Risky Business

Companies can’t control when disaster strikes, but they can control their response and get back to business.

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Five years ago when a magnitude 9.0 earthquake struck off Japan’s northeastern shore, generating gigantic tsunami waves that crashed into miles of shoreline and destroyed coastal towns and villages in its wake, there were global implications for manufacturers—especially for an automaker, General Motors (GM).

The Detroit, Michigan-based manufacturer of Buick, Cadillac, GMC and Chevrolet vehicles found out the hard way that their business continuity plans were too tactical. Todd Scott, executive director of Global Supply Chain at GM, explains the company has vehicle architectures that are designed under specific platforms then produced globally, from Asia to South America and Europe to North America.

“As a result of this global architecture, we have shared supply from the Tier One level down,” he says. “We didn’t understand our sub-tiered supply base well in 2011. We didn’t know the locations of all of our suppliers and we didn’t know which suppliers supplied our Tier Ones.”

Not only that that but the regional supply chain heads for the company’s different divisions across the globe didn’t know, or ever talk to, each other. “We really didn’t know each other well and that added an extra layer of complexity,” he says.

It’s no surprise then that GM was still actively locating suppliers within the affected area six weeks after the tsunami, which created tens of billions of dollars in damage and took 16,000 people’s lives.

Fast forward to April 2016, when Japan was hit with a 7.0 magnitude earthquake. The changes GM made since 2011 helped the manufacturer recover quickly from the quake, which displaced 44,000 people and caused billions of dollars in damage. In fact, it took GM just six hours to locate and contact all of its affected tiered suppliers. So despite the fact that 70 of the company’s suppliers suffered negative impacts in the earthquake, the company responded quickly and still reported record profits in the second quarter.

“We are a much more globally connected organization today,” Scott says. “When the 2011 tsunami hit, we had to dispatch one of our most senior executive vice presidents from North America to discuss tactical issues, such as ‘Can we borrow those parts from you? We’ll loan you these parts in return, and we promise to pay you back. Here is our arrangement in writing.’ With the quake that hit in April, we had that all worked out to a working level within just a matter of days.”

Scott says the heads of affected divisions were able to quickly understand each other’s needs and respond. “We had parts produced in Mexico going to China; we stopped that pipeline right away so we could survive in North America,” Scott says. “We stopped the pipeline of parts from China so they could keep going. All that was worked out at a working level; no intervention was necessary.”

Disruptions in the supply chain are a fact of life. But when companies are prepared for risk, they can mitigate the unexpected fairly quickly and get back to business as usual.

Identify Your Risk

“Disruptions happen—all the time and all over your supply chain,” says Hank Canitz, director of product marketing at Logility, a producer of supply chain management solutions. But what could be the top disruptions for your supply chain varies slightly, depending on your industry and where you operate.

A Council of Supply Chain Management Professionals (CSCMP) study, which identifies four areas of potential disruption. This list, which goes beyond uncontrollable events such as natural disasters, included technology, meaning disruption from artificial intelligence, 3D printing, Big Data and other high-tech capabilities; macroeconomic trends, such as globalization and urbanization; increasing customer requirements and demands; and operational constraints, including Free Trade Agreements, environmental legislation and safety requirements.

Bill Hurles, executive director of the Global Supply Chain Resiliency Council, is no stranger to disruptions. He recently retired from GM as the executive director of Supply Chain where he led the global operations of 159 plants as well as GM’s Global Supply Chain Leadership Team. This executive, who weathered the tsunami with GM, highlights the following risks for companies to watch, though he couches his comments with: “It varies, depending on the breadth of the organization’s supply base and where they operate.”

Geographic events such as earthquakes, hurricanes and floods top his list. He then adds geopolitical risk, which is important for any company operating globally. The third risk he identifies is sub-tier risk mitigation. “Something could happen on a regional sense that could affect a Tier One or Tier Two supplier, so it’s definitely an issue. If you don’t know who your Tier Two suppliers are, you can really be blindsided,” agrees Bindiya Vakil, who is the CEO and founder of Resilinc, a cloud provider of resilience and risk management intelligence and analytics.

Companies need to think outside the box when it comes to risk, adds Doug Thomas, professor of Supply Chain Management at Penn State’s Smeal College of Business. “Fluctuating oil prices, for example, might not be a headline-grabbing kind of risk, but companies need to be thinking about designing their networks in environments where they can adapt to oil prices or things like the Britain European Union referendum,” he says. “Big swings in foreign exchange or oil prices can change what your ideal network will look like.” He suggests management teams regularly run what if scenarios like how does the competitive landscape change if oil prices rise to $70 a barrel instead of $40 a year from now. How will a change like that affect the manufacturing transport mix they currently use?

