what we tell them to do (or rather, what we do not tell them not to do).

 

Reference: Teagarden, M. B. (2009) Learning from Toys: Reflections on the 2007 Recall Crisis. Thunderbird International Business Review, 51 (1), 5-17

It's early Sunday morning, and today is the end of daylight saving time, which gives me one hour extra time to blog while the wife gets a well-deserved extra hour of sleep. Sipping my coffee and browsing the Internet for anything supply chain risk, I came across an article in the British newspaper The Telegraph, which said that Britain could miss out on the full economic benefits of hosting the 2012 Olympics because companies are not prepared for the Games and have mixed views about its impact.To me, more interesting than the disbelief in business opportunities, though, was the disbelief in any impact on their supply chain from the Olympics.

A new Deloitte report found that over two thirds of companies in the UK expect no impact on their operations from the Olympics. Rick Cudworth, head of business continuity and resilience at Deloitte, said: "Many of these businesses need a wake-up call. They operate in service industries where people are vital, where the supply chain is time critical, where having products on the shelf or food to serve in restaurants is essential to their daily business. Thinking through the impacts that an Olympic-scale event could have on logistics, the supply of goods and the movement of staff is essential."

Scaremongering? Perhaps. I was living and working in Salt Lake City during the 2002 Winter Olympics, and while for a large portion of the city it appeared to be business as usual, for other parts the the impacts were severe, particularly because of the beefed-up security so shortly after 9/11. And there probably won't be any less security this time around. Security restrictions and cordoned-off areas leaving businesses stranded aside, supply chain logistics challenges will have many managers scratching their heads in 2012. I do believe that much.

In the Deloitte survey, although only half of businesses said they expect an increase in demand, 20pc expected a strong increase. Also, a quarter of the 200 large companies surveyed – which employ more than 500 people – have appointed an individual or group to assess the potential opportunities and disruptions from the Games.

Is Britain still unprepared? After all, they do have a Civil Contingencies Act and the BS 25999 Business Continuity Standard, something many countries still lack. They have the tools, but are they simply oblivious to their value in securing business operations?

Nigel Bourne, the CBI's London director, warned there needs to be an "education" with businesses about how to financially benefit from the Games and prepare for potential disruption. He said that demand on London's transport network during the six-week period that the Olympics and Paralympics are held will be "far greater than anything we have seen".

I was in London two months ago, and even on a normal weekday the strain on the transport system seemed to be quite heavy. That said, it all went very smoothly, even in the midst of strikes over staff cutbacks.That was a one-day event, but the Olympics will run for weeks on end.

 

The London Olympics are still 18 months away, enough time for planning ahead, and for considering the negatives and the positives of such an event. Am I scaremongering? Hopefully not.

Perhaps I am biased. As someone who writes regularly about supply chain risk, both here on the Supply Chain Expert Community and on my own blog, I belive that supply chain risk should, and to a large degree really is, among the top priorities for many businesses. Apparently not, if I am to believe the Ernst & Young Business Risk Report 2010. In their sector-wide view of the risks facing businesses across the globe, supply chain risk is just "below the radar" on 12th place. Why supply chain risk isn't raking more prominent, I can only speculate about. I would imagine that global firms would be particularly concerned with their global supply chain risk management. Perhaps the 70 industry executives that were interviewed for the report have never heard of supply chain disruptions? Nonetheless, the 48-page report is packed with useful information, and albeit supply chain risk is not mentioned explicitly, it is not hard to read supply chain issues into the top ten risks that are listed.

 

1. Regulation and compliance (2)

 

In a stable economy, this would perhaps not be so much to worry about, but in the current economic climate, where different governments in different countries suddenly propose new and different regulatory responses to battle the credit crisis, I can see that this is a major risk. The whim of government regulations suddenly changing has always been a risk for companies with global supply chains.

 

2. Access to credit (1)

 

With many companies still explicitly or implicitly relying on government backup, and governments themselves running into deeper and deeper sovereign debt, this is a vicious circle that could unleash a second credit crisis. As with #1, this may affect global supply chains.

 

3. Slow recovery or double-dip recession (No change)

 

The financial crisis has abated, but a fiscal crisis has emerged in its place. While this is a macro risk, on a micro level it may still affect individual firms. Supply chain flexibility and keeping all options open is the key mitigation measure here.

