Spend Matters would like to welcome back Sherry Gordon, our resident supplier performance management expert – and my co-conspirator in getting to the bottom of supply risk technology.

There has been a lot of discussion lately on Spend Matters about supply risk. One very challenging area within this arena is sub-tier supply risk. It can be hard enough to find out what's going on with direct suppliers, but what about their suppliers and their suppliers' suppliers? Understanding sub-tier supplier risk is an important challenge, and has long been an area that the aerospace and defense industry has been trying to address. One failure to conform to DoD rules or one supplier problem can adversely impact multiple prime contractors. This situation occurred when an existing government regulation, the Berry Amendment (regarding metals that go into DoD products) was suddenly enforced. It caused over 50 suppliers in violation to be put on a stop-payment list.

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This post is authored by Spend Matters Contributor, Sherry Gordon

With supply risk frequently in the headlines over the past few years, many companies want (and need) to address it, and there are many software solutions to help. Where do you begin? How do you choose the right solution? Just as there is not only one type of supply risk, there is no one solution to address supply risk. Like most complex business problems, a software solution will not help address supply risk problems without a business process in place to support it.

So how should a company go about choosing the right solution? This topic is part of a session I will conduct with Jason Busch at the ISM Conference in San Diego in April. Our topic will be “Understanding and Choosing Supply Risk Solutions: Software, Content and Analytics.” We’re soon going to give you a peek at our session to whet your appetite for our talk -- and also to entice you to stay at the conference until the last morning, when we present (April 28th at 9 am). Our session is the culmination of a supply risk track on which the conference organizers have placed a lot of effort and focus, and to which they have invited a number of well-known practitioners.

Because companies at different stages of supply risk maturity require different kinds of capabilities, we will be presenting a technology-oriented supply-risk capability maturity model to help organizations better evaluate how third-party solutions can map to their requirements and maturity levels. One important question: at what stage of maturity is your business process for risk management? Do you even have a process? We propose three levels of risk management business practices, reflecting the spectrum of maturity:

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Punxsutawney Phil saw his shadow on February 2nd; looks like six more weeks of winter. It has come to my attention, however, that his predictions have been right only 37% of the time. Born and raised in Lancaster County, Pennsylvania, I was more attuned to the predictions of rival groundhog Octorara Orphie, from the Slumbering Groundhog Lodge of Quarryville, PA, founded 102 years ago. This year Orphie predicted an early spring, as did a number of other woodchuck prognosticators. As they say, there are lies, damned lies, and predictive groundhog analytics. (By the way, if you're interested in joining the Quarryville Slumbering Groundhog Lodge, you must be at least 35, as Slumbering Groundhogs must all be old enough to be President of the United States.)

With groundhogs demonstrating so many occasions of predictive inaccuracy, perhaps the KPI for the arrival of spring needs to be based upon more robust data. Since Punxsutawney Phil is correct only a little more than one third of the time, maybe the performance measure needs to be defined more clearly; in any case, how can you base the prediction of such an important event on the shadow of a rodent soothsayer? Besides, if you apply Six Sigma tools, you may find that there is too much variation in the conditions outside Phil's burrow. Or, Phil himself probably needs a Gage R&R (gage repeatability and reproducibility) to ensure that his measurement system will produce reliable results. Perhaps Punxsutawney Phil needs to be replaced, possibly by automation, as suggested by PETA, who would prefer a cruelty-free robotic groundhog. But KPIs should be based upon an organization's own goals, not on those of other organizations, such as PETA.

Now that we have some baseline data on Phil, we can begin to set some targets for improvement. We probably need to put in place some performance-improvement incentives, or a "carrot" approach, if you will. I'm not sure whether groundhogs eat carrots, but they do like sticks, suggesting the "stick" approach instead. If performance incentives do not prove effective, we should consider outsourcing Phil's job to lower-cost counties in Pennsylvania, or following through on the automation threat. It's a global economy, and predicting spring does not need to be performed by high-priced local rodents and their fancy top-hatted protégés.

While in the midst of working with Jason on our session for the ISM International Supply Management Conference in April ( “Understanding and Choosing Supply Risk Solutions: Software, Content, and Analytics”), I began thinking about the implications of the business-practice side of the supply risk equation. While there are now many supply risk solutions available, one still needs to consider the impact of supplier management on supply risk

When it comes to supply risk, some supply managers and some firms are their own worst enemies, unintentionally causing problems for their suppliers. Sure, there are a lot of uncontrollable and unpredictable risks to worry about. But how many supply risks are self-induced?

