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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.

Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1680353.Created from apus on 2023-05-20 16:15:37.

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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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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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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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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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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 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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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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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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. 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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