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14Learning from Risk Management Leaders

Although. most. companies. have. a. way. to. go. before. they. can. brag. about.their. risk. management. prowess,. some. companies. have. achieved. distinc-tion,.at.least.in.some.aspect.of.risk.management..This.chapter.highlights.a.variety.of.companies.that.have.demonstrated.their.commitment.and.skills.when.pursuing.supply.chain.risk.management.(SCRM):.Boston.Scientific,.Boeing,. IBM,. Cisco,. Delphi,. and. a. major. defense. contractor.. The. pur-pose.of.this.chapter.is.to.appreciate.what.leading.companies.are.doing.to.become.risk.management.leaders..We.also.highlight.a.company.that.offers.risk-.related.lessons.learned.the.hard.way.

Making RiSk ManageMent a pRiORity at BOStOn SCientifiC

A.company.that.is.widely.recognized.at.being.at.the.top.of.its.risk.man-agement.game.is.Boston.Scientific.Corporation.(BSC),.a.company.started.in.1979.with.38.employees.and.$2.million.in.sales.1.Today,.with.a.world-wide. workforce. of. 24,000. employees,. more. than. $7. billion. in. sales. from.more. than. 100. countries,. and. a. product. portfolio. containing. 15,000.products,. it. is. not. surprising. that. a. company. this. complex. continuously.faces.uncertainty.

Even.before.the.2008.economic.downturn.BSC.had.taken.a.heightened.interest.in.the.impact.of.supplier.risk.on.the.company’s.operations..In.this.regard. the. company. is. an. early. risk. management. adopter.. The. company.created.a.detailed.Supplier.Risk.Management.program.to.help.prepare.for.

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268  •  Supply Chain Risk Management: An Emerging Discipline

any.anticipated.and.unanticipated.risks.they.may.face..BSC.defines.supplier.risk.management.as.a.proactive.and.systematic.process.for.cost-.effectively.identifying.and.reducing.the.frequency.and.severity.of.unwanted.events.in.the.supply.chain.that.have.an.adverse.effect.on.the.business.

The. primary. goal. of. BSC’s. program. is. to. move. from. being. a. reactive.risk. taker. to. being. proactive. toward. risk,. thereby. allowing. the. company.to. reduce. its. overall. risk. exposure.. The. company. divides. this. goal. into.four.specific.objectives—gain.visibility.to.high-.risk.suppliers.that.require.attention,.identify.and.understand.the.specific.drivers.that.increase.sup-plier.risk,.proactively.manage.and.mitigate.supply.chain.risk,.and.measure.risk.mitigation.and.its.impact.

BSC.followed.a.three-.step.process.when.designing.its.risk.management.program.. The. first. step,. information. acquisition,. required. BSC. to. gather.and.access.information.from.the.external.environment,.suppliers,.and.the.analysis.of.different.parts.and.components..The.second.step.involved.com-piling.this.information.using.basic.risk.management.systems.and.tools..The.final. step. involved. communicating. this. information. to. different. Boston.Scientific.business.units.and.plants.as.well.as.to.suppliers.

having the Right tools

After. its. initial. analysis,. Boston. Scientific. designed. a. formalized. process.to. manage. supplier. risk.. This. process. includes. (1). identifying. risk. areas,.(2). analyzing. and. prioritizing. these. risks,. (3). developing. risk. mitigation.plans.to.address.high-.risk.areas,.and.(4).tracking.high-.risk.areas.

To.support.this.process.the.company.has.developed.a.primary.risk.tool.it.calls.the.Supplier.Risk.Wheel..Each.supplier.has.its.own.wheel..The.pur-pose. of. this. tool. is. to. identify. high-.risk. events. and. risk. categories. that.require.action..The.Supplier.Risk.Wheel.starts.with.data.and.survey.inputs.to. identify. specific. risk. events,. which. create. the. outer. ring. of. the. wheel..Risk. categories. that. contain. these. identified. risk. events. comprise. the.middle. circle. of. the. wheel.. Each. risk. item. (outer. ring). and. risk. category.(middle.ring).is.assigned.a.color.based.on.the.level.of.risk.it.involves.(red.=.very high risk,.light.red.=.high risk,.yellow.=.medium risk,.light.green.=.low risk,.dark.green.=.very low risk),.and.each.level.affects.the.next..Finally,.the.risk.categories.are.used.to.calculate.the.overall.supplier.Risk.Probability.Index.(RPI),.which.is.the.center.circle.of.the.wheel.

BSC.has.developed.other.tools,.including.a.Risk.Distribution.Matrix.and.a. Supplier. Comparison. Report,. to. provide. further. risk. insight.. The. Risk.

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Learning from Risk Management Leaders  •  269

Distribution. Matrix. is. a. mapping. tool. with. an. x-. and. y-.axis.. The. x-.axis.represents.the.supplier’s.Risk.Probability.Index.from.the.Risk.Wheel.and.the. y-.axis. represents. the. potential. revenue. impact. presented. by. the. sup-plier..The.matrix.uses.red,.yellow,.and.green.zone.designations.

A. Supplier. Comparison. Report. allows. the. comparison. of. the. highest.and.lowest.indicators.or.ratings.in.various.areas.between.suppliers..This.approach.also.relies.on.a.color-.coded.scheme.and.considers.factors.such.as.the.supplier’s.percentage.of.revenue.from.medical.devices,.quality,.align-ment.with.BSC,.accreditation,.delivery,.capacity.utilization,.plant.size,.and.service.support..Another.tool.is.a.comprehensive.risk.template.that.details.the.kinds.of.actions.taken.to.prevent.or.mitigate.risk.in.the.case.of.a.risk.event..Boston.Scientific.uses.all.of.this.information.to.determine.the.best.ways.to.eliminate.or.manage.supplier.risk.

