Preparing for the Fumble | Supply Chain Quarterly | Q2 2019 Issue

WHETHER IT IS FOOTBALL, SOCCER, OR HOCKEY, successful teams know how to respond not only when the game is going well, but also when play has been disrupted. No team knows where, when, or how a fumble, interception, or turnover will happen, but managing these disruptions must be part of its game plan.

Similarly, in the business world, we cannot fully predict when a disruption—such as a natural disaster, a labor strike, or a failed trade agreement—will occur, but we need to have an effective supply chain risk management plan for responding to it. Without a clear plan and strategy, these risks can overwhelm our operations.

Every team then—whether on the playing field or in the market place—should have considered possible disruptive scenarios and have practiced plays to respond to them. A hurricane, fire, labor strike, or failed trade agreement may be incredibly more disastrous than poor aim with a ball, but it is no less expected and should be prepared for.

When one team is not prepared for a disruption and the other team is, it increases the other team’s competitive advantage. Those that have practiced plays at the ready are more likely to respond quickly to a disruption and come out ahead, whether that involves recovering the ball, regaining control of the puck, or getting operations back in order before losing any customers.

In fact, the best teams will use these plays not just as defensive maneuvers but as potentially offensive ones as well. They will look not just at how to recover from a disruption but how to best take advantage of it as well. In American football, this shows up as an interception returned for a touchdown. In hockey or soccer, it is a breakaway chance made possible by an intercepted pass. In the business world, it can come from winning new customers because you are the first company back up and ready to respond to their needs. In every game, the competition’s mistakes present golden opportunities for offensive success.

In other words, supply chain risk management should involve preparing not just a defensive strategy for responding to unforeseen disasters but also an offensive strategy for how to capitalize when competitors fumble their response. A resilient supply chain will not only keep you running while the competition is down, it will also help you ramp up growth when the competition is weakest. To prepare for the fumble, supply chain managers will need to create an effective supply chain risk management plan that clearly lays out their overall strategy, spells out the response plans for different risks, and empowers people to respond effectively.

Manage Risks, Not Threats
The trick to preparing for the fumble, however, is to focus on “risk management” and not get bogged down in “threat management.” A supply chain threat is a specific disruption, such as Hurricane Alfonso, the tornado spotted the next county over, or an increase in the price of steel. There are an unlimited number of individual supply chain threats at any given time. If a supply chain risk manager tried to focus on threat management, he or she would end up facing a complex math problem with dozens (or hundreds) of variables. It would be like a coach trying to create a play to counter every single play the opponent can dream up.

A supply chain risk, in contrast, is the impact that the threat could have on the company’s strategy, operations, physical infrastructure, and/or finances. For example, a risk is the destruction of a store, a reduction in the supply of a critical material, or a transaction failure, to name just a few. Unlike threats, risks are not specific, they are essentially categories of disruption impacts that can be prioritized and managed. By focusing on the impact of the threats, instead of the threats themselves, we change the math to a limited number of variables and can come up with plays to counter our opponents’ ability to gain an advantage. These plays can fit in an operations playbook that our team can understand and employ.

This concept is illustrated by Figure 1. Here the blue parts of the circle show the unlimited number of threats that a supply chain can face. To create a targeted supply chain risk management plan, a company needs to focus on the limited number of risks (or threat impacts) shown around the outside of the circle.

Once they have identified what risks a threat poses, organizations can respond to the threat based on how it will impact their organization. This categorization methodology allows the company to target its efforts at the impact point and build mitigation strategies around the limited number of disruptions for that given impact point.

For example, a construction supplier in central Pennsylvania recognized that all its suppliers for one of its key materials, steel, were based overseas. Instead of worrying about every threat from foul weather to fuel prices to international politics, they focused on mitigating the operational risk of a lack of affordable steel. This enabled them to create multiple mitigation strategies, such as warming up additional suppliers and increasing buffer stock. The firm’s supply chain risk management (SCRM) plan employed a clear strategy for supply chain resiliency with a process for categorizing, prioritizing, and mitigating risks, and empowering its people to respond effectively.

The Three Elements of SCRM
A mitigation plan that focuses on risks instead of threats requires consistency and vigilance. It needs to be rooted in a common view of the supply chain and a common approach to the identifying and responding to risks. It will also require the persistent monitoring of possible threats, effective execution of an appropriate response, and continual re-planning and review of the possible responses.

