Tag Archives: risk management

Supply chain and Procurement – The Decade in Review and Key Strategies for the Decade Ahead

Current State of Procurement
Working with some of the world’s best companies has given me a good view of procurement and supply chain over the years. As we exit 2019, we’ve made much progress, elevating the importance and status of our profession. Many firms have clearly articulated strategies that deliver year on year price reductions, restructured operations to separate transactional activity from strategic activity, and have designed multiple supply networks to meet the needs of specific market segments.

Overall, as procurement professionals, we have failed to progress developing rigorous category strategies, planning, and fail to optimize the opportunities available from detailed plans and well-executed cross-business/cross-functional business category strategies. Many of the firms I have visited in the last three years are just now embarking on developing a category planning approach. Many companies are still working with a centric, functional approach rather than recognizing that procurement is a business-wide process. Many businesses tend to have an annual, sometimes even quarter by quarter, business horizon rather than a forward-looking multi-year strategy. Many firms have not sufficiently invested to leverage technology to manage the current state and are in no position to look to the future state where data analytics and digital disruption will be a way of life. With robotic process automation, the internet of things, and automation with Artificial Intelligence are considered futuristic, and the reality is that they are here now. Data scientists are in high demand among progressive procurement, and supply chain-oriented companies.

The most surprising thing to me is that most companies do not have detailed maps of the suppliers in the supply chain. For me, this is some of the most critical intel a procurement or supply chain executive must have. It is impossible to have social responsibility, anti-slavery/forced labor, environmental or risk management programs without knowing all the suppliers in the supply chain. Knowing just the suppliers in tier one is not enough.

While we have made significant progress in the past decade, the challenges of a rapidly changing environment will force our firms to have renewed strategies that are forward-looking. The days where we chased low-cost labor around the globe are in our rear view. Far too often found out too late that our source of low labor costs put us at risk from natural disasters, political regulation and was temporary at best as standards of living are on the rise. In all cases, automation offsets low-cost labor. Robots work 24 hours a day, 24/7, never get tired or sick, and quality and productivity are consistent. Another lesson is that many organizations are building facilities close to the markets they serve in smaller footprints, making the supply chains more secure, agile, and flexible.

Strategies for the next decade

  • Enhance category management and develop robust strategies that are forward-thinking
  • Redesign the procurement process with the understanding that is a business-wide process with many owners, not a functional activity
  • Invest in bringing the technology up to manage the current state. Many companies are reluctant to invest in technology. Failure to do so will put the company at a competitive disadvantage and perhaps extinct
  • Build a TCO approach focused on total value. You could be getting low prices but higher production or management costs
  • Develop full supply chain maps of the supply chain along with real social responsibility and risk management programs
  • Provide the procurement teams with a comprehensive business orientation; in the past decade some organizations have compartmentalized jobs. When this is the case, individuals and groups fail to understand the business, company, and business strategies.
  • Manage succession planning and develop bench strength and a continuous recruiting
  • Develop a supplier relationship management program that rewards innovation, speed to market, business alignment and value contribution
  • Develop the individuals and teams in your business. Many groups need a program that goes back to basics and develops the population to build, drive and execute well-planned category strategies
  • Develop and train procurement leaders to look forward and create new processes, systems, and comprehensive business programs to cope with digitization, disruption, rapid product change, and supply chain agility

The changes I have seen in procurement have been challenging, exciting, and thought-provoking. The reality is that we are at the crossroads of change. While you may not agree with the current state of procurement and strategies for the future, I urge you to assess your organization and make a strategic commitment for the decade ahead.

Are you ready for the 2020s?

Commodities Could Be Trouble in 2017

money-crop

Have we been lured into complacency with commodities that have fallen over the past year impacting cost of major raw materials and our profitability? With corn over 40% down, copper 38% down and wheat more than 30% down, it is apparent that we have enjoyed significant market opportunities. Having traded commodities in my career, I know that commodities run on a cycle and the good times may be close to an end. A good example of commodity cycles is peanuts, where prices rose 33% in 2016, but bumper crops were expected in the current season, which should drive prices down. Today in the Spend Matters guest post US Peanut Prices Increase More Than 30% in 2016, Mintec noted persistent rains in China have caused high moisture levels in the peanut crop, which will greatly affect quality and price.

In a Bloomberg report on Barclays Black Swan Threats to Commodities, there is upside risk for raw materials in 2017 and the likelihood of further upside risk based on radical changes in the global economy, energy markets and global political risks on trade. Another dynamic that could impact all buyers involved in international trade is the opportunity and potential for disruption and risk posed by currency. With Switzerland announcing that it’s abandoning its peg to the Euro, the unknown impact of Brexit and China changing how exchange rates are fixed, it could signal volatility.