Boston. Scientific. has. also. created. a. Risk. Alert. and. Communications.System.. This. system. relies. on. a. variety. of. data. sources. in. four. catego-ries. (financial,. governmental,. disasters,. and. market. dynamics). to. gain.insight.into.potential.risk.events..Examples.of.data.sources.supporting.the.alert.system.include.Dun.&.Bradstreet.information,.U.S..Environmental.Protection.Agency.(EPA).e-.newsletter,.regulatory.updates,.U.S..Food.and.Drug.Administration.(FDA).updates,.weather.updates,.commodity.analy-ses,.supplier.communications,.foreign.travel.warnings,.and.state.depart-ment.fact.sheets..Finally,.the.company.actively.benchmarks.and.compares.its.risk.management.capabilities.against.other.best-.in-.class.companies.

Is.all.this.work.worth.it.to.Boston.Scientific?.The.company.has.developed.three. sophisticated. metrics. for. evaluating. its. risk. standing—cross. prod-uct,.which.is.a.measure.of.overall.BSC.supply.risk.in.dollars;.the.standard.deviation.of.revenue.at.risk;.and.the.average.supplier.RPI.by.quarter..All.three.indicators.reveal.the.company.is.trending.in.the.right.direction.

Boston. Scientific. understands. that. being. a. supply. chain. risk. manage-ment.leader.requires.the.development.of.the.right.kinds.of.tools.and.tech-niques.to.support.their.journey.

naVigating thReatS at BOeing

Global. companies. know. that. at. any. moment. unpredictable. events. can.happen.anywhere.in.the.world..These.events.become.worse.when.a.com-pany.is.unable.to.determine.its.risk.exposure..And.probably.no.company.

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270  •  Supply Chain Risk Management: An Emerging Discipline

appreciates.this.more.than.Boeing,.a.company.with.170,000.employees.in.50.U.S..states.and.70.countries,.and.with.thousands.of.suppliers,.partners,.and. customers. located. in. 150. countries.. With. people. and. operations. in.this.many.locations.being.affected.by.tornadoes,.hurricanes,.earthquakes,.pandemics,.civil.unrest.or.terrorism,.or.catastrophic.product.failures.that.are.major.news.events.is.not.only.a.possibility,.it.is.a.certainty..The.ques-tion.becomes.how.severe.a.risk.event.will.be.and.its.effect.on.the.company.and.its.stakeholders.

Boeing.created.a.system.called.ThreatNavigator.to.monitor.diverse.loca-tions. and. potential. risks.. This. system,. the. brainchild. of. several. Boeing.emergency. management. professionals,. allows. managers. to. quickly. com-prehend.a.complex.situation.and.monitor.it.in.real.time..These.personnel.also.envisioned.a.system.that.could.track.and.contact.Boeing.employees,.including.those.who.are.traveling.

An. in-.house. team. created. ThreatNavigator. using. web. technology.. This.tool.combines.internal.and.external.information.and.displays.it.visually.in.a.Google.Maps.format..External.data.feeds.come.from.sources.such.as.NC4.(a.commercial.information.service.described.in.Chapter 12).as.well.as.the.National. Weather. Service.. Icons. show. the. type. of. incident. and. use. color.codes. to. indicate. the. elapsed. time. since. an. incident. occurred.. Alerts. are.also.sent.to.system.users.via.e-.mail.so.they.can.be.kept.up-.to-.date.on.a.situ-ation..Before.the.development.of.ThreatNavigator,.alerts.and.information.from. many. sources. were. sent. to. emergency. responders,. something. that.took.hours.to.accumulate.and.analyze..And.it.doesn’t.take.a.Boeing.rocket.scientist.to.figure.out.that.hours.in.an.emergency.represent.an.eternity.

ThreatNavigator,. which. came. online. in. 2012,. has. already. been. used.numerous. times.. It. was. first. used. to. monitor. a. NATO. summit. hosted.in.Chicago.to.follow.the.actions.of.protestors.who.vowed.to.shut.Boeing.down.due.to.the.company’s.military.support.of.NATO..It.was.also.used.to.monitor.areas.affected.by.Hurricane.Sandy.during.October.2012..The.sys-tem.also.helped.determine.if.evacuations.were.necessary.during.Colorado.wildfires.as.well.as.during.civil.unrest.in.Cairo..And.risk.managers.used.ThreatNavigator.to.monitor.the.Oklahoma.City.area.after.a.massive.tor-nado.hit.the.area.as.well.as.the.aftermath.of.bombings.at.the.2013.Boston.Marathon..This.system.also.tracks.medical.emergencies.or.events.at.com-pany.sites.daily,.something.that.shows.the.system’s.versatility.

Other. systems. support. ThreatNavigator.. These. include. the. DENS.(Desktop.Emergency.Notification.System),.which.delivers.computer.alerts.to.