 

4. Managing talent (7)

 

Baby boomers’ retirement is now posing the most worrying threat to skill sets in the labor force. I never thought about it that way. So far, much of the concerns, at least in many European countries, and here in Norway, has been how to finance the social welfare and pensions of these retirees. A lack of skilled workers to replace those who retire has so far not been that much of an issue. Nonetheless, even supply chains need skilled people.

 

5. Emerging markets (12)

 

With emerging economies dominating global growth I would not be surprise to see a shift in global supply chains becoming more regionally or even locally oriented towards their "home" market rather than overseas export. This would change the supply chains of global companies entirely.

 

6. Cost cutting (No change)

 

The biggest cost concerns are no longer related to operating costs, but to commodity costs, which in turn of course will affect supply chains. When operating costs have been cut to the bone, where do you start saving when raw material prices start to rise? Do you have alternative supplies? And how will your supply chain fare when you engage in a price war with a competitor in the aforementioned emerging markets?

 

7. Non-traditional entrants (5)

 

The financial crisis, so the report says, has increased risk aversion and made it harder to raise capital. This has weakened emerging firms that sought to expand on the back of high leverage. This also means that now is the time for traditional or well-established firms to strengthen their supply chains by investing in their supplier relationships.

 

8. Radical greening (4)

 

Is the environmental movement in supply chains dead? Why has this "risk" now slumped 4 places since last year? Perhaps the economic downturn has dimmed the spotlight a bit, but I am sure that the pressure towards sustainable supply chains will continue. Then this is not a risk, but it will be an opportunity.

 

9. Social acceptance risk and corporate social responsibility (New)

 

This, I believe, will rise to even more prominence in 2011. Is it a risk? As with sustainable supply chains, socially responsible supply chains ought to be embraced as an opportunity. ISO 26000 on social responsibility is soon to be finalized and will of course affect the supply chain of any company that decides to implement this standard.

 

10. Executing alliances and transactions (8)

 

Mergers and acquisitions are perhaps not taking place that much following the recent credit crunch, but supply chain collaborations have their own risks, and so they should be on this list.

 

...

 

This is the only risk that explicitly mentions supply chains:

 

12. Maintaining infrastructure

Numerous sectors now depend on optimized global supply chains. Infrastructure failures could threaten the sourcing networks, in which numerous companies have invested heavily.

 

This I find interesting. Supply chains are seen as infrastructure-related risks only? While this is definitely true to some degree, in my opinion it makes supply chains a lot less important than I think I are. That said, this second below-the-radar risk has also risen significantly from 2009, from 20th to 12th place, and I do hope to see it in the top 10 in 2011, in line with what the World Economic Forum said their 2008 Global Risk Report that global supply chains are an invisible business risk. Well, it'll be interesting to read the Ernst & Young Business Risk Report 2011 to see what has changed.

 

Meanwhile, you can read the full report and download a pdf-version from ey.com: Ernst & Young Business Risk Report 2010

Perhaps logistics is a wider and more comprehensive term than supply chain management? I may be leaning towards that now, after reading a recent paper developed by a a working group set up by the German Bundesvereinigung Logistik, BVL, the nonprofit German Logistics Association. Here, a selection of no less than eight academics from Germany describe the five cornerstones of logistics as an academic discipline, and discuss how logistics in fact can act as an integrative platform over a wide range of different issues at the micro meso and macro level. I never thought of that before.

 

The mandate of the working group was to "develop a framework of understanding for logistics as an academic discipline" in order to promote "the depth and relevance of the science of logistics among those outside the discipline" and to serve as "a point of reference for continuing in-depth discussions about the science of logistics". That is certainly a bold goal statement. Can the paper hold what it promises?

 

The article starts off with a definition or description of  what logistics entails as a scientific discipline:

 

Logistics is an application-oriented scientific discipline. It models and analyses economic systems as networks and flows of objects through time and space (specifically goods, information, moneys, and people) which create value for people. It aims to supply recommendations for action on the design and implementation of such networks through accepted scientific methods. The scientific questions of the discipline relate primarily to the configuration, and organisation of these networks and to the mobilisation and control of flows. Its ultimate goal is progress in the balanced achievement of economic, ecological and social objectives.