In many companies, procurement and finance have a joint obligation to protect the company’s profit plan. The goal of managing commodities and currency is not to speculate, but to assure the profitability across the organization is maintained. If you’re planning a commodity or currency strategy, here are three approaches to consider:

  1. Cover 70 to 80% of the plan, leaving 20 to 30% flexibility to move with key markets
  2. Develop formula-based pricing levels
  3. Work with finance to build currency hedging by buying foreign currency or by changing contract pricing to US dollars

It does make sense to look on the horizon for any currency or commodity that might pose potential risks and build the plan prior to any change in market pricing. There is no doubt that 2017 will bring a new frontier to global trade and it’s best to be prepared, rather than be surprised.

How will you manage volatility should it arise?

The Economics of Cheese

cheese

What every sourcing professional should know

When you read this week’s Wall Street Journal story A Cheese Glut is Overtaking America, after thinking about doing your part to assist with the report that every American would have to eat three extra pounds of cheese this year to work it off, did you think about the economic impact and why this story matters to sourcing, procurement and supply chain? There are many lessons that can be learned from agricultural commodities and understanding the economics, especially in strategy development and managing volatility and risk.

During my career I have managed agricultural commodities and I understand the value and role that economics plays in sourcing. Let’s look at a commodity cycle we’ve experienced in recent years. It’s not difficult understand that after a period of drought, many crops fail and grain prices increase significantly. Farmers then look ahead to a tough winter of feeding cattle with the high cost grain, which will have a negative impact on profitability. As a result, farmers send their cattle to the slaughterhouses and cut their losses. As consumer demand remains steady and exports continue to rise, there is little doubt that the limited supply will force prices to rise. As the weather becomes more stable and grain prices fall, it’s natural for farmers to increase their herds of cattle, production of milk (and cheese!), flocks of poultry and grains. This is the easy to understand supply and demand economic cycle.

In this recent cycle, the opportunity to capitalize on the high prices became apparent to many farmers, however, the failure to understand the impact of the high US dollar on exports and the collapse of the export market, has caused increasing inventory levels, plus the time requirements to flex the size of herds and flocks has built up to the glut of some commodities. Gluts, shortages, currencies, pandemics, weather, labor, regulation and government stability all contribute to agricultural commodity economics and add financial and capacity complexity across supply chains, requiring an increased understanding of the economics to gain control. Today, I’m wondering how many Midwest farmers will switch from planting corn to soybeans, since the USDA projects that soybean production in the US and South America will be tight over the next two years while global demand continues to rise. How much corn is planted, of course, will impact the economics of food supply chains, but it also will impact ethanol, alcohols, building products, plastics and even tires.

Sourcing professionals involved in commodities of any kind can make or break their company’s profitability. The skills required to manage the complexities of commodity sourcing are understanding economics, extensive research of the market, having the right tolerance for risk and volatility, maintaining a calm demeanor and building extremely strong supplier relationships at both the farm (producer) and broker levels. They also need an analytical approach combined with communication and quick decision-making skills to be effective in commodities. We can all learn much from understanding the economics of commodities.

Have you thought about the economics of low-priced Cheddar?

Donald Trump or Hillary Clinton: How much personal risk are you willing to take?

Ten tips for managing risk in uncertain times

slip-up-danger-careless-slippery-medium

This is personal; especially in procurement and supply chain, our career and our lifestyle depend on how we manage risk. Procurement and supply chain executives are seeing volatility in 2016 with unstable markets, mergers and acquisitions, increased regulations and slow growth in the global economy. All bets are off for 2017, when a new administration will be in place whose policies are unclear at this time. There is little doubt that procurement and supply chain leaders will be forced to build strategies, plans and processes in uncertain times. To survive, we must welcome and embrace uncertainty.

No one can predict what the level of uncertainty will be, but with digital disruption, artificial intelligence, unstable markets and supply-chain integration, it is only natural that procurement and supply chain leaders build flexible strategies, be prepared to take risks and calculate the impact of risk-based decisions. Politicians are proposing many activities that could have a drastic effect on sourcing and supply chain operations. The thought of UK pulling out of the EU, the US pulling out of its trade deals, pressure on offshore headquarters, increasing wages and support for reshoring will all impact procurement and supply chain operations.