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Learning from Risk Management Leaders  •  271

employees.about.emergencies;.the.DAN.(Dialogic.Automated.Notification).system,.which.sends.messages.globally.through.an.automated.phone.noti-fication.system;.the.BEACON.(Boeing.Employee.Accountability.Network).system,.which.accounts.for.the.location.and.well-.being.of.employees.if.a.site.evacuation.is.required;.the.TRIS.(Travel.Risk.Intelligence.Service).sys-tem,.which.monitors.Boeing.employees.when.they.travel.and.what.health.and.safety.threats.might.be.nearby;.and.other.systems.including.an.emer-gency.800.number.and.an.emergency.website.

These.systems.help.keep.the.company.and.its.vast.network.of.employ-ees.safe.in.an.unsafe.world..They.allow.critical.business.operations.to.be.maintained. wherever. possible. during. a. crisis. or. event.. By. being. able. to.react.quickly.to.events,.Boeing.is.at.the.forefront.of.risk.mitigation,.creat-ing.a.confidence.within.the.company.that.it.will.be.able.to.deal.with.risk.events.better.than.ever.before.

SupplieR RiSk aSSeSSMent at iBM

It.should.come.as.no.surprise.that.a.company.known.for.developing.inno-vative.products.and.solutions.for.its.customers.would.develop.an.innova-tive. approach. for. managing. supply. chain. risk.. To. grasp. the. importance.of. the. supply. chain. to. IBM,. consider. that. the. company. has. more. than.1,800. first-.tier. suppliers,. contractors,. and. manufacturing. sites. and. more.than.25,000.professionals.working.in.its.Integrated.Supply.Chain.group..The.hardware.group.alone.at.IBM.buys.$12.billion.of.production.materials.per.year.from.suppliers..And.the.company.is.increasingly.relying.on.sup-pliers. in. India,. China,. other. Southeast. Asian. countries,. Eastern. Europe,.and. South. American. countries.. As. its. electronics. supply. chain. becomes.increasingly.complex,.so.too.have.the.risks.the.company.faces..Needless.to.say,.the.IBM.of.today.faces.more.risks.than.the.IBM.of.just.a.few.years.ago..

Several. years. ago. IBM. began. a. review. of. its. approach. to. supplier. risk.assessment..An.initiative.to.improve.IBM’s.risk.assessment.ability.started.as.part.of.an.overall.corporate.strategy.built.around.enterprise.risk.man-agement.(ERM)..As.part.of.that.effort,.IBM.looked.more.closely.at.its.risk.management. approaches. in. its. supply. management. group.. And. not. sur-prisingly,. given. the. global. nature. of. IBM’s. business,. the. company. found.opportunities.for.improvement.

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272  •  Supply Chain Risk Management: An Emerging Discipline

An. assessment. of. IBM’s. current. state. revealed. that. while. some. risks.guidelines.and.processes.were.in.place,.risk.assessment.was.largely.a.man-ual,.and.at.times.overly.subjective,.process..What.constituted.high.risk.to.one.individual.or.team.might.really.be.construed.as.medium.risk.to.another..Furthermore,.the.approach.to.collecting.data.to.support.risk.assessments.was.not.especially.rigorous.

The.company.searched.the.marketplace.to.identify.commercially.avail-able.solutions.to.evaluate.suppliers.in.terms.of.financial.risk,.operational.excellence,. and. product. integrity.. After. six. months. the. IBM. team. con-cluded.that.no.comprehensive.tool.was.available.to.satisfy.its.requirements..While. many. tools. considered. some. aspect. of. what. IBM. was. looking. for,.none.brought.everything.together.in.a.comprehensive.way.

What. do. you. do. after. searching. the. market. and. finding. that. no. com-mercially.viable.approach.is.available.to.fit.your.needs?.IBM.determined.it. would. be. better. off. developing. a. tool. internally. supported. by. existing.IBM.products,.including.its.Cognos.analytics.tool.and.ILOG.event.man-agement.capabilities..The.resulting.Total.Risk.Assessment.(TRA).software.tool.provides.automated.alerts.to.commodity.managers,.purchasers,.and.others. at. IBM. about. potential. risks. in. the. supply. chain.. It. also. includes.complex.algorithms.to.quantitatively.evaluate.risk.

iBM’s Risk Management tool

IBM’s. primary. goal. when. developing. the. TRA. software. was. to. have. the.ability. to. assess. risk. systematically. to. become. more. predictive. and. less.reactive..This.tool.incorporates.data.from.an.existing.IBM.database.that.tracks. supplier. financial. data. and. status,. uses. a. third-.party. data. source.that. provides. information. on. worldwide. news. and. events,. and. receives.inputs. from. IBM. procurement. managers. and. others. as. they. provide.responses. to. a. set. of. structured. questions.. It. is. also. driven. by. periodic.assessments.of.all.suppliers.and.leverages.many.of.IBM’s.in-.house.predic-tive.analytic.engines.to.calculate.probabilities.of.risk.occurrences,.deter-mine.the.likelihoods.of.events,.and.develop.alert.dashboards.

The. risk. management. tool. provides. a. comprehensive. risk. assessment.and. ongoing. mitigation. approach. to. protect. against. loss. of. revenue. and.profits. by. minimizing. the. likelihood. and. severity. of. supply. chain. dis-ruptions.. The. tool. manages. and. updates. 13. categories. of. risk. across. five.elements:. country,. hub,. supplier,. supplier. site,. and. commodity.. All. new.suppliers. are. assessed. through. this. tool. prior. to. awarding. business. with.

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Learning from Risk Management Leaders  •  273

higher-.risk. suppliers. encouraged. to. develop. risk. mitigation. plans. before.receiving.material.approval.

