The Effects of Asset Management Strategies- Who Really Owns Accountability for Overall Risk Management?
Industry supply chains have constantly had to respond to business needs for overall cost reduction. This author can recall numerous supply chain executive surveys dating back to the early part of this decade, all pointing to supply chain cost reduction as one of any top three organizational challenges. While the severity of such pressures tended to vary, the extreme being the global of recession that began in 2008-2009, they have since established numerous structural supply chain changes. These changes included transferring more cost risk into lower tiers of the supply or value-chain as well as the shedding of assets. The consul of CFO’s was to avoid, as much as possible, the ownership of hard assets. A clear byproduct of the implications of shedding assets or outsourcing asset management was who owns overall accountability for risk management.
This relentless pressure to improve return-on-assets has, as this community well knows, led to far different industry supply chain structures. Shedding of capital-intensive manufacturing related assets led to the resurgence of the contract manufacturing model. Today’s dominant contract manufacturers hold production plants in multitudes of countries and regions. In semiconductor related manufacturing, the termed fabless model emerged where many semiconductor suppliers shed their super highly expensive capital intensive chip manufacturing plants into today’s smaller concentration of global fabricators such as TSMC. Fabless semiconductor firms’ in-turn, outsourced chip assembly and test to other lower-cost Asian locations.
Similar asset transfer trends occurred in logistics and transportation. Manufacturers and retailers shed transportation assets to third-party logistics providers (3PL’s), and have since added technology and services augmentation which are the basis of termed fourth-party logistics providers (4PL). Each of these providers themselves discovered enhanced opportunities for profitability growth by transferring transportation assets to mega-carriers or IT infrastructure to leasing or IT hosting firms.
Like any game, the unwritten gaming rules seem to be, hold no assets.
In this specific commentary, we want to focus on a current development capturing the attention of general and business media that being the U.S. railroad industry. By its nature, this industry is completely capital-intensive and ROA driven and must further adhere to continual regulatory standards and practices.
In April of 2011, a Supply Chain Matters commentary focused on how U.S. railroads were attempting to bounce back from years of industry setbacks as well as severe recession across the economy. A previous decade or so of asset transfer and outsourced maintenance strategies had the bulk of railcars, especially those related to the transport of bulk cargo, under the ownership of leasing, financial services or bulk shippers themselves. In essence, the railroads served as service providers to ship customers’ bulk cargo, utilizing primarily non-owned bulk transport railcars. In 2009, railroad shipments had declined by a whopping 64 percent, the worst year since 1988. An estimated 28 percent of rail fleets were parked and idle storage on unused track, some stretching as much as 30 miles in places. The crisis of asset management was acute and leasing companies and railroads jointly bore the brunt of that crisis. Another reality was that a large percentage of the bulk transport railcar fleet remained dated and proper maintenance did not appear to be financially viable in times of severe downturn.
That brings us to today and in particular the current manufacturing and energy boom occurring across the United States. The U.S. economy is rebounding and utilization of bulk transport railcars has now increased significantly to the point of periodic lack of availability. The massive new discoveries of shale oil deposits and the new technologies of fracking have led to today’s oil exploration boom, but with a certain bulk transportation challenge. The existing north to south oil pipeline networks existing across the United States did not account for current booming sources of crude oil production such as the Bakken region in North Dakota. That region alone is producing what is estimated to be 1 million barrels of crude production per day. In December alone, rail transport accounted for nearly three-fourths of crude production stemming from the Bakken region. With the lack of pipeline infrastructure, and with new options for higher profitability depending upon which refinery or which port ultimately receives such crude, energy companies have now re-discovered rail as the preferred shipment mode.
The rest of this story has occupied general and business media headlines, namely a tragic series of tanker car explosions and fires endangering property and human life. There have been revelations that Bakkan crude is far more volatile and unstable than allegedly believed. The railroads have been finger-pointing toward tank car owners for holding liability for such accidents. Two major railroads have filed lawsuits against asset maintenance contractors over who is liable for derailments caused by broken axles. Of further contention is which entity is responsible for proper safety inspections and which is responsible for necessary safety modifications to strengthen railcar axles and to contain a potential tank car explosion from spreading to other cars. Maintenance contractors claim the railroads are far exceeding weight limits and overlooking the hazardous nature of today’s crude oil shipments. Both are balking at who will pay the overall expense, with the implication being which party is accountable for risk?
This entire situation has resulted in an oil safety deal reached in mid-January when federal regulators were forced to step-in and demand railroads and energy companies agree to forms of voluntary changes to improve the safety of tanker rail cars. Railroads must now take more proactive steps to avoid derailments, reduce speeds and reroute tanker laden trains around high risk areas such as major cities. Both parties agreed to come up with recommendations for improved safety of tank car fleets.