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Many companies that are using spend management technology typically have a sourcing solution in place first before they consider implementing a supplier performance management (SPM) solution. There are various reasons for this. Companies often pursue sourcing as a first step to obtain the good return on investment that it provides. Sourcing solutions are a fairly straightforward sell to senior management, as compared to SPM, and since the resources in many purchasing organizations are focused on sourcing, the fit appears to be a logical one. In the case of supplier performance management, the business case seems less clear than for sourcing. With sourcing, you can estimate how much less you might spend on sourcing goods and services with a solution in place; in SPM the return on investment depends entirely on how well you implement the process. (This ROI challenge is also true for sourcing, but is less obvious.) Many companies seem to find SPM more difficult, a subject that I once wrote about for Spend Matters. A lot of companies use the low-hanging fruit argument, as in, "Let's get the ROI for sourcing first, and then move on to SPM."

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Over on Conversation Starter, Whitney Johnson opined about how women still face social taboos when they try to negotiate for more salary. She recounts a story of how, early in her career, she countered a $24K offer with $27K and got it (despite a lame argument that this was only $57 per week more, so why was it important?) In retrospect, she decided that this was an anomaly, as she hit much more resistance later on at other organizations. Johnson found out that the social norm is that "nice girls don't ask" for more money. When they do, they are socially penalized in subtle and sometimes not so subtle ways, such as men not choosing female candidates who tried to negotiate. For women, it's "damned if you do and damned if you don't." As Johnson writes, "When men ask for something, they are being proactive; when women ask, they are being pushy. It's a double standard to be sure, but it's also a double bind -- if we don't ask, we don't get; if we do ask, we may be shunned.”

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Supply risk is a hot topic. More than a passing phase, it seems to be gaining traction. Supplier bankruptcies, sub-tier supplier glitches, volatility in commodities, political unrest, natural disasters, transportation glitches have companies worrying about the next failure. The buzz has been reaching a fever pitch as numerous supply-risk solutions providers continue to jump into the fray. In many firms, whether and how you address supply risk depends on the awareness and support of senior management, the organization’s current hot buttons, the potential risks a company is conscious of, whether the company has specific business processes in place to manage risk, and whether multiple functions in addition to purchasing are involved. Despite the buzz, few companies have a good understanding of the third-party tools and content available to help them systematically monitor, manage, and respond to risk within their supply base. Supply-risk management and supply-risk solutions are still an emerging market. Many companies know they should be doing something about supply risk, but are confused by the many available options.

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The recent raiding of the Gibson Guitar plant by the U.S. Fish and Wildlife Service and seizure of alleged illegal wood is the latest manifestation of sub-tier supplier risk. And it couldn't have happened to a more environmentally-conscious company. Gibson Guitars has made a huge effort to buy sustainable tonewoods from certified suppliers. While Gibson has said that its suppliers must have lied, it is still hard to understand how authorities had reason to raid the plant, and yet Gibson had not been informed or tipped off by any sources that it may have been buying illegal wood. This situation shows how tricky supplier risk can be. The certifications may have lulled Gibson into complacency. And why not?

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I recently penned a piece on my blog about customer-supplier collaboration between Hershey Foods and Kmart (part of Sears Holdings). A Kmart general manager and a Hershey Foods sales executive gave a talk at the AME Lean Conference about how the two companies jointly developed and executed very successful programs for the 1368-store Kmart chain. An example of one of these programs was the Heroes at Home Kisses (wrapped in blue foil with silver stars) which raised money for military families.

There are multiple challenges to implementing such collaborative programs between a retailer and a manufacturer, such as, for example, shipping constraints, inventory, financial issues, display space in stores, and the overall challenge of new product development and sales. Both companies had to put significant resources behind the programs to ensure success. Hershey needed to involve category managers, packaging, logistics, and manufacturing resources and invest in dedicated resources, advertising support, specific promotions, customer events, and sampling. Sears Holdings had to provide resource support, merchandising, television advertising and invest in new product launches and marketing initiatives.

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Recently, I wrote a post about my experience cycling in France and how the problems from a particular supplier tarnished the image of the otherwise excellent cycling tour company. Charles Dominick asked me several good questions that I'll address in this post.

First he brought up the question of whether a company with this high-performance culture (and others like it) should insource these types of customer-facing tasks (i.e., have them performed by employees, rather than suppliers). I believe that the importance of finding suppliers whose culture and values mesh with one's own can't be overemphasized. However, in this particular case, the supplier had a positive attitude. He was pleasant but incompetent despite his outward customer-service demeanor. So the problem in the situation I described wasn't particularly a culture clash. It was a capability issue. Ideally, companies with a high-performance culture should insource important customer-facing tasks. But depending upon the situation, this may not be financially feasible. The company I wrote about offers independent cycling tours all over Europe (plus guided cycling tours and walking tours). So to have capable employees who can be all over the continent on any given day for the independent tours would probably not be cost effective. I think important customer-facing tasks can be outsourced if the supplier is carefully qualified and chosen and their performance is continually evaluated.

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