The.proprietary.algorithms.used.to.calculate.risk.scores.from.the.inputs.coming.into.the.system.are.critical.to.this.tool’s.success..The.TRA.tool.pro-vides. a. numeric. score. and. graphically. represents. different. risk. categories.as.being.low,.medium,.or.high.risk,.thereby.providing.guidance.to.supply.managers. who. must. develop. contingency. or. risk. management. strategies.appropriate.to.those.ratings..The.tool.provides.a.wide.range.of.functionality:

•. Catalogs.full.supplier.risk.exposure.across.multiple.commodities•. Performs.probability-.based.risk.assessments•. Develops. roadmap. guides. for. risk. mitigation. strategies. for. execu-

tive.approval•. Establishes.control.limits.for.each.risk.element•. Highlights.new.business.processes.and.risk.escalation.pathways•. Monitors. global. risks. against. specified. “risk. appetite”. corporate.

thresholds•. Updates.and.provides.feedback.to.executives.as.risk.exposures.elevate•. Supports.the.Supply.Commodity.Councils.as.crisis.situations.occur

Constructing. the. databases. to. support. this. tool. had. an. early. benefit..When.an.earthquake.and.subsequent.tsunami.struck.Japan,.IBM.was.able.to.identify.within.hours.the.supplier.sites.that.might.be.at.risk.from.among.hundreds.of.its.Asian.suppliers..Other.companies.required.days.and.even.weeks.to.arrive.at.a.complete.picture. of.their.risk.exposure.. Linking.the.TRA. system. to. another. system. that. tracks. on-.hand. inventory. allowed.IBM.to.secure.supply.from.affected.areas.faster.than.competitors,.provid-ing.IBM.with.uninterrupted.supply.to.customers.

IBM. has. noted. several. initial. benefits. from. its. homegrown. solution..Some.of.these.benefits.include.the.tool’s.ability.to.uncover.multiple.risks,.assess.the.likelihood.and.impact.of.those.risks,.and.address.those.risks.with.formal. mitigation. plans.. The. tools. also. provides. a. consistent. risk. man-agement. approach. across. all. brands. and. commodities. and. provides. the.executive.team.with.trends.and.patterns.that.have.been.revealed.through.systematic.risk.analysis.

A. decade. from. now. there. will. be. an. impressive. number. of. risk. man-agement.tools.commercially.available..Today,.however,.is.a.different.story..Progressive.companies.like.IBM.realize.they.can’t.wait.for.the.day.when.commercially.available.tools.arrive..The.time.to.act.is.now.

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274  •  Supply Chain Risk Management: An Emerging Discipline

uSing Supply Chain Mapping tO Manage RiSk at CiSCO

An.emerging.risk.management.technique.focuses.on.mapping.the.nodes.within.a.company’s.supply.chains.(refer.to.Chapter 12.for.a.discussion.of.supply.chain.mapping)..These.nodes.include.production.sites,.warehouses.and.distribution.centers,.contract.manufacturers,.suppliers,.and.custom-ers.. Frankly,. there. is. no. shortage. of. nodes. and. entities. across. a. complex.supply.chain..One.leading-.edge.approach.connects.these.nodes.within.a.map.with.lines.that.indicate.product.volume.and.total.price.or.margin,.and.then.superimposes.these.with.a.risk.index.on.every.connection..Various.tools. support. the. calculation. of. the. risk. index,. including. failure. modes.and. effects. analysis. (FMEA),. Time-.to-.Recovery. (T-.t-R). metrics,. and. a.Resiliency. Index.. Some. approaches. use. red,. yellow,. or. green. symbols. to.indicate.high,.medium,.or.low.risk..The.resulting.map,.when.constructed.properly,.produces.a.compelling.picture.

The. next. step. in. this. process. involves. a. detailed. look. at. the. high-.risk.connections. with. the. development. of. risk. mitigation. plans.. However,.leading.companies.don’t.stop.there..Cisco,.a.leading.producer.of.network-ing.equipment,.has.taken.its.mapping.process.to.an.entirely.new.level..This.next. level. integrates. worldwide. threats. (weather,. political,. hazards,. etc.).and.superimposes.any.threats.continuously.on.the.map.using.data.from.companies.such.as.NC4..Many.risk.management.leaders,.including.Cisco,.Bayer.Crop.Science,.and.Flextronics.utilize.supply.chain.maps.and.these.24/7.threat.events.to.drive.their.tactical.and.operational.risk.discussions.

Here. is. an. example. of. how. Cisco. utilizes. this. approach.. In. May. 2008,.Chengdu,. China,. experienced. a. magnitude. 7.9. earthquake.. Cisco. con-ducted.a.full.impact.analysis.that.evaluated.supplier.sites,.parts,.and.prod-ucts. in. the. Cisco. supply. chain.. Within. a. day. of. the. event,. assessments.revealed.that.Cisco.had.20.suppliers.in.the.affected.area..Within.two.days.of.the.quake,.Cisco’s.SCRM.Group.initiated.a.crisis.survey.forwarded.to.the.supplier’s.emergency.contacts.

As.a.result.of.these.efforts,.two.suppliers.were.identified.as.at-.risk..The.first. supplier,. a. single-.source. supplier,. represented. a. significant. revenue.risk.to.Cisco..This.supplier.was.already.flagged.for.review.due.to.the.risks.associated.with.using.a.single.source..In.fact,.Cisco.had.already.qualified.a.second.source..The.second.supplier.was.smaller.in.revenue.risk.but.expe-rienced.significant.damage.to.its.facility..Cisco.sent.its.Crisis.Management.