One railroad is going a step further. The BNSF railroad is seeking bids for investing in 5000 next-generation tank cars that will meet higher safety and cargo load standards. However, for the current remainder of the rail industry, and perhaps many industry supply chains, is an open question of which party holds ultimate risk when the bulk of assets and asset management services are outsourced. We believe it is a timely and rather important question, one that will occupy the mindshare of CFO’s, insurance providers and industry supply chain leaders in the months to come.
What’s your view? Does outsourcing of assets and asset management include the outsourcing of risk accountability? Is the current trend sustainable?
We call Supply Chain Matters reader attention to a recent posting on Insurance Networking News regarding the Top 10 U.S. Business Risks for 2014. The report highlights findings from insurance provider Allianz and its Allianz Risk Barometer report, a survey among 400 corporate insurance experts from 33 countries.
Readers will recall that in Prediction Seven of our 2014 Predictions for Global Supply Chains, we stated that increased dimensions of supply chain risk and major disruption will further impact product sourcing strategies. This latest Allianz survey provides added evidence of both the increased dimensions of risk as well as the interdependencies of a disruption on the other important aspects of business including the value of the brand. It specifically calls attention to the increasing complexity and interdependence of business risks adding broader systemic threats for businesses. While the report highlights is a ranking business risks from a U.S. perspective, it further notes that notes that globally, business interruption and supply chain losses provide the greatest risks to businesses. That finding should be of little surprise to readers of Supply Chain Matters.
In its top ten rankings of U.S. business risks, business interruption caused in the supply chain was ranked as the number one risk by 61 percent of respondents. Rounding out the top five risks were natural catastrophe as number 2, fire/explosion at number three, and cyber-crime and IT failure as number five. Loss of brand reputation joined this list for the first time, and was ranked as the number four risk. That ranking, by our view is long overdue. While 2013 losses associated with natural catastrophe were considerably down from the levels of 2012, they were more costly in terms of business interruption.
Strategic sourcing and procurement teams need to continue to calibrate with their insurance and corporate risk colleagues as to the implications of these ongoing trends and the increased exposures that major supply chain disruption can present to any business. This is an area that can no longer be viewed as a passing trend.
Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions.
Part Two of this series summarized Prediction One related on what to expect in the global economy and Prediction Two, what to expect in procurement costs.
Part Three of the series summarized Predictions Three, continued momentum associated with the resurgence in U.S. and North America production, and Prediction Four, talent recruitment and retention as a continued challenge.
Part Four addressed some unique industry specific supply chain challenges in 2014.
Part Five predicted increased implications regarding current supply chain social responsibility strategies and practices.
In this Part Six commentary, we move on to the implications of increased supply chain risk.
Prediction Seven: Increased Dimensions of Supply Chain Risk and Major Disruption will Further Impact Global Sourcing Strategies
Since our inception in 2008 as both a supply chain social media based educational forum and industry analyst anchored consulting firm, we have continually raised awareness to the increased occurrence of major supply chain disruption and risk. Industry supply chains encountered the brute reality of such risks in the year 2011, with the industry supply chain effects of both the devastating earthquake and tsunami that struck areas of Northern Japan and the widespread floods in Thailand that impacted multiple production facilities.
Supply Chain Matters has moved to many other post 2011 commentaries addressing areas of increased risk and their potential implications to business performance. In the area of extraordinary climatic events, each passing year brings an unfortunate new meaning definition of historic magnitudes of storms. In 2013 alone, the world witnessed one of the largest and most destructive typhoons, which struck the Philippines. Across the U.S. Midwest, records were shattered in regards to the most powerful tornadoes ever recorded that brought associated destruction and loss of life. Risk also escalated in the occurrence of natural disasters including more powerful and frequent earthquake events, some of which have occurred in key component supply regions such as Taiwan.
In our previous publishing of annual predictions, we raised awareness to increasing threats and exposures. In 2012, we modified our prediction in this area to include effects of liability insurance costs as a new consideration factor in major sourcing decisions. Since that time, the voices echoing increased disruption risk across global supply chains has magnified with multiple consulting firms, insurance providers and corporate liability firms joining in the chorus of concern. Yet, we live in a world of shortened sound bites and in the moment memories. Recent surveys of supply chain executives indicate a lowered priority on risk management, probably because there are so many other challenges and priorities on the minds of industry supply chain executives.
Government and industry groups look to escalating climatic events as uncontrollable acts of nature which are the new normal. However, we have again added the challenge of major supply chain risk to our 2014 predictions primarily because of the implications of the various events that are occurring.