Blocking and Tackling

Companies can put blocking and tackling measures in place to improve risk management and resiliency. But, Canitz says some companies approach disruptors in different ways—and some better than others.

For example, some companies rely on redundancies. “They build an extra plant, stockpile inventory or have extra suppliers,” he says. “But in today’s competitive world, where you’re not only competing against the competitor around the block, or in the next state, but the ones across the globe, these redundancy-type methods are too expensive and are not competitive.”

Companies also take a hard look at processes; the ultimate goal being to standardize them to make the supply chain more flexible. This requires firms to involve the supply chain in other business processes like product development, marketing and sales. “But companies have been trying to adopt standardized processes for as long as I can remember, and there are still a lot of companies struggling with this,” Canitz says. “The ability to move production among plants requires compatible processes, machines and personnel, and that  is not all that common.”

Postponement, where a manufacturer produces a generic product that can be modified in the later stages of production before transport to the customer, is another blocking and tackling method to increase resiliency. A multi-echelon inventory optimization (MEIO) solution can help ensure that inventory is deployed to meet customer requirements while minimizing total inventory. 

The last tactic companies use, and one that Canitz calls critical to risk mitigation, is developing a company culture that allows employees to talk about what’s wrong and make decisions to fix it. “This is the blocking and tackling method companies fall down on more than anything else,” he says. “You need a culture where people are communicating and aware of what’s going on. It’s great to be able to run your processes day in and day out when things are going great, but when things happen unexpectedly, how quickly can you respond? If you have to go all the way up to your CEO to make a decision, you’re not going to be able to respond very quickly.”

This is one area GM addressed when cracks in its resiliency armor surfaced in aftermath of the tsunami. The company now has a common data file shared among all global partners. They have set up video conferencing rooms company-wide, put Skype on everyone’s laptops and added 4G LTE to its vehicles to improve global communication. “We are globally connected, and talk once a week at a leadership level. We’ve built a much more trusting relationship,” says Scott.

The openness of communication among GM’s supply chain leaders helped the company respond quickly after the recent earthquake. The quake happened April 16, and by April 21, Scott presented response plans to the executive team. “That’s a pretty quick reaction when you’re talking about a network the size of ours,” he says. “Because we had relationships built and a level of trust, we were able to address the situation quickly. We were even a little bit ahead of our senior leadership team. I’ll gladly take that criticism every day; that we were ready and able to make a decision, and that it was the right decision for the company, than to be criticized for making the wrong decision, having no alternatives or taking too long to act.”

Changes to the culture, like those that have occurred at GM, cannot come from the middle, adds Canitz. “The only way cultural change takes place is when it comes from the top. It’s got to originate with C-level executives, and they all have to be marching in the same direction.”

Build a Good Offense

“Most companies only respond to disruptions,” laments Canitz. “They play defense to minimize the impact; there isn’t a lot of offense going on to plan for or prevent disruptions in the first place.”

But offensive play is the best way to get your arms around risk mitigation, and according to Scott, improving a company’s risk mitigation strategy begins with data, which needs to be dynamic and constantly updated. “Data forms the entire basis for having a quick reacting and strategic risk management process,” he says.

Good data sets require a solid tool to manage them, but the reality is that “most companies still use spreadsheets in their sales and operations (S&OP) planning,” adds Canitz. “But spreadsheets are not a good tool for the types of ‘what if’ scenarios you need to perform … they are not a good tool to handle the volumes of data you’ll need to pull in from other systems.”

Canitz adds companies need to learn to walk before they can run. “You need to have basic demand planning, supply planning and inventory planning in place to provide the foundation of rich data. That’s where I’d start,” he says. “Then you need to look at a tool that allows you to pull in information from various systems (supply planning, demand planning, transportation, inventory and financials). A tool like Logility’s helps companies pull this information together, collate it, prioritize it, analyze it, run ‘what if’ scenarios, and determine optimal strategic and tactical plans going forward.”

Data management and analysis solutions such as those from Resilinc can help companies prioritize their response, adds Vakil. They can use such tools to perform proactive planning for risk mitigation. We often see situations where a single sourced, custom/semi-custom part which costs $100,000 a year, is used on a product which generates $500 million in revenue a year.  This impact assessment can be used to prioritize budget and resources on mitigation activities across all parts. A company with about 5000 parts under management with suppliers can quickly identify the 10 parts with high financial risks and high revenue impact. They can also quickly pinpoint the 15 parts coming from risky locations where disruptions happen quite frequently, resulting in high location risk. Worse, suppliers in these areas may also report long recovery times, possibly 40 weeks or more, which further compounds the impact of a major disruption. 