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Learning from Risk Management Leaders  •  275

Team. to. help. the. supplier. recover. from. the. physical. damage.. The. result.was.a.faster.Time-.to-.Recovery.(T-.t-R).compared.with.competitors..When.each.day.means.millions.of.dollars.in.lost.revenues,.taking.risk.manage-ment. to. a. higher. level. means. being. faster. and. better. than. competitors..And.at.Cisco,.that.means.taking.an.approach.such.as.supply.chain.map-ping.and.extending.its.functionality.to.support.real-.time.threat.visibility.and.risk.response.

SuRViVing a neaR- death expeRienCe at delphi

A. company. that. can. see. its. own. demise. coming. tends. to. view. the. need.for. change. a. bit. differently. than. a. company. that. is. looking. at. a. secure.future..Even.before.the.2008.financial.meltdown,.Delphi,.a.major.first-.tier.supplier.to.the.automotive.industry,.knew.it.was.in.trouble.as.it.filed.for.bankruptcy.protection.in.2005..This.company.became.familiar.with.just.about.every.category.of.risk.

Delphi.is.a.different.company.today.after.roaring.back.from.bankruptcy..At. a. corporate. level,. Delphi’s. return. on. invested. capital. (ROIC). is. now.34%.compared.with.an.18%.industry.average..Profits.are.stronger.and.are.now.the.expectation.rather.than.the.exception..As.Delphi’s.CEO.explains,.“There.is.no.commodity.here..We.physically.monitor.every.piece.of.busi-ness.we.book.to.make.sure.it.is.equal.to.or.better.that.what.we.have.today..If.the.order.doesn’t.raise.the.return.on.invested.capital,.then.we.probably.aren’t.going.to.do.it.”4.The.company.now.enjoys.the.luxury.of.evaluating.the. effect. of. new. orders. on. its. ROIC. measure. to. determine. whether. an.order.is.worth.accepting..You.know.things.are.better.when.you.can.pick.and.choose.what.business.you.want.to.pursue.

As.part.of.its.restructuring.effort,.Delphi.reduced.its.product.lines.from.119.to.33,.reduced.its.technical.centers.from.33.to.15.worldwide,.and.cut.its.workforce.from.185,200.to.118,000..And.the.company.now.focuses.on.higher-.margin,.innovative.products,.particularly.in.a.product.segment.it.calls.“active.safety.”.It.has.also.reduced.its.dependence.on.General.Motors,.which.made.up.54%.of.Delphi’s.sales.in.2004.compared.with.23%.currently.

As. part. of. its. broad. approach. to. reinventing. itself,. Delphi. has. become.a.leader.in.total.cost.modeling.5.(Recall.from.Chapter 13.the.importance.of.total.cost.analysis.when.managing.risk.).The.need.to.accurately.under-stand. the. total. cost. of. doing. business. with. suppliers. that. are. located. all.

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276  •  Supply Chain Risk Management: An Emerging Discipline

over. the. world. is. probably. on. every. manager’s. wish. list.. Delphi’s. Cost.Management.group.(a.function.within.Supply.Management).took.the.ini-tiative.to.develop.a.desktop.tool.that.is.user.friendly,.requires.few.manual.inputs,.and.has.reduced.the.time.required.to.estimate.the.total.cost.of.buy-ing.a.part.from.five.days.to.several.minutes..And.perhaps.best.of.all,.the.training.required.to.use.the.tool.takes.only.40.minutes..This.is.important.because. there. is. a. clear. relationship. between. the. complexity. of. a. system.and.internal.acceptance.of.that.system.

The. Cost. Management. group. worked. with. logistics,. manufactur-ing,. engineering,. and. R&D. when. developing. the. model.. Development.required.collecting.information.about.transportation.and.logistics.costs,.capital.costs,.and.currency.and.risk.issues..An.important.part.of.any.total.cost. model. is. the. identification. of. the. relevant. costs. that. will. populate.the.model..Perhaps.most.importantly,.the.development.team.took.almost.18 months.to.validate.the.model’s.accuracy,.primarily.by.subjecting.it.to.real-.life. sourcing. scenarios.. (Recall. from. Chapter  13. our. discussion. of.the.importance.of.measurement.validity.).The.tool.is.accepted.internally.because. it. replaced. a. much. more. cumbersome. system. and. has. demon-strated.itself.to.be.accurate.and.reliable.

The. risk. of. a. near-.death. experience. resulted. in. dramatic. changes. at.Delphi.. These. changes. clearly. affected. how. the. company. looks. at. and.responds. to. risk.. Like. many. companies,. Delphi. realizes. that. a. proactive.approach.to.risk.management.means.not.having.to.wait.for.someone.else.to.develop.the.tools.and.techniques.required.to.be.an.industry.leader.

Managing StRategiC RiSk thROugh COllaBORatiVe COSt ManageMent

Few.would.argue.that.the.future.of.defense.contractors.is.a.bit.bleak..With.budget. constraints. affecting. every. Western. country,. this. segment. of. the.economy.clearly.faces.strategic.risks..This.case.highlights.one.defense.con-tractor’s.efforts.at.developing.a.collaborative.approach.to.managing.costs.6.The.cost.management.process.featured.here.moves.beyond.anything.pre-viously.developed.at.this.company.and.combines.elements.of.value.analy-sis,.value.stream.mapping,. project.management,.total.cost.management,.Six.Sigma,.innovation.management,.early.supplier.involvement,.and.risk.management.into.a.coherent.cost.management.process.

