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2015

The challenge of today’s ever growing supply chains is the incomplete understanding of the impact that disruptions to your operations befell one supplier’s site.  To help address this issue there is a method, first introduced at Cornell University, and which is slowly gaining influence with some major American corporations.  It is a system to aid in the prioritizing the financial and operational impact of risk – company cannot function properly if the former is not tied to the latter.  It will allow companies to allay risks on their most important suppliers.


The system is called time to recovery (TTR) and time to survive (TTS). Time to recovery is simply the time it takes for a specific supplier facility, distribution center or a transportation center to restore to full tasks after a disruption. In order to accomplish TTR must be combined with the following company functions or valuations:


  1. Details of firms supply chain.
  2. Bills of Materials
  3. Sales volume
  4. Profit margin by product line
  5. Pipeline inventory

 

Time to recovery works in this fashion.  Using all the above roles TTR identifies the risk linked with an interruption at each and any of the supplier sites for the entire time of recovery.


For TTR to be a success must acknowledge that some suppliers may be too optimistic about the true time to recover – supplier realize that too long of a time that they remain out of action will not sit well with their customers or manufacturers.  Thus, part of TTR is to identify bottlenecks at suppliers to ensure the accuracy of TTR information and to discern them from other suppliers whom face little or no disruption in their services.


In order to measure this possible situation companies have adopted time to survive (TTS). This is the time a supply chain can continue to match demand after a facility disruption. Using pipeline inventory and TTR data from supplier one can determine the time that a company will be able to serve customer demand without that particular facility.  If the time to survive is better than it’s time to recovery it is safe to say the exposure to risk will be held in check during the recovery period.  In addition, the ability to match supply with demand will not be seriously impeded.  Of course, if the reverse is true the firm’s financial and operations can be at risk.


These new metrics led to a building of a model that will assess the levels of strategic inventory – inventory used in response to an interference in the workings of the supply chain. TTS and TTR must be combined for two reasons:


  1. How much strategic inventory the firm requires
  2. Where to position this inventory for maximum affect

These two calculations will lead to a strong supply chain for every facility will have a TTS greater than its TTR, saving a firm the cost and time involved in the implementation of strategic services.


TTR and TTS, like any system, must be continuously monitored and adjustments made where and if necessary based upon changes in location and environments. For example, if inventory levels change then risk exposure changes in proportion.  When the risk reaches a certain level the procurement managers need to review those drivers to ascertain the risk modifications.


Time to survive and time to recovery measurements should complement each other.  Together, they allow an organization to work with its suppliers to build strategies to allay supply chain risks.  

In the past Chief Financial Officers gave little recognition to the safety of the overall supply chain.  They were mostly concerned with the bottom line – financial profitability – leaving the supply chain safety to others in the organization.

 

Today, the new brands of Chief Financial Officers realize that supply chain performance does directly impact the profitability of an organization.  They are beginning to look at supply and demand as a financial means to manage inventory on a global scope.  The realization that the slightest miscalculation or interruption (sometimes completely out of their control) can decide the profitability.

 

Supply chain Management or to be more precise supply chain risk management is an essential strategic concern for Chief Financial Officer. This has come about not just due to a global economy but also because of climatic catastrophes and political unrest where many manufacturing facilities are located. 

 

Suppliers/vendors and other third parties have a large influence on supply stability, especially those that are located off shore.  This influence can extend to company performance and brand image.

 

Despite this new view by the ‘new’ CFO’s there is still a resistance to seeing the supply chain in a holistic manner to understand the depth of the exposure a company can be faced with.  Too many times it the issues facing supply chain are met or viewed in individual silos as opposed to the entire picture.

 

Supply chain risk management is not about the firefighting mindset.  One only has to consider the tragedy in Japan – the tsunami – had a perceptible impact on the supply chains of many companies.  Among them being, the steel, automotive, electronics and chemical industries.   Did this disaster raise questions about supply chain risk and security? 

 

As stated above climatic or weather disruptions are not the only threat to supply chain.  What about the political unrest in the Middle East that threatens oil supplies?

 

The CFO makes decisions to decrease inventory levels, rely on a sole supply source and adopts just-in-time manufacturing methodologies.  These are all valid decisions but can a company afford the tradeoffs – quality and business continuity?

 

The disruptions mentioned above are vivid reminders to the CFO that these tradeoffs do not come without risk. 

 

In a highly connected world, an enterprise wide view of the significance of the supply chain is vital managing risk.  These risks can reveal themselves in various areas – internal planning, operations, suppliers, and any category of spend. These risks should force the CFO to consider upstream supplier relationships, together with second and third party suppliers and logistics, as fundamentals tied to the company’s operations.  The organizations’ supplier relationships and supply network are just as important to a company as their internal processes as they are tied to the business model and its success.

 

The new CFO now asks questions on the topic of what might happen to the ability to fulfill customer orders and business operations if a key part of the supply chain was put into jeopardy. 

 

  1. Which suppliers can we depend on for our raw materials and their delivery?
  2. What would happen if we were to lose one or more of them?
  3. How long would we be able to continue operations?
  4. Are there other parties available to us?
  5. Are there enough inventories downstream to sustain us through recovery?