For a number of valid business reasons, major amounts of product design, test, and component and volume production are sourced across coastal regions of Asia. We all know these areas well: China, Singapore, Malaysia, Thailand, Taiwan and the Philippines to name just a few. Major customer service and support operations also stem from areas of Asia and Oceania. The countries that they are located within are today the most fragile in terms of extraordinary climatic events, natural disasters and flooding. Insurance providers and the re-insurance brokers that finance global risk threats are well attuned to these trends, and price liability or business recovery insurance rates based on risk probability. If you need reinforcement, read their global risk summaries and reports. A preliminary analysis of natural disasters in the first-half of 2013, performed by global re-insurance firm Swiss-Re, estimated $56 billion in economic losses from disasters. According to the Swiss Re analysis, flooding was a main-driver of natural catastrophe related losses accounting for nearly $8 billion in global insurance claims. Global insurance covered upwards of 35 percent of these losses, amounting to $20 billion.
Many corporations self-insure to some extent, under the guise of the probabilities of extraordinary events that would impact the business. Recent history of events, their impacts on the supply chain, and consequent impacts on revenues and profits have additional new meaning for corporate finance executives.
We believe that in 2014, the ongoing cumulative effects of increased financial and business disruption liabilities will compel more manufacturers, retailers and service supply chains to once again revisit global sourcing strategies, especially in the light of risk among strategic suppliers, both in upper and lower tiers of the value-chain. Dual or alternative sourcing strategies among strategic suppliers will become ever more important and will drive some new sourcing patterns that include different or diverse geographies to balance risk. Product development, sourcing and procurement teams must be proactive to implications of these developments and will need to depend on more sophisticated analysis tools to identify component risks in relation to overall revenue dependence and weighted risks for disruption in supply.
Suppliers that provide strategic components, products and/or services for key customers may well be fielding requests for considering the locating of facilities in different geographic areas that offset risk and provide contingency back-up to a major disruption. We believe the days of sourcing based on one-dimensional cost and labor dimensions are over and 2014 will bring new dimensions of analytical analysis, advanced information technology and consequent sourcing actions that balance as much as possible, global risk. This will be a far different dimension of supply chain risk management and mitigation and firms had best be prepared for the new shift.
This concludes Part Six of our 2014 Predictions series.
Keep your browser focused on Supply Chain Matters as in an upcoming posting, we will move on to Prediction Eight, which predicts further turbulence in global transportation carrier networks.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
© 2013 The Ferrari Consulting and Research Group LLC, and the Supply Chain Matters Blog. All rights reserved
Yesterday, an earthquake measuring 6.3 magnitudes struck eastern Taiwan and it adds more food for thought in terms of having active supply chain risk mitigation plans.
This latest major quake was reported to have struck at a depth of 19.5 kilometers and the epicenter was reported as 52.9 kilometers south of the coastal city of Hualien.
This tremor shook buildings in Taipei and according to a published Bloomberg report, caused the temporary evacuation of one of world’s largest semiconductor fab facilities. Limited damage was reported to the international airport.
Taiwan Semiconductor Manufacturing Company (TSMC) temporarily evacuated three separate fab facilities, but workers returned to their areas shortly thereafter. Another semiconductor producer, United Microelectronics Corp (UMC) temporarily suspended its operations and work was reported to have resumed after a few hours. According to Bloomberg, the administration of Hsinchu Science Park, where many of Taiwan’s high-tech companies reside, reported no reports of damage nor did the island’s 62 industrial parks. However, quite a number of aftershocks have occurred on the island.
This is not the first time that Supply Chain Matters has highlighted severe tremors in this region. Our last was in March of this year. Regarding yesterday’s occurrence, we were interested to read the U.S. Geological Service summary of this latest earthquake incident. The report notes: “This region of Taiwan is familiar with moderate to large earthquake activity, and has hosted over 60 events of M6 or greater within 250 km of the October 31 event in the past 40 years.”
Interesting read when you consider that a considerable amount of the globe’s semiconductor chip fab capacity is located in the region. In August, we highlighted a study from a supply chain risk consulting services provider which identified that within certain automotive and high tech supply chains a vast majority of suppliers are dependent on component supply from just four semiconductor suppliers. Guess where many of their fab facilities are located?
And, if the Taiwan incident is troubling, consider that yesterday, a magnitude 6.6 tremor occurred in Chile. The two countries was the largest reserves and mining capacity for lithium, which is now rather important for automotive and alternative energy related product supply chains, are Bolivia and Chile. Chile was hit by a 8.8 magnitude quake in 2010.
Supply Chain Matters does not normally cite or comment on the huge plethora of opinion research studies concerning the discipline and state of global supply chain management. By our view, there are too many outlets, beyond experienced analyst anchored firms, producing so called research vs. opinion of the day among a limited set of respondents.