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Learning from Risk Management Leaders  •  277

Over. the. years. this. company. has. developed. various. approaches,. some.of. which. are. quite. sophisticated,. to. analyze. its. products.. While. provid-ing. a. solid. foundation. upon. which. to. carry. out. detailed. analyses,. these.approaches. did. not. necessarily. provide. the. insight. required. for. altering.product. cost. structures. and. winning. new. orders.. This. case. describes.the. development. of. a. collaborative. cost. management. approach. that. was.applied.to.a.complex.product.that.is.no.longer.needed.by.the.U.S..military,.the.company’s.primary.customer..This.pending.loss.of.sales.clearly.repre-sented.a.strategic.risk.to.the.company..A.new,.more.competitive.approach.was.needed.to.compete.for.sales.from.international.customers.

This.company.decided.to.target.an.international.customer.to.replace.the.expected.loss.of.sales.from.its.primary.customer..The.defense.contractor.believed.this.opportunity.presented.an.ideal.opportunity.to.develop.a.new.and.collaborative.approach.to.cost.management..This.opportunity.became.the.pilot.program.for.a.new.process.that.identifies.and.then.manages.every.cost.element.and.driver.within.a.complex.product..International.custom-ers. do. not. have. pockets. that. are. as. deep. as. the. Pentagon,. making. cost.reduction.an.absolute.necessity.when.competing.for.foreign.contracts.

a Collaborative approach to Cost Management

An. internal. cross-.functional. team. undertook. the. task. of. documenting.the.current.state.of.the.product,.including.an.extensive.analysis.of.every.cost.element.and.driver..The.company.needed.a.complete.cost.picture.so.it. could. identify. where. opportunities. to. reduce. costs. existed.. The. result.of. this. initiative. was. the. most. detailed. “as. is”. analysis. ever. performed.by. this. company.. The. primary. objective. of. this. exercise. was. to. identify.where.design.flexibility,.and.therefore.potential.cost.reduction.opportuni-ties,. might. exist.. The. team. examined. areas. as. basic. as. quality,. delivery,.and.operations.to.identify.cost.reduction. opportunities.. It.also.analyzed.every.cost.component.all.the.way.to.its.manufacturing.line.cost,.including.machine. times,. labor. rate. and. times,. material. costs,. and. costs. of. goods.sold..Extensive.cost.models.were.developed,.much.more.so.than.what.could.have. been. developed. with. existing. methodologies.. The. analysis. revealed.that.materials.made.up.50%.of.total.product.costs,.a.finding.that.made.it.clear.that.suppliers.were.going.to.be.an.integral.part.of.this.process.

After. completing. its. current. state. analysis,. the. company. conducted. a.two-.day.workshop.with.company.engineers.and.designers..The.first.part.of. the. workshop. featured. the. creative. generation. of. cost. reduction. ideas.

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278  •  Supply Chain Risk Management: An Emerging Discipline

while.the.second.part.involved.identifying.potential.savings..The.partici-pants.also.identified.the.cost.of.implementing.an.idea,.including.the.cost.to.document.an.idea.and.verify.its.feasibility,.as.well.as.the.cost.to.put.an.idea.in.place..While.some.ideas.related.to.internal.control.and.manufac-turing,.supplier-.provided.materials,.as.mentioned,.comprised.the.major-ity. of. costs.. This. should. come. as. no. surprise. as. companies. increasingly.outsource.greater.amounts.of.value-.add.to.suppliers,.particularly.in.com-plex.products.like.the.one.featured.here.

At.this.point.a.decision.was.made.to.involve.suppliers.to.generate.addi-tional.cost.ideas..Twenty.current.suppliers.participated.in.a.workshop.that.lasted.one-.and-.a-half.days..The.company.also.invited.potential.suppliers.to. broaden. the. domain. of. innovation.. Participants.were. divided.into. six.smaller.groups.according.to.specific.tracks.or.topics..During.these.work-shops.suppliers.identified.more.than.150.cost-.reduction.ideas.

After. the. workshop. the. defense. contractor. evaluated. the. feasibility. of.each. idea. and. verified. whether. suppliers. could. follow. through. on. what.they.said.they.could.do..The.accepted.ideas.from.suppliers.were.expected.to.result.in.more.than.20%.lower.product.costs..Moving.forward,.the.cost.management.team.met.every.week.to.update.the.supply.chain’s.progress.on.these.ideas.

A.risk.when.using.revised.cost.figures.is.actually.achieving.those.figures.during.production..To.mitigate.this.risk.the.defense.contractor’s.spread-sheets.included.a.risk.factor.column.that.adjusted.the.savings.expected.for.items. due. to. any. uncertainty.. This. adjustment. percentage. was. agreed. to.by.a.team.that.was.familiar.with.the.relative.magnitude.of.potential.risks.across.the.various.ideas.

Even.after.all.this.effort.to.lower.product.costs,.the.defense.contractor.did.not.win.the.new.foreign.contract..So,.was.all.this.worth.it?.The.answer.is. a. resounding. yes.. Perhaps. most. importantly,. this. company. became.familiar. with. a. collaborative. process. that. will. help. it. better. understand.and.manage.costs.across.its.current.and.future.programs..And.this.com-pany’s.primary.customer.enjoyed.cost.benefits.through.lower.pricing.for.its.remaining.orders..This.experience.revealed.in.no.uncertain.terms.the.important. role. that. suppliers. play. when. managing. supply. chain. costs..Looking. ahead,. collaborative. cost. management. will. allow. this. company.to. become. increasingly. competitive. as. it. applies. its. newfound. cost. man-agement.prowess.to.other.products.and.opportunities.