 

This definition is then underpinned by five cornerstones:

 

- Flows in networks
- Levels of aggregation
- Interdisciplinarity
- Unity within variety
- Real-world orientation

 

The first cornerstone are logistics flows, and since the flows work at different levels and with different objects (goods, information, money and people), scientific inquiry in logistics can come from many perspectives: technical, organizational and social. Second, levels of aggregation refers to the notion that logistic flows (and networks), repeat themselves at different levels: in a company, between companies, between industries, between countries etc., going from microeconomics to macroeconomics. This is a view very similar to the one employed by Helen Peck in her article on drivers of supply chain vulnerability. Number three, interdisciplinarity, refers to the notion that logistics is highly application-oriented, and consequently is not only borrowing methods from other  disciplines (e.g. mathematics, engineering, economic science, social  sciences) but also developing them further. Which brings up the fourth, unity within variety, implying that logistics should integrate and condense these different disciplines, something I find a very bold statement. Fifth and final, what makes logistics exciting and interesting is that it is not abstract, but hands-on. And because it is so hands-on, maybe that is why logistics is misunderstood as not scientific enough? Judging by this sentence it may very well be:

 

The understanding of practical logistics as a generally reactive instrument for the fulfilment of defined market requirements is still widespread. In contrast to this narrow interpretation, it is of fundamental importance to understand and/or continue to develop logistics as a proactive organisational activity.

 

I think we're still a far way from viewing logistics as having such a wide scope as the BVL would like it to have. That said, I am all in favor of logistics taking a turn in that direction. Perhaps it really is time to rethink my view of logistics versus supply chain management. Logistics is the better term after all. Well, in my opinion it is. Not that I plan to change the name of my blog from Supply Chain Risk to Logistics Risk, though. For the time being it is still "Supply Chain Risk - explained, explored, researched and reviewed". Maybe I will change it in the future, but not just yet.

 

Reference: Delfmann, W., Dangelmaier, W., Günthner, W., Klaus, P., Overmeyer, L., Rothengatter, W., Weber, J., & Zentes, J. (2010). Towards a science of logistics: cornerstones of a framework of understanding of logistics as an academic discipline Logistics Research, 2 (2), 57-63

 

An extended version of this post and a link to the original German version of this paper can be found on my blog @ Logistics risks - the new science?

 

If you wonder what is a good place to relocate to and what place that is perhaps not so good, AON has done the research for you. In their most recent highlighting of global risks is a People Risk Map. Along with the accompanying report it provides “a comparative overview of risks associated with recruitment, employment and relocation  in 90 cities worldwide. These ratings enables companies to compare risk by location, identify the reasons for the risks, and determine actions to address these risks.” So they say, but is it as good as it sounds?

 

In 2009 AON published the political risk map, identifying, among other things, where supply chain risks are on the The map also included a Commodity Crunch Exposure Matrix, which identified the countries most vulnerable to political instability in 2009 if commodity prices should continue to fall.

 

This year AON is taking a closer look at globalization from an organizational point of view, underlining that outsourcing or going global involves people and that people (or the lack of people) may come at a cost. Having offices and plants worldwide involves three types of people risks, according to AON:

 

  • Risks associated with recruitment
  • Risks associated with employment
  • Risks associated with restructuring, retirement, and retrenchment

 

The AON People Risk Map identifies 25 critical factors impacting People Risk by location. These 25 factors are clustered into five areas of People Risk:

 

  • Demographic risks are those associated with labor supply, the economy and the society.
  • People risks associated with Government Support are those where government policies and practices either help or hinder the management of people in that location.
  • Education risk factors seek to measure risks associated with finding qualified professionals in a location.
  • Talent Development risk factors look at the quality and availability of recruiting and training resources.
  • Employment Practices risk factors seek to measure the risks associated with employing people in a given location.

 

The individual factors are listed below:

aon-2010-people-risk.jpg

Used on a world map, people risk displays like this:

aon-people-risk-map.jpg

 

The least risky city, believe it ot not, is Toronto, Canada. The worst, perhaps no surprise, is Dhaka, Bangladesh.

aon-people-risk-city-ratings.jpg

The report is well worth reading and does provide some valuable regional insights, where the results are discussed and broken down in more detail for Europe, the Americas, Asia Pacific, the Middle East and Africa. While the map and the report on one hand are an obvious and clever marketing tool for AON's consulting services, I also believe that they can provide some firsthand information for a company seeking to globalize its operations. In my opinion the AON map and report perfectly complements the Global Risk Reports from the World Economic Forum as a risk management primer for busy executives as well as academics seeking in-depth analysis.

 

As global economic growth continues to shift from the developed markets to the emerging markets, companies are seeking more localization in their people strategy to capitalize on the faster growth opportunities in these markets. This means companies will want to increase their presence by hiring talents from, and deploying talents to, these emerging markets. The better a company understands the people risks related to each local market, the better equipped they will be to realize the business opportunities.