Taking the right risks and making early decisions will make or break a career. Here are 10 tips for managing personal risk:

  1. Continuous review of the strategy and the horizon will keep you and your team aligned to necessary changes
  2. When change is evident, build a clear business case and act decisively
  3. Be proactive and engage management early
  4. Quickly build a fact-based analysis and use influence to align top management to the strategy
  5. Assure that you have an effective change process
  6. Put your top people on executing the necessary changes
  7. Prepare for cynics and challenges to the plan
  8. Build communication and preparation for a crisis mode
  9. Lead with confidence and bring your team along
  10. Keep on top of the business news and use the analysts on your team to brief you daily of changes that are occurring

No one can predict the future, but the signs of significant change are in the wind. In preparing for battle General Dwight Eisenhower said “In preparing for the battle, I’ve always found that plans are useless, but planning is indispensable.”

What is your proactive strategy? How much risk will you accept?

5 Key Considerations to Outsource IT

outsourceIT

Does your organization insource or outsource all or some IT services? In my assessment of about 200 organizations’ procurement and supply chain capabilities some obvious opportunities have been discovered like SKU rationalization, supplier rationalization, specification homogenization and outsourcing. MRO, internal print shops and IT can be excellent candidates for outsourcing, since these areas are not core competencies for many companies and there are opportunities to improve cost, productivity and efficiencies. For this blog, I want to focus on the IT outsource.

Many mid-market companies cope with decaying technology, old versions of key business systems, limited resources and tech staff turned firefighters who try to keep systems running. When implemented well, outsourcing IT will result in cost improvements, new technical capability, increased capacity and improved staff productivity. When the IT issues consume the company’s priorities and take a large amount of management time and resource or when IT issues cause the company to lose customers and impact employee productivity, it may be time to consider outsourcing.

Outsourcing is not a panacea! Many companies who have struggled with outsourced IT services implementation will confirm that, but when done well with an IT managed service provider (MSP) who’s right for your organization and can develop into a trusted advisor, there can be tremendous payback for your organization. Here are 5 key considerations for successful outsourced IT services:

  1. Once IT is outsourced, the supplier has a strategic link to your business. It is essential that the contract aligns the outsourced supplier’s strategy to your overall business strategy.
  2. Demand that the supplier’s team is not only competent, but a good fit with your company culture. Insist that the team stay with your business beyond the implementation so that the supplier won’t be tempted to divert those resources to other clients.
  3. Define supplier performance and develop KPIs that maintain and drive performance.
  4. Build a disaster recovery plan for risk management.
  5. Run the outsourced supplier as if they are an extension of your firm.

If companies have not made the appropriate investment in IT, outsourcing can be a good solution and provide budget control not possible when IT suppliers are considered only in break/fix scenarios. It enables the company to upgrade technology, reduce cost, increase uptime and provides high quality resources to the IT area. You technical staff can focus on strategy to drive your company forward. If your company does not depend on IT for competitive advantage and you can manage the pitfalls, it can be a good candidate for mid-market companies.

Is it time to review non-core competencies and outsource?

Cybersecurity Watch-Outs – Use Your Contracts Wisely

cyber watchout

This week, I am continuing the heads-up on cybersecurity and what it means for your contracts. I’m fortunate to have a guest blogger, Jeff Mayer of Akerman LLP, to outline areas we should consider. Thank you, Jeff.

Thanks to Bill Michels for allowing me to be a guest blogger today. I have had the privilege of regularly advising purchasing departments and speaking on purchasing law issues, including at national and local ISM conferences, on many cutting edge issues relating to purchasing law, including international contracting, warranties and responding to sudden and unexpected catastrophic events (force majeure). Most recently, as Bill has noted, the hottest topic in contracting is data security, which impacts all the other critical contracting areas, such as warranties and force majeure events. Data security breaches are very real and very costly. In addition to legal risk, there is PR risk, stock price risk and, of course, people can lose their jobs for not taking the proper precautions to mitigate potential breaches. Use your contracts to help. Akerman is fortunate to have an entire team devoted to data security issues and I asked two of those team members, Melissa Koch and Elizabeth Hodge, to outline some of the most critical legal provision for purchasing departments concerned about data security issues. Melissa and Elizabeth’s top tips are:

  1. Be clear on what data is at issue (especially if it will include personal, confidential or sensitive information).
  2. Make sure the ownership rights are spelled out and well understood to help control who has access to the data and how it can be used.
  3. Understand all of the touch points on how the data will flow, who will have access to it, and where it will be stored. This is particularly important if a vendor is going to have access into your company systems. You will want to make sure there are at least industry standard procedures and processes in place to keep the touch points and data safe and secure. You will also want to make sure the transfer of the data complies with all applicable laws. Regulators across all industries increasingly expect data owners to know where the data lives and who is handling it. You will want to know if the data will stored beyond U.S. borders or if vendor employees and subcontractors outside the U.S. will have access to the data.
  4. Pre-qualification reviews, audits and certifications. Take the time to thoroughly evaluate the vendors with whom you will be sharing data, and make sure they are properly audited and certified using current standards. You will want to make sure their ISPs are also audited and certified.
  5. Make sure you have proper recourse in the event of a security incident through carefully drafted indemnity rights and carve outs from limitation of liability. Also verify if the service provider has appropriate cyber liability insurance and the limits on such coverage.
  6. Make sure the service provider is required to assist in transferring data back to you in the event the services agreement terminates. You want to make sure that the contract does not give the services provider to lock you out of access to your data, especially if the data at issue is critical to your business operations.
  7. You should not only demand that the vendor indemnify you, but also that they cooperate with any pending litigation or investigation.

And none of these issues stands apart from other issues that you face in a purchasing department. Just as legal systems vary, making international contracting challenging, so do local laws on data security and privacy. And, unlike other commercial laws, you may not be able to contract out of those obligations. Similarly, your warranties in a contract bear directly on legal obligations related to data security. And any force majeure clause needs to be examined closely to determine whether it provides an out or escape to the vendor in event of a major data breach. While data security issues go well beyond the contract, making sure your contracts fit with your overall data security strategy is just as essential as any other contract strategy.

Contact Information

Jeffrey J. Mayer

Akerman LLP

71 South Wacker Drive

46th Floor

Chicago, IL 60606

Dir: 312.634.5733

Fax: 312.424.1900

jeffrey.mayer@akerman.com

Melissa Koch

Akerman LLP

420 S. Orange Ave.

Suite 1200

Orlando, FL  32801-4904

Dir: 407.419.8422

Fax: 407.254.4213

melissa.koch@akerman.com

Elizabeth Hodge

Akerman LLP

777 South Flagler Drive

Suite 1100 West Tower

West Palm Beach, FL  33401

Dir: 813.209.5052

Fax: 561.651.1597

elizabeth.hodge@akerman.com

 

Are Your Contracts Ready for a Cybersecurity Breach?

lock

I have just returned from the Zycus Horizon 2015 conference, where I was a speaker. The thing about conferences is that you always learn something and yesterday was no exception, especially when I listened to a presentation by Deborah Wilson from Gartner entitled “Cyber Security What the CPO needs to know.” The thing that I found most interesting in the presentation was that all supplier contracts need specific language about risks, obligations and notifications concerning cyber security breaches. Do your contracts contain clauses that address cyber security?

While reading news headlines waiting for my flight, this one caught my eye: “Average Cost of Cyber-crime in the U.S. Rises to $15 Million.” So today I called a few law firms that I have worked with over the years and all of them confirmed that the fastest growing practice in their respective firm. All were now building new contracts with cyber security language. The Security and Exchange Commission issued guidelines that have gotten a lot of attention as companies build the contract language to protect them.

This is a wakeup call to me; many of my clients are highly exposed as they have not added the new language and contract clauses. I will be adding them to my contracts immediately. In next week’s blog, I will continue with this topic by including advice from some cyber security legal experts.

From the FDA warning medical facilities that they should top using a medication infusion pump that was vulnerable to hacking to the highly publicized security breaches attributed to suppliers (one breach was caused by a supplier’s invoice that included a Trojan), you may not think you’re vulnerable, but anything connected to your organization’s network is a potential threat. My advice is:

  1. sit with your legal team to review what language is needed
  2. rewrite the contracts, and
  3. kill the evergreen contracts–nothing lasts forever!

Are you prepared?

Interest Rates and Cost Control—it’s been a wonderful life

Broken-piggybank

10 tips to control costs

This WSJ headline caught my attention: Fed’s Fischer: ‘Good Reason’ to Think U.S. Inflation Will Move Higher.  Vice chairman says Fed shouldn’t ‘wait until inflation is back to 2% to begin tightening.’  This should serve as a warning to all companies that the good times may be nearing an end and we may be experiencing the switch from a buyer’s to seller’s market.

Should interest rates rise, many suppliers and supply chains will feel the significant impact of severely extended payment terms. We’ve been working in an economy where the cost of money is relatively low; as interest rates rise, suppliers and the entire supply chain will be impacted by added costs to support the extended terms. As these costs increase, there’s an additional risk that the front-end of the supply chain may not be able to fund or pass through increased costs, causing severe supply chain risk.

