Human Capital Alliance Senior Advisor Somsak Jaitrong analyzes how deep understanding of value-chains is aiding Asia’s manufacturers.
Human Capital Alliance Senior Advisor Somsak Jaitrong analyzes how deep understanding of value-chains is aiding Asia’s manufacturers.
Human Capital Alliance senior advisor, Somsak Jaitrong looks at supply-chain congestion solutions.
Human Capital Alliance Senior advisor Somsak Jaitrong looks at a new disaster risk-mitigation model.
The Fukishima earthquakes and the unprecedented Thai floods in 2011 created unforeseen havoc for many supply-chain dependent global manufacturers. Not long after these “low-probability, high-impact” events, many global manufacturers suddenly realized that their highly-disbursed efficient low-cost supply-chains were seriously disrupted for extended periods.
The Fukushima earthquakes disrupted Toyota’s highly-efficient Japan-based supply-chain, a critical part of its global manufacturing operations while the prolonged Thai floods made everyone aware that Nikon’s production of popular cameras was highly dependent on its Thai lens manufacturers.
Earlier this year, David Simchi-Levy, MIT professor of engineering systems, William Schmidtt, Cornell University Graduate School of Management assistant professor and Yehua Wei, Duke University Fuqua School of Business assistant professor wrote in the Harvard Business Review that major disaster such as Katrina and Fukushima clearly showed that traditional methods for managing supply-chain risks were seriously inadequate.
Traditional risk mitigation methods
The authors said that traditional methods for managing supply- chain risks primarily relied on knowing the likelihood of occurrence and the magnitude of impact, for every potential event that could materially disrupt a firm’s operations.
These methods that used historical data to quantify risks may be adequate for analyzing common supply-chain disruptions such as poor supplier performance, forecast errors and transportation breakdowns.
“However, because historical data on rare events are limited or non-existent, their risk is hard to quantify using traditional models.”
Developed new computer-driven risk-mitigation model
To address the challenge, the authors developed a computerized risk management model that targets specific points along supply-chains. Their model that was tested as a case study with Ford Motor Co also delivered several most interesting findings.
Obviates need to determine any specific risk
The authors’ new model’s basic premise relies on the continuous quantifying of the financial and operational impacts if critical suppliers facilities are out of commission. By focusing on the shuttering’s operational impacts, companies don’t have to determine when low-probability, high-impact disruptions will occur.
Greatest surprise – little correlation to size of spend
Using their model to analyze Ford’s exposure to supply-chain disruptions, the authors’ greatest surprise was the low-correlation between procurement spend from a particular site and the disruptive impact on company performance.
The study discovered that the supplier sites cause the greatest damage were those which Fords annual purchases were relatively small. These findings even surprised Ford managers
“Many of these suppliers had not previously been identified by the company’s risk mangers as high-exposure suppliers.”
The Ford example
In March 2013, Ford suddenly experienced a shortage of specialty resin Nylon 12, used for manufacturing fuel tanks, brake components and seat fabrics because a key supplier, Evonik’s plant exploded in Marl, Germany. Evonik took more than six months to restart production, during which time downstream production facilities of Ford and other major automakers severely disrupted.
The authors said that if Ford had used the framework model prior to the disruption, it would have detected the risk exposure and associated production bottlenecks. Moreover, it would have encouraged Ford to proactively work with Evonik to fast track its new Singapore production plant.
High value parts may not be as critical
As supply-chains become increasingly globalized, complex and extended, the authors said that highest disruptive impact points of failure in many cases may not be from high-value parts’ suppliers.
Most importantly, the authors said their new model allows supply-chain managers to avoid guessing the likelihood of infrequent high-impact events and instead concentrate on evaluating their organization’s vulnerability to disruptions, regardless of their cause and where they strike.
At the same, using quantitative measures to determine risk, it provides an easy to understand segmented process that results in more resilient supply networks.
Somsak Jaitrong, Human Capital Alliance senior advisor explains successful supply chains.
With globalization, many Asian companies are turning their supply-chains into unique competitive advantages.
In a recent article, “Three ways CEOs can improve the supply chain”, McKinsey’s Christoph Glatzel, Alex Niemeyer and Johannes Rohrem said these companies realize their supply chains are much more than the cost of getting products into customers’ hands.
These companies understand that supply-chains translate corporate strategy into day-to-day interactions both within and beyond the organization.
“Ultimately, it is the supply chain that satisfies or disappoints their customers.”
These companies also use a broader supply-chain definition – one that includes planning, information sharing, and value-adding activities, from raw material to final distribution, rather than just logistics.
“Leading companies have made strategic investments in their supply-chain capabilities and set up efficient and effective organizations that overcome cross-functional silos.”
Using supply-chain excellence, these companies have redefined their customers’ service expectations and their ability to bring market innovations into a powerful competitive advantage.
The best companies, the author said continue evolving and reinventing their supply chains, even if they have already achieved a leading position in their industry.
“By doing so, they are able to manage risks; respond to changes in the economic, technological, and competitive environment; and exploit new opportunities more effectively than their competitors.”