To accomplish all this, an SCRM plan will address the following elements: strategy and architecture, execution approach, and training and development (see Figure 2). If a company wants to be able to use its SCRM program as a competitive weapon and gain market share, then it needs to make sure that this goal is infused into all three of these elements. Let’s look at each element in turn.

Strategy and architecture: A firm’s SCRM strategy should clearly document the purpose of its supply chain risk management efforts. Some companies’ SCRM strategies will focus on defending market share, others will focus on expanding market share. Either way, the reason for the risk management efforts should be easy to understand and clearly communicated to all supply chain professionals in the organization.

The SCRM strategy must also define how the firm categorizes and prioritizes risk. To be effective, SCRM will need to prioritize the largest vulnerabilities across every link in the supply chain from raw material to warrantied returns. For a company that is offensively minded, that prioritization process may also consider what risks competitors may be overlooking that can then be seized upon to gain a competitive advantage. The strategy should also explain the tolerance the firm has for specific types of risk. For example, fast-growing firms typically have a higher tolerance for operational risk, while more established firms will have a lower tolerance for operational risk.

The architecture part of this element involves clearly defining the firm’s supply chain (including processes, practices, stakeholders, and technology) and identifying which roles are responsible and accountable for which risks. It will also enable and incentivize those roles to effectively manage the risks.

Execution approach: There are many models that companies can use to guide their risk management response efforts. These may range from the ISO 31000 standard to a model developed internally for a specific firm. The important thing is to choose one that begins with risk analysis/prioritization, enables rapid response, and involves continual communication. Without any one of the parts of this trifecta, a risk response model will fail.

Typically, these models begin with a continuous risk analysis process. The process involves taking data from the field, the market, and anywhere else that is appropriate and looking for trends or forecasted events that could cause a fumble within the supply chain. As those risks are identified and mitigation strategies developed, the opportunity to use those disruptions to gain market share will present themselves. The key is planning not only for what is needed to maintain standard operations, but also for what is needed to gain market share. Taking this extra step to gain market share requires knowing the competitive landscape and the market share of the product or service at risk. That knowledge allows the team to create offensive plans as soon as the disruption occurs and take advantage of any weakening in competitors’ customer fulfillment efforts.

When a threat appears and disruption occurs, these response plans will guide field managers’ efforts and point them to corporate resources for support. The operations team will work the defensive angle of the response plan, securing the company’s supply lines. Meanwhile, the sales team will be monitoring how those risks are impacting competitors and what changes to the defensive position could allow their team to pick up a fumble.

During and after the response efforts, the company should track the impacts and effects of the response and record the lessons learned. The result of this analysis will be used to revise response plans.

To be successful, the company’s execution approach needs to have a rapid planning cycle that informs the leadership of what market share is up for grabs and whether it is best to take it or support the competitor in more of a “coopetition” play (for example, through sharing warehousing space should a partner’s warehouse be down due to damage from a major storm).

Personnel training and development: The supply chain staff is the heart and soul of SCRM. That’s because they are the firm’s eyes and ears in the field. The success of an SCRM plan depends on their ability to recognize a disruption, predict its impact, and infer the market implications. Training and development on these skills are essential because these actions must be second nature to them.

Many firms simply rely on standard operation procedures or continuation of operations plans for SCRM. Both of these are effective tools, but only when the staff is trained and practiced in their use. Your staff must be empowered with the knowledge necessary to act effectively and safely on the firm’s behalf. To be able to do so, they need to know how to use internal resources and work with emergency responders and supply chain partners. Furthermore, they should understand not just the risks but also the opportunities created by a disruption.

An Offensive Defense
Obviously, an effective supply chain risk management program will help bring greater stability to any organization by improving the chances that it will able to respond to both anticipated and unforeseen threats. But a good SCRM program can do so much more than that; it can also help pave the way for growth.

Consider the case of a provider of spare parts for emergency vehicles that is located in central Oklahoma. The provider identified delays in receiving inventory as a key risk. In response, it built out a strategic amount of buffer stock, spread throughout the distribution infrastructure in the region. Its competitors did not. When a storm hit the region, its underprepared competitor rushed its operations back online without having enough supplies to sustain sales. This allowed the prepared supplier to not only win market share, but also keep it when the customers returned to their “old faithful” suppliers to find them open but not able to provide the parts required.