 

Not only these questions but the CFO must keep in the back of his/her mind the following – serious defects in these alternative raw materials, disruptions in transportation, material price volatility, transparency, how soon would the disruption be felt in our operations and for how long and our resiliency.

 

If all of these questions are not proactively answered now risk management becomes CRISIS MANAGEMENT.


When I say proactive it means weekly business continuity planning meetings.  These meetings should assess any and all impact such disruptions to the supply chain can cause and create tested response plans to minimize the impact.   Many companies argue that the cost of implementing these programs is prohibitive.  My question to them is this:  Would you rather pay now for prevention or pay dearly later at the risk of the entire company’s survival? 

 

Just for the record these are some of the proactive strategies that should be considered:

 

  1. Identifying alternate suppliers
  2. Contract manufacturers who can assist at a moment’s notice
  3. Postponement strategies
  4. Inventory buffers

 

In conclusion I leave you with several questions.

 

  1. Do we consider an end-to-end view of the supply chain?
  2. Do we initially focus on a smaller scope?
  3. For our suppliers, do we consider all scenarios that could lead to disruptions?
  4. Do we address our resiliency and response time?

 

CFO’s must work with all management to address these questions in order to make significant strides in limiting supply chain risks and preventing crisis management.

 

If your employees are a company’s most valuable asset to ensure that the business runs smoothly, efficiently and constantly improves then why do we continuously fail to put people to good use? 


Good Question?!


Perhaps we can tie that question to another:


Why and How Did American Work Force Become Disengaged?!


Employees who have or will become disengaged, employers in the United States will not receive their creative, innovative and entrepreneurial power.  It goes further than just the creative ‘juices’. Without employee engagement employers are looking at high turnover and absenteeism and low productivity.


During the past three decades, corporations have reaped record profits, CEO’s and COO’s are making record salaries (notice I did not use the word –earning). However, employee wages have both declined or languished. 


Disappearing are the positions in middle management of all types of companies – jobs paying between $14.00 and $21.00 per hour with benefits.  Why and how did this come about?


There are six (6) reasons for this dearth of employee engagement.  They are the following:


  1. Corporate Re-engineering:

As the U. S. economy became in affected by with globalization many of America’s large firms commenced to reshape themselves to reduce costs.  They changed into lean and mean firms with fewer jobs. Complete business functions or departments were either shuttered or outsourced or off shored.

  1. Decline of Unions:

As of 2013 the American labor force had only 11.3% of the population unionized. This was the lowest percentage in almost 100 years.  A similar event took place in the private sector as the union force amounted to a mere 6.5% of the population.  This is a dramatic turn of events as in the 1950’s it was 35% of the population. American firms made a determined effort to eliminate or weaken union grasp.  It is quite evident how successful they were.

  1. Automation:

Due to the great movement overseas resulting in massive downsizings, manufacturers have made investments in automation.  Automation has been successful beyond belief – eliminated millions of blue collar jobs and the internet has allowed companies to outsource and offshore many white collar jobs.

  1. Two-Tier Pay Systems:

One of the most subtle strategies created to reduce wages was the Two-Tier System.  This strategy rewards long time employees with keeping current wages and benefits but reduces those of all new employees. The sinister side of this is that it encouraged older workers to vote against younger workers in order to sustain their status.  As these older workers retire and replaced by newer and younger employees the overall wages are reduced.   The larger picture is that this system breeds disunity, fosters unhappiness and produces low morale because the younger employee is performing the same work as the older employee but only receiving two-thirds of the pay.  This system has been used in a host of industries – airlines, construction, chemical, printing, petroleum, food, textile, insurance, aircraft production, tire production and retail.

  1. Temporary and Part-time Workers:

Most of the jobs created since 2008 have been part-time or temporary ones. Part-time positions have grown from 1.9 million in 2009 to 2.7 million in 2013. There are several reasons for this increase in part-time jobs.  A few of them are the following.  Some businesses are not convinced that recovery is here to stay, so why hire. Another reason is that consumer demand is still too low and many companies have too much inventory-on-hand.  Additionally, it appears that many firms will intentionally keep their headcount under 50 so as to be affected by Obama care.  Furthermore, these people are hired without health benefits but that only perpetuates the problem – people do not make enough money to support their families unless they have ‘relief’ I n the form of food stamps or other government support.

  1. Contract Workers:

Contract workers are a relatively new and increasing category of employment in this country.  These are full time workers who are self-employed, but not part of a company’s head count.  Thus, there are no benefits and pay their own taxes.  It is safe to say that contract workers are the future as employers continue to reduce head count.


This relentless effort to reduce labor costs over the last 40 years has been quite successful, but it has created huge economic problems. Low and dormant wages have led to less consumption which has kept the GDP at a trivial 2% growth rate.  In addition, there is not enough consumption to purchase all the goods that America can produce.  It is clear that this economic model will continue into the future without any recognition to what has happened to the middle class. 


The irony of this story is in view of decreasing wages and benefits are the continued rise of CEO compensation.  Per the AFL/CIO report, corporate profits, salaries and benefits to CEO’s have risen 331 times as much as average employee.


American corporations can become more competitive if they release the creativity, innovation and entrepreneurial spirit of employees.  Motivating them to give their utmost must start with a discussion on wages, benefits, security and equality.