“You cannot afford this,” Vakil explains, “because if this $100,000 part goes down, your revenue impact is $500 million or more. The Resilinc solution applies big data analytics to  prioritize biggest problems, and prescribe which risks to address first.” If it’s a location issue, maybe there’s a supplier at a less risky location. If it’s a financial concern, maybe the parts can be designed out or a life time buy placed. “Advanced machine intelligence solutions like Resilinc’s help experts choose predict problems, and choose mitigation strategies that are appropriate and effective,” she says.

Canitz cites the Avian flu as a key example of a proactive response using resiliency planning tools. Companies could not predict that they’d lose 60 to 70 percent of the eggs that went into their products. But they could use technology to run different scenarios to figure out how to keep operating, and Logility’s client considered everything from changing the formula to getting different suppliers. “Our client run hundreds of scenarios before they came up an optimal plan that would allow them to meet customer demand,” he says.

Know Thy Suppliers

None of this is possible, however, if companies do not know their supply chains in the first place.

“It sounds trite and oversimplified, but companies need to know where their stuff comes from,” Thomas says. “They need to be able to trace down two to three tiers in their supply chain and know where things are coming from. Some of the big natural disasters hit companies very hard, because the supplier to their main supplier happened to be located in an area that was hit and the company didn’t know their risk.”

Joey Alonso, president of Quortum, a northern Virginia firm that provides risk management services, agrees. “When you think about supply chain, you’re really talking about partnerships. And, as with every partnership, you need to know who you are partnering with.”

After the tsunami, Hurles says GM identified Japan as its epicenter of risk, and began mapping its supply chain there. “Companies need to map where the suppliers are,” Vakil says. “They need to understand where their Tier One’s are manufacturing and the suppliers they use. Our solution helps identify those relationships.”

Once companies know where their suppliers are, they can perform predictive analysis and look at some what if scenarios. Let’s say this key supplier is out for two months. What will the impact be? Knowing this, companies can put a plan in place that brings in a new supplier or some other alternative. “Maybe they give a new supplier 10 percent of their total orders so they have some capabilities so that if a Tier One supplier goes down, this supplier can come up,” he says. “This provides the ability to look out into the future, develop plans like this, and it gives companies the ability to react should a disruption occur in the future.”

When suppliers are known and become key partners to the business, a proactive approach can be employed to help improve their operations. Canitz has experience working with partners to build Lean and Six Sigma capabilities within their facilities. “But," he says, "you must have visibility into your Tier One, Tier Two suppliers, and the means to collaborate.”

GM has the ability to dispatch tactical operations professionals to their suppliers in times of crisis. Besides for helping them get a boots on the ground take on the issue, it also enables the company to step in and help. “It lets us know how they have been impacted, and what we can do to help,” Scott says. “We’ve had cases where we have provided generators to companies or even arranged to have drinking water brought in.”

SIDEBAR: 

Global Supply Chain Resiliency Council Awards

The Global Supply Chain Resiliency Council was formed to bring together supply chain risk management and resiliency practitioners with luminaries and educators to advance the professional discipline through opportunities to collaborate, develop and share best practices, and be recognized for innovation and leadership. A key goal of the Council is to elevate the profile of supply chain resiliency business challenges and opportunities vis-a-vis the C-level strategic agenda.

To that end, the Council awards supply chain resiliency at its annual Global Supply Chain Resiliency Council and Awards event. The awards program is designed to recognize organizations and individuals that serve as role models and leaders in driving supply chain resiliency strategy success within their company, supply chain community and across industries. The awards committee considers nominations received from suppliers, customers and experts from the Council’s technical adviser, Resilinc.  In 2014 and 2015, resiliency programs receiving recognition included companies like Amgen, Palo Alto Networks, Bose, Western Digital, etc. The awards are handed out in the spring, but companies are encouraged to share their resiliency success stories now.  The Council has begun accepting award nominations beginning in September for the 2017 awards. To learn more about this prestigious award, visit: www.resilinc.com/resources/events-awards/.  Any member of the Global Supply Chain Resiliency Council LinkedIn group is eligible to nominate a company (Link: https://www.linkedin.com/groups/3725519), educational organization, individual or team for consideration, at the following link: https://www.surveymonkey.com/r/Z8596Q6 

 

 

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