Three critical supply-chain activities
The authors said successful companies have identified three specific activities that lead to superior supply-chain business performance:
Differentiating supply-chain and corporate strategies
Although business strategies may include superior service, product innovation, or cost leadership, companies must ensure their supply chains deliver the strategy’s key points.
Leaders from across the business, the authors said must help define a workable supply chain and then ensure they provide the necessary data to the company.
At the same time, marketing should be able to articulate what customers value most from the company’s services, how those needs vary among customers, and how it can be differentiated from competitors.
“Your commercial functions have to identify which customers justify the cost of the highest service and which would be better served using a more standardized approach.”
Effective supply-chain and product-development functions they said will find ways to create innovative products that suit the needs of all those customer groups while keeping overall costs under control.
Creating modern, end-to-end supply chain organizations
Today, companies must create modern, end-to-end supply-chain organizations. “The times of managing the supply chain in separate tiers is over.”
Modern sophisticated data analysis enables companies to manage supply chains end-to-end and, in some industries such as retail, almost in real time.
Appointing single leader
Successful companies should appoint a single leader with responsibility for end-to-end performance and for delivering improvement projects across tiers and traditional functions such as marketing, manufacturing, and procurement.
The supply-chain organization should also combine operational excellence with strong analytical capabilities and data-driven, cross-functional decision making.
Analytical teams, they said should also be created to support decision making and identify hidden risks and opportunities in unstructured data.
The IT function should also be equipped with nimble applications and platforms that enable collaboration and analytical decision making.
Performance standards for entire organization
Finally, successful supply-chain operations must establish organization-wide performance standards that monitor and most importantly incentivize everyone to deliver the most value to a business while protecting against its biggest risks.
“That means using more than the traditional metrics of cost, service, and capital.”
The most appropriate key performance indicators, the authors said depend strongly on the needs of the business, the product, and the market segment: the cost of production for value players, the stability of supply for staples and critical products, agility in volatile markets with fluctuating demand, and launch excellence for new products are essential.
“If a metric doesn’t matter in your business, don’t misdirect the organization by using it.”
Somsak Jaitrong, Human Capital Alliance Senior Adviser looks at the growing demand for socially responsible global supply chains.
The past decade’s growing socially-responsible supply-chain requirements have dramatically changed how Asian companies and economies conduct business.
The tragic 2013 Bangladesh garment factory collapse that killed more than 1,120 people created an expanded impetus for developed-economy companies to manage their supply-chains’ social responsibility performance and most importantly to protect their own brands and long-term reputations.
Corporate social responsibility
Corporate social responsibility reflects a firm’s obligations to society and stakeholders for actions undertaken. They may include obligations to protect and improve society’s welfare along with advancing their own interests.
In general, all socially responsible firms must do no harm and should pro-actively provide benefits to society.
Development of fully-integrated supply chain networks
Initially in their drive to access Asia’s massive low-cost labor, developed economies began transferring labor-intensive activities to Asia.
Eventually, fully integrated supply chains business networks were developed to manage the production and distribution of products to end-users.
By concentrating on their marketing core-competency activities, global brands depended on their suppliers to provide low–cost products and high manufacturing flexibility.
Today, many supply-chains compete against each other to create extremely responsive supply-chains and deliver lower prices to developed economies’ store shelves and manufacturers.
For instance, the time to design and deliver new garments to the market has now been reduced by global brands such as Zara, H&M , Gap and The Limited from more than one year to a few weeks.
Linking technology and trust
These extended internet-based enterprise networks, linking members and their activities required high degrees of trust.
To ensure more efficient and effective networks, members exchange sensitive information and data-linking processes that help them achieve competitive gains that could not be achieved if they acted independently.
Individual supply-chain members shared the networks’ common goals and duly performed their tasks.
Lower production and transaction costs
The integrated supply-chains improved each member firms’ competitive capabilities by lowering production and transaction costs, accelerating product-development and providing access to needed resources and knowledge.
To add further specialization, many firms began outsourcing component assemblies to local and foreign companies who in turn also sub-contracted their work.
More efficient processes, cheaper products and happier consumers appeared to be a winning combination. However, something gradually became wrong with this picture.
Disaster highlighted problems
The Bangladesh factory disaster made many ”best practice” supply-chains aware they were overlooking or turning a blind-eye to many partners’ social responsibilities.
These included labor issues such as collective bargaining, minimum wage rates, maximum work hours and enforcement of workers’ rights as well as manufacturing environmental conservation issues.
Greater sense of balance
Subsequently, buyers realized they had to balance supply-chain advantages with loss of control over possible costs that may far outweigh any strategic advantage gained.
To achieve this balance many buyers have become supply-chain corporate social responsibility managing partners.
Two basic strategies
Two basic strategies are now being used to monitor supply-chain members’ social responsibility.
A most obvious method is developing and implementing supply-chain-wide codes-of-conduct that must be adhered to by all partner companies. These codes of conduct are tailored for the firm’s individual global partners.
In other cases, buyers outsource the corporate social responsibility monitoring to third-party agencies such as the Fair Labor Association and the Ethical Trading Initiative that have developed generic codes that are applied to different supply chains.
To ensure they remain integral parts of global supply chains, Asian companies and economies have adapted their operations and policies to comply with these new demands.