So says AON. For more information on the map and the report, visit my original post on Risky cities - want to work there? or go straight to the AON People Risk download section.

A story in the UK Telegraph caught my attention the other day: Nasa warns solar flares from 'huge space storm' will cause devastation. So maybe the old Mayans were not too far off in their calculations of the date the world ends - and 21.12.2012 or thereabouts is maybe not so hoax after all? Perhaps the world will end in 2013 instead? For sure, 2013 is destined to a year that is likely to test business continuity plans worldwide, if NASA is to be believed.

 

We could face widespread power blackouts and be left without critical communication signals for long periods of time, after the earth is hit by a once-in-a-generation “space storm”, Nasa has warned. Scientists believe it could damage everything from emergency services’ systems, hospital equipment, banking systems and air traffic control devices,  It will disrupt communication devices such as satellites and car navigations, air travel, the banking system, our computers, everything that is electronic. It will cause major problems for the world.

 

If this is true, the paralyzing effect on supply chains by the volcanic ash cloud this Spring will be like a mild Summer breeze in comparison. Perhaps, as DK Matai notes in his reflections, we will be going back to 5000 BC?

 

Solar flares can damage satellites and x-rays can disturb radio and other wireless communications. Although there have been big sun storms before in history, we have never been this dependent on the technology they can disrupt. Small microprocessors and chips that power our vehicles; the Global Positioning System (GPS) that helps us navigate; Internet, satellite and mobile phones can all be affected. Immediate cash sources such as Automated Teller Machines (ATMs) and credit card transactions may also malfunction. In the event of an EMP nothing using electrical or electronic systems may function correctly.

 

This means no power for:
i. Pumping fuel into vehicles;
ii. Recharging batteries for flashlights, radios, pocket computers or communication devices; 
iii. Withdrawing cash or using credit cards to pay for food, fuel and services; and
iv. Transportation of food, essential goods and professionals for emergency and healthcare services.

 

Semi-Permanent Damage  If a truly massive Coronal Mass Ejection (CME) hits earth, it could practically take out the world's electricity distribution on a semi-permanent basis. It would take many years, if not decades, to repair the world's electrical system, even if replacement parts were immediately available.

 

Extreme weather events are a natural ingredient in any Business Continuity Plan. Including extreme space weather is perhaps not the first thing that comes to mind that you must prepare for. That said, the electric power system can go down for many reasons, solar flare or no solar flare, and being prepared for a long-lasting electric outage is probably a good investment in any case.

"The world is at risk and the supply chain is not exempt. Supply risk used to be defined as the potential for strikes by transport workers, fires at a key supplier's plant, or missed deliveries. That simple vision no longer applies." So said Jack Barry in 2004, when he wrote short a article on the risks of outsourcing for a special issue on Supply Chain Risk and Uncertainty for the International Journal of Physical Distribution & Logistics Management, or simply IJPDLM as it is known in my academic circles.

 

Is it still a true statement? Is outsourcing, while most certainly a low-cost strategy, the opposite of low-risk, and are companies who outsource their services and supplies in a sense risking it all? I am probably not the right person to answer the question, but Barry's article does raise some important issues that haven't become less significant since 2004. Globalization, for all its benefits, does come at a cost, and Barry's message is that it is about time that we acknowledge and consider this cost.

 

I think Barry is spot on when he says that effective supply risk management requires identifying an monetizing risk events, establishing the probability of occurrence, and developing contingencies for alternative sources of supply.

An  enterprise may have lowest over-all costs in a stable world  environment, but may also have the highest level of risk - if any one of  the multiple gating factors kink up an elongated global supply chain!

The Nokia-Ericsson plant fire is the classic textbook example of a gating factor kinking up a supply chain. Or rather was, as the volcanic ash cloud of Spring 2010 is perhaps slated to be the next textbook case of an unforeseen event that did not exist in any business continuity plan to that date.

 

What is the impact of the compromise of intellectual properties from global sourcing?

Another important message by Barry. What do you do when subcontractors become suppliers, then partners, and, finally, competitors - all fostered by the transfer of technology for short-term cost advantage. Is it really worth it in the long run? Remember: The wrong people can ruin a right supply chain.

What are the consequences of the lack of  seamless global e-commerce?