Sourcing practitioners have basically two options for dealing with cost containment: wait until the supplier increases the price, then react, or proactively create a cost containment plan that involves the entire organization.

Good proactive cost containment plans require these 10 actions:

  1. Improvement of functional inter-site and intra-business collaboration
  2. Monitoring external markets and market pressure for price increases
  3. Forecasting the impact of potential price increases on the business
  4. Reviewing all contracts to solidify current pricing and prioritizing cost containment targets with quantified objectives
  5. Researching market and supplier data
  6. Building a supply chain map
  7. Running risk assessments on the supply chain
  8. Conditioning suppliers against price increases
  9. Building tactics for delay
  10. Deterring price increases

I have been around long enough to experience cycles of inflation and these actions have been proven successful when dealing with inflation. The difference today with the inflationary periods of the past are that the extended payment terms across the supply chain make some of the suppliers extremely vulnerable to the increased cost for money.

Sometimes forecasting the economy is like using a Ouija board, but all signs are pointing to interest rate hikes, hence, inflation. So, should you wait? I see it like this, borrowing a quote from Clarence in It’s a Wonderful Life, “You see, George, you’ve really had a wonderful life. Don’t you see what a mistake it would be to throw it away?”

Are you ready for a Seller’s Market?

Recession – 5 steps to take now

rough road

Are you prepared? What is your plan?

This week has been a week like no other as the stock market reacts to falling commodity prices, interest rate changes and devalued currencies. Bloomberg Business published an interesting article, “China may tip the World into Recession: Morgan Stanley”, that points out that a continued slowdown in the next years may bring global economic growth below 2%. Ruchir Sharma, head of emerging markets for Morgan Stanley Investments, views this as the threshold equivalent to a world recession.

While this is a bold prediction, it should serve as a warning to procurement and supply chain practitioners to dust off and review risk management plans. In any recession, where volumes are dropping, inventories are growing and cash management becomes critical, it is necessary to assure that the supplier network can withstand financial stress.

It’s also wise to do a complete contract review with both leverage and strategic supply sources. It will be smart to assure that the volumes are not overcommitted. In addition to reviewing contracts and volumes, building scenario forecasts can help a company to determine options and strategic directions. Now would be a good time to understand the impacts of currency changes on both the buy and sell side of the transactions. The savvy purchaser will align the supply chain with the impact of the customer’s terms and conditions on currency; in other words, understand the currency risk end-to-end and plan accordingly.

Review contracts with customers, too, to understand what commitments are being made to customers and take the opportunity to solidify some of the future orders in advance. Another practice I recommended, as we approach a potential recession, is business reviews with suppliers and customers.

Economists will argue for many years whether we’re approaching or are in recession. One of the worst things managers can do when the world is dipping into a recession is to take no action. Personally I like the Boy Scouts motto: “be prepared.”

  1. Review and update all risk management plans
  2. Review all customer and supplier contracts
  3. Build best and worse case scenario forecasts
  4. Understand all international contracts adjusting for currency fluctuations
  5. Audit the supply chain

What’s your strategy?

Is China Re-shoring?

yuan

Foreign Exchange Strategy or Economic Reality?

China devalued its currency last Tuesday, which will have big implications on the supply chains of many companies. It’s not too difficult to understand that when a currency like the Yuan is devalued, goods produced in China become less expensive for buyers in other countries, while imports become very expensive for Chinese buyers. It will encourage in-country consumption as Chinese consumers buy the less expensive domestic product over high cost imports. China’s economy has been struggling and its exports declined over 8% in July extending a declining trend. Those companies that have been moving to low cost country sourcing in places like South Africa, Viet Nam and Turkey may now find themselves at a completive disadvantage, while those companies remaining in China will benefit from the lower cost and increased exports.

The real supply chain losers are companies that export to China. This has impacted world commodity markets as commodity prices on oil and copper tumbled to a six month low. One devaluation will likely not be felt long term, however, a series of devaluations could effectively restructure the supply chains in the future. While we don’t know the true reason for the devaluation, the result in China could be a knee-jerk reaction to return to China manufacturing if the trend continues.

Astute supply management practitioners will always have a risk management strategy for currency. If you don’t, it is essential that you evaluate all global supply chains and develop scenarios and options. Don’t get caught by surprise, develop your Forex strategy now or you may need to reengineer the supply chain later.

Is China re-shoring? Maybe.