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Learning from Risk Management Leaders  •  279

leaRning aBOut RiSk the haRd Way at j. C. penney

Few. would. argue. that. hiring. a. new. CEO. is. not. a. strategic. decision..Dissatisfied. with. J.. C.. Penney’s. lackluster. performance,. the. company’s.board.of.directors.took.a.bold.step.and.hired.Ron.Johnson,.the.chief.exec-utive.who.reinvented.retailing.at.Apple..All.the.new.CEO.had.to.do.was.arrive. at. Penney’s. corporate. headquarters. in. Texas. on. the. corporate. jet.(which. he. reportedly. did. weekly. from. his. home. in. California. as. he. lived.during.the.week.in.a.high-.end.hotel.in.Dallas),.spread.some.Apple.pixie.dust,. sit. back,. and. watch. good. things. happen.. What. could. possibly. go.wrong?. Apparently,. a. lot. could. go. wrong.. After. only. 17  months,. J.. C..Penney’s.board.ousted.the.CEO..This.case.is.featured.here.because.of.its.abundant.risk-.related.lessons.

If. anyone. ever. doubts. that. pricing. is. a. strategic. variable,. look. no. fur-ther.than.what.happened.at.J..C..Penney..Shortly.after.arriving,.Johnson.decided.that.the.company’s.reliance.on.coupons.and.deep.price.discounts.were.simply.not.right.for.the.retailer..Apparently,.he.also.was.not.too.fond.of.fixed.checkout.stations.and.cash.registers..He.allowed.employees.to.wear.whatever. they. wanted,. similar. to. the. approach. at. Apple. where. employ-ees.walk.around.with.mobile.checkout.devices..Unfortunately,.customers.could.not.always.figure.out.who.was.an.employee.or.where.to.pay.for.their.purchases.7.Customer.confusion.soon.reigned.

With.minimal.testing.Johnson.moved.quickly.to.change.Penney’s.busi-ness. model,. an. act. of. hubris. that. the. company. may. never. fully. recover.from..He.pursued.an.“everyday.low.prices”.model.with.prices.that.were.not.necessarily.the.lowest..And,.at.least.to.Johnson,.it.was.obvious.that.Penney’s.customers.wanted.new.high-.end.brands..Bring.on.the.new.brands!

While.Johnson.eventually.scrapped.his.new.pricing.approach,.the.dam-age. was. already. done. as. customers. headed. for. the. exits.. Unfortunately,.new. customers. did. not. arrive. to. replace. those. who. left.. Repositioning. a.lower-.end. department.store.as. one. with. high-.end. styles. requires. careful.planning,. positioning,. and. execution,. something. that. did. not. take. place.as.Johnson.rushed.to.change.almost.everything.quickly.8.And.a.total.mis-reading.of.the.customer.is.usually.not.a.good.thing..As.one.marketing.pro-fessor.noted,.“Ron.Johnson.was.clueless.about.what.makes.shopping.fun.for.women..It’s.the.thrill.of.the.hunt,.not.the.buying..Women.love.to.shop.

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280  •  Supply Chain Risk Management: An Emerging Discipline

and.deals.are.what.make.the.game.worth.playing..It.took.billions.of.dollars.of.lost.sales,.lost.market.cap,.and.over.a.year.of.embarrassing.performance.for.Johnson.to.realize.this.truth.”9.The.company.has.since.announced.the.closing.of.dozens.of.stores..Its.very.survival.is.even.in.question..The.unfor-tunate.reality.is.that.strategic.risk.is.the.ultimate.risk.

What.lessons.should.we.take.from.the.J..C..Penney.saga?.First,.pilot.test-ing.is.a.legitimate.risk.management.approach.when.changing.something.as.strategic.as.a.company’s.business.model..And.while.testing.takes.time,.it.is.usually.time.well.spent..The.author.of.a.Harvard Business Review.article.on. data. analytics. posed. an. interesting. question.. In. his. article. he. stated,.“Imagine.if.Ron.Johnson’s.tenure.at.J..C..Penney.had.involved.small-.scale,.data-.driven. experiments.rather. than.wholesale. changes.”10.Second,.truly.understanding. the. customer. and. what. motivates. her. is. invaluable.. This.may. be. Johnson’s. biggest. mistake. throughout. this. ordeal.. Third,. just.because. an. idea. worked. in. one. industry. does. not. make. it. an. automatic.winner.in.another..Apple.and.J..C..Penney.have.very.different.retail.out-lets,.products,.and.customers.

It. is. also. a. good. thing. to. learn. from. the. experience. of. others.. When.Macy’s.acquired.May.department.stores.in.2006,.a.chain.that.relied.heav-ily.on.coupons.to.attract.customers,.it.decided.to.wean.May’s.customers.off. those. dreaded. coupons.. A. year. later. Macy’s. abandoned. that. strategy,.acknowledging.publicly.that.pulling.back.on.coupons.was.the.company’s.biggest. mistake. in. the. acquisition.. Another. lesson. is. that. when. recruit-ing. leaders,. it. is. a. good. idea. to. make. sure. they. believe. in. the. organiza-tion.and.what.it.stands.for..Some.critics.concluded.there.wasn’t.anything.about. Penney’s. that. Ron. Johnson. actually. liked.. Finally,. be. careful. that.changes.don’t.confuse.the.customer..J..C..Penney.told.customers.to.expect.low. prices,. just. not. the. lowest.. Were. customers. really. getting. a. deal?.They. weren’t. sure,. and. that. did. nothing. to. help. Ron. Johnson’s. cause..Unfortunately,.some.lessons.are.learned.the.hard.way.