Another example can be seen in the previously mentioned construction supplier in central Pennsylvania. The company began its work in SCRM about five to six years ago and identified a disruption to the timely and affordable supply of steel as a key risk to the firm. In response, it constructed mitigation plans for any disruption in supply or price. These plans included diversifying suppliers, identifying alternate transportation plans, and creating local buffer stock.

When the Trump administration announced tariffs on steel, the company enacted its mitigation plan. The firm knew no number of alternative suppliers or alternate transportation routes could affect the impact of the tariffs, only a bulk buy before any tariff was put into place could help. The company did a cost-benefit analysis that factored in the price of storing the extra steel, and it was able to see that it would be able to sell its products at a discounted rate (from their competitors) if the price of steel passed a certain point. Before making the buy, however, the company conducted another round of risk planning that looked at what would be the impact if the tariff didn’t occur and the company had its funds tied up in an extra supply of steel. While this potential risk helped temper the buy somewhat, the company believed that it would most likely be able to move the material no matter what. They also determined that the risk of the price greatly dropping after the buy was remote. The firm then executed a purchase of one year’s worth of steel, which equaled enough to fill multiple train cars.

Fortunately for the firm, the tariffs did have a significant impact on steel prices, and the company’s risk plans allowed it to offer a lower price than its competitors because it had bought the steel and stored it for less than the current market price of steel. Stockpiling steel also allowed the company to fulfill large orders once its customers began bulk buying (four months later).

The strategy allowed the firm to not only solidify its customer base, but also achieve its best quarter of new-customer growth in a decade. That’s because some of its competitors “fumbled the ball” by following a strategy that assumed a stable flow of steel with minimal price fluctuation. These competitors failed to anticipate that current events—such as port strikes, political challenges with China, and rising global demand for steel—could disrupt a historically stable market. The firm, however, not only foresaw the potential for disruption but also realized that any company that did not prepare adequately was vulnerable to losing customers.

Its risk plan did not stop with stockpiling supply. The company understood that the cost associated with switching suppliers was a key barrier for its customers. So once the new customers switched, the company made sure to keep them with excellent customer service. For example, typically the firm only provides 24-hour care to its most important (or “A” level) customers. But after the risk plan was enacted, the firm treated all new customers like “A” customers for the first six months.

The company ended up scoring big in a market with minimal margin and the need for volume. While not all of its competitors fumbled, no others planned as well to take advantage of the fumbles.

Forcing the Fumble
Some sports teams and organizations go beyond preparing for the fumble to making it more likely for a fumble to happen. Think about a forecheck in hockey, which is a defensive play made in the offensive zone with the objective of applying pressure on the opposing team to regain control of the puck. An aggressive forecheck in hockey creates a lot of turnover opportunities close to the opponent’s goal. In many of the world’s best defenses, creating chances for disruptions is a vital piece of strategy.

Similarly, companies can use an aggressive supply chain strategy to drive the competition to step out of its comfort zone, creating more chances for fumbles should a disruption occur. For example, a company may follow an aggressive expansion model that includes reducing its margins, so that they are paper-thin in order to entice its competition in the market to do the same. Once a competitor’s revenues are reduced, it will have less operational cash to prepare for or rebound from a disruption. If the new entrant has followed a sound risk management plan, it will avoid its competitor’s mistake and have saved for growth and to keep cash flow positive during a disruption. Following such a plan ensures that the entrant will be ready if the “old faithful” cannot respond to a disruption quickly enough. The new entrant can expand its presence in the market and win favor by being there when the community needs it.

Fair Play
It’s important to note that there’s a difference between taking advantage (or even forcing) your competitors’ fumbles and engaging in price gouging or predatory practices. Predatory practices are illegal and unethical and generally require acts of fraud, misrepresentation, or oppressive practices committed by businesses against consumers or other businesses. Planning for a disruption and investing in products/services that could be beneficial should a disruption occur is nowhere near the definition of unfair practices. Because of the investments made, based on sound planning, prepared companies are able to offer products at market value. Unprepared competitors, however, are typically in a predicament that requires them to price at a premium.

No team wants to drop the ball. But every team does. It’s the team that prepares for those disruptions and then executes its plan well that wins. Whether it’s in response to a political or weather-related disruption, an effective SCRM plan secures a company’s operations and increases its competitive advantage during the bad times. By preparing for the fumble, firms can turn their overhead costs of continuing operations into a pre-sales investment.

About the author:
SHAWN WINN is Chief Operating Officer of Suppy Chain Visions, A Management Consulting Firm. 

Back to Supply Chain Monthly