Current technology applications, so Barry says, are islands of digital standards surrounded by seas of non-compatibility. I guess he's right. Each supply chain consultancy firm appears to have their own proprietary software solutions, which of course are promoted as being better than their competitor's. But do we need them all? How long can the supply chain afford  the buffers of excesses required by just-in-case technology - and sold by overly zealous ERP consultants?

 

In a presentation Barry made at the Institute for Supply Management Services Group Conference in 2004, titled Global Risk: Outsourcing Services, A New Aesop's Fable of the Ant and the Termite he used these two slides to illustrate his point:

 

The benefits of globalisation:
India develops my software
Ireland manages my customer service
Taiwan does my testing
Mexico performs piece labor
Germany balances my finances
Israel does my clinical research
… my supply sources are global.
>>> I have the lowest overall cost of services
The risks of globalization:
India owns my IT process and innovation
Ireland is between me and my customers
Taiwan controls my quality control
Mexico dominates my capacity curve
Germany leverages my finances
Israel has first views of my innovation
… my supply sources may be beyond my laws and conventions.
>>> I have the highest level of risk to continued operations

I think I will let those two slides speak for themselves. Have we gone forward since 2004, or is this still the case?

 

Reference

Barry, J. (2004). Supply chain risk in an uncertain global supply chain environment International Journal of Physical Distribution & Logistics Management, 34 (9), 695-697

Jan Husdal

Supply Chain Risk Insights

Posted by Jan Husdal Sep 15, 2010

Last week I had the pleasure of attending the 10th International Research Seminar on Supply Chain Risk Management, ISCRiM, in Loughborough, UK. ISCRiM, for those of you who have never heard of it, is a network of academics and researchers working on various supply chain risk issues. The main purpose of the ISCRIM-network, in their own words, is to speed up, and improve, the research within “Supply Chain Risk  Management”. From a humble beginning in 2001, the network now spans some 35 people in more than 20 countries. Every year since then they have met for a seminar to exchange ideas and present some of the latest research and publications.

 

The ISCRiM seminars have so far resulted in several books, first Supply Chain Risk, edited by Clare Brindley, then Supply Chain Risk: A Handbook of Assessment, Management and Performance Chain Risk Management, edited by George Zsidisin and Bob Ritchie, and a soon there will be a third book, dedicated to showcasing some best practices in different industries. Managing Supply Chain Risk and Vulnerability, edited by Teresa Wu and Jennifer Blackhurst is not an ISCRiM-book per se, but many of the contributing authors are affiliated with ISCRiM.

 

The ISCRim seminar is not a public event, as attendance is for members or invited speakers only, with me belonging to the latter category. Interestingly, among this year's attendants were two representatives from Zurich Insurance, which to some may seem a bit odd, as ISCRiM in its very nature is mainly academic, but the more I thought about it, the more it made sense. As a risk insurer and also risk consultant vis-a-vis theirclients it is important for Zurich to stay at the forefront of supply chain risk research, and I think Zurich is headed the right way by linking up with ISCRIM. That way they can act as a catalyst for feeding the supply chain industry with the latest supply chain risk research and conversely, feed academia with the challenges where more research is needed.

 

Zurich does more than just attend seminars. Unbeknown to me, although I do try to keep at the forefront of supply chain risk as I find it on the Internet, they have set up a site called Supply Chain Risk Insights. Relatively new, with the oldest post dated March 2010, some of the more interesting articles I found were

 

  • Business Resilience - showing how contingency plans and logistics partners can help companies cope with natural disasters.
  • Social Responsibility - discussing how corporate social responsibility extends far into the supplier realm.
  • Assessing Risks - illustrating that disruption risks often stem from not managing your suppliers properly.

 

So far, the archive contains no more than 10 articles, but I do hope to see it grow as this site develops. Another nice feature on Supply Chain Risk Insights are a selection of short 3-minute supply chain risk insights videos with Linda Conrad and Nick Wildgoose from Zurich, who present hot topics that relate to supply chain risk management, and what you as an executive should be aware of, and how you can mitigate risk, e.g.

 

 

 

All in all, I find that Supply Chain Risk Insights is a valuable addition to my Internet resources for researching and learning about supply chain risk, particularly from a practitioner's point of view. I'm sure there are many more sites out there, run by others insurers or consultants, but I haven't come across one that specifically targets supply chain risk. If there is, please let me know, and I'll be happy to include it in my list on my own blog, and of course, mention it here on the Kinaxis Supply Chain Expert Community.

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