COnCluding thOughtS

A.major.take-.away.from.this.chapter.should.be.the.recognition.that.many.different.and.creative.ways.are.available.for.managing.supply.chain.risk..Just. as. there. is. an. abundance. of. supply. chain. risks,. so. too. there. is. an.abundance. of. approaches. for. addressing. these. risks.. No. “cookie. cutter”.

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Learning from Risk Management Leaders  •  281

approach.is.available.that.will.be.everything.to.everyone..The.domain.of.risk.management.tools,.techniques,.and.approaches.is.broad.

Excluding.the.J..C..Penney.example,.certain.commonalities.characterize.the. companies. featured. here.. First. and. foremost,. these. companies. could.not. wait. for. others. to. develop. solutions. that. satisfy. their. specific. needs..While.we.expect.an.abundance.of.risk.management.tools.and.systems.to.become.commercially.available.over.the.next.5.to.10 years,.and.of.course.there.are.tools.available.now,.the.companies.featured.here.feel,.at.least.for.now,.they.are.best.served.by.their.own.internal.development.capabilities..Second,.these.companies.know.they.have.not.completed.their.risk.man-agement. journey.. In. fact,. these. companies. would. likely. admit. they. have.merely. taken. a. series. of. steps. in. what. will. be. a. continuous. journey.. Few.expect.supply.chain.risk.to.magically.disappear.anytime.soon.

Something. else. these. companies. have. in. common. is. they. are. develop-ing.a.corporate.culture.that.understands.the.importance.of.supply.chain.risk. management.. They. understand. that. supply. chain. risk. management.represents.that.place.within.our.thought.process.where.supply.chain.man-agement.and.risk.management.intersect..And.this.intersection.is.becom-ing.an.embedded.part.of.how.each.company.operates..Finally,.a.detailed.analysis. at. each. company. would. surely. reveal. a. risk. champion. or. group.that.is.not.at.all.satisfied.with.the.status.quo.regarding.risk.management..They.understand.that.supply.chain.risk.management.is.becoming.a.criti-cal. business. process. that. affects. a. company’s. strategic. success.. They. will.stay.at.the.forefront.of.risk.management.leader.ship.

endnOteS

. 1.. Accessed. from. http://www.bostonscientific.com/.templatedata/.imports/.HTML/.product-.safety-.information.html.

. 2.. Carson,.Christine..“Navigating.Threats.”.Boeing Frontiers,.(September.2012):.32.

. 3.. Carbone,. James.. “IBM. Identifies. and. Eliminates. Supply. Chain. Risk.”. Accessed.from.http://www.digikey.com/.supply-.chain-.hq/.us/.en/.articles/.supply-.chain/.ibm-..identifies-..and-.eliminates-.supply-.chain-.risk/1507;. and. “IBM. Details. Its. Total.Risk. Assessment. Tool. for. Supply. Management. at. CSCMP.” Accessed. from.SCDigest’s On- Target e- Magazine,. October  12,. 2011, http://www.scdigest.com/.ontarget/11-10-012-3_IBM_Supply_Chain_Risk.php?cid=5054.

. 4.. Bennett,. Jeff.. “Delphi. Roars. Back. from. the. Brink.”. The Wall Street Journal,.November 11,.2013:.B1..

. 5.. Siegfried,.Mary..“Precision.Tool.Tackles.Complex.Task.”.Inside Supply Management,.(April.2011):.24.

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282  •  Supply Chain Risk Management: An Emerging Discipline

. 6.. Monzka,. R.M,. Phillip. L.. Carter,. William. J.. Markham,. Robert. J.. Trent,. Janet.Hartley,. Casey. P.. McDowell,. and. Gary. Ragatz.. “Implementing. Value. Chain. Risk.Management—Case.Study.Findings.”.Center for Advanced Purchasing Studies,.Tempe,.AZ.(2012):.26–28..This.company.wishes.to.remain.anonymous.

. 7.. Townsend,.Matt..“In.Street.Clothes,.J.C..Penney’s.Sales.Staff.Goes.Missing.”.Business Week,.June.20,.2013,.Accessed.from.http://www.businessweek.com/..articles/.2013-.06-.20/in-.street-.clothes-.j-dot-.c-dot-.penneys-.sales-.staff-.goes-.missing.

. 8.. Denning,.Steve..“J.C..Penney:.Was.Ron.Johnson’s.Strategy.Wrong?”.Forbes,.April 9,.2013,.Accessed.from.http://www.forbes.com/..sites/..stevedenning/.2013/04/09/.j-.c-penney-.was-.ron-.johnsons-.strategy-.wrong/..

. 9.. Denning,. Steve. “J.C.. Penney:. Was. Ron. Johnson’s. Strategy. Wrong?”. Forbes,. April  9,.2013,.Accessed.from.http://www.forbes.com/..sites/..stevedenning/.2013/04/09/.j-.c-penney-.was-.ron-.johnsons-.strategy-.wrong/.

. 10.. Davenport,.Thomas.H..“Analytics.3.0.”.Harvard Business Review,.(December.2013):.70..

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