We were recently able to obtain a copy of The Chief Supply Chain Officer Report 2013, Pulse of the Profession, conducted and compiled by SCM World, and we were impressed with the research approach as well as the key findings. The full report is available for no-cost download by registered members of SCM World and is well worth a reading. An Executive Summary can be obtained by no-cost registration.
This is fourth year of this particular study and the continuity of the study and its findings adds particular meaning. This year’s research survey was conducted during late July and August of this year and was noted as including over 750 completed responses, which is a substantial study considering today’s practices in these types of surveys. It is current and timely.
The goal of this commentary is not to re-produce the findings but rather to add some of our impressions to the findings. SCM World, the authors of the report have done a great job of articulating individual findings.
Our impressions are the following:
More and more, senior supply chain executives now have a seat at the senior executive table but that comes with the reality check of added accountabilities. According to the summarized findings, supply chain leaders are apparently caught in the middle of rising customer demands and expectations and the global growth ambitions of their firm’s management teams. The conundrum of objectives directed at continued reductions in costs while helping to grow the business are being taken on. There is rather interesting detail that points to how these pressures now manifest themselves in stated supply chain process and management objectives, which should capture the attention of peer supply chain executives.
By our Supply Chain Matters lens, this is not an area that is addressed by summarizing multiple years of industry performance and metrics, but rather leadership for weighting and interpreting key business objectives to required supply chain outcomes.
The report further provides compelling evidence on the impact that omnichannel online fulfillment is having on retail supply chains as well as key suppliers to retail. The report concludes: “the omnichannel model is swamping traditional store-based operations.”
We were fascinated with some of the findings related to changing perspectives and landscapes surrounding the firm’s supply chain related social and environmental responsibilities (SER). Responses point to more and more focus towards leading corporate social responsibility efforts, while consumer willingness to pay for socially responsible products remains low. SER efforts continue to be driven by cost and efficiency goals, but the recent visibility to health and safety issues has increased the ranking of health and safety objectives across the global supply chain
Concerning the area of supply chain risk management, the authors point to responses indicating easing concerns in this area. Executives actually quantified multi-million impacts of recent risk events in their responses and the report authors conclude that this easing stems from supply chain teams investing in risk sensing and management capabilities these past few years. Survey findings rank the top ten risk mitigation practices, and by our view, tend to have a procurement focused bias toward continuity of supply. Report authors point to more executive mindshare now focused on other cost and price risks which we believe, further reinforces a procurement lens, and perhaps the need for broader cross-functional perspectives related to other forms of key risk.
In these times, no supply executive survey neglects to reinforce the challenges related to overall talent management and the annual occurrence of this particular survey provides a historic perspective to some progress being made in this area. The findings point to specific successes in knowledge workforce development but efforts to provide an overall compelling career management perspective in supply chain remains challenging. Again, there is interesting data related to different perspectives, a broader skills umbrella, and advocating for broader cross functional and cross business training initiatives.
Overall, we view this research as insightful and thought-provoking, and recommend that industry supply chain executives take the time to review and absorb the findings.
Supply Chain Matters has frequently reminded our readership on the increased existence of supply chain risk in a multitude of commentaries. Our latest was a mere few weeks ago when we called reader attention to a Resilinc published study indicating that concentrated risk remains in sub-tiers of global supply chains and that for automotive and high tech supply chains, that risk is concentrated in four countries and four major component suppliers.
Last night, we picked-up an alert to postings by the San Francisco Chronicle and the Huffington Post Green site which caused us a pause. Perhaps our readers, especially those with supply chains, product development or design operations located on the U.S. west coast should also take note.
Both postings report that a recent U.S. Geological Survey reveals that if a large earthquake, on the magnitude of 9.1 or higher, were to strike off the coast of Alaska, it could trigger a devastating wave of tsunamis that could cause widespread destruction to California coastal regions. That destruction potential is described by USGS scientists as at least $10 billion, and have the potential to destroy the port facilities of Oakland, Los Angeles and Long Beach, as well as flood low lying areas of San Francisco and the Bay Area. Scientists also predict that widespread flooding could impact 13 low-lying counties of California including flooded buildings, facilities and warehouses with likely damage in the hundreds of million. These reports did not address other west coast regions potentially at-risk such as Oregon or Washington.
While our readers may initially come to the conclusion that such a magnitude tremor is not likely, best recall that the Tohoku earthquake and resultant tsunami that devastated Northern Japan in 2011, and caused multiple and considerable industry supply chain disruption, was of this same magnitude. In their reported briefing of officials, USGS scientists characterized this type of event occurring in Alaska and the U.S. west coast as “hypothetical but plausible”.
If this latest study does not capture attention, consider that in preparation our Supply Chain Matters Top Ten Predictions for 2013, we included in our honorable mentions commentary, a report from the Guardian indicating that geologists believed that a 7.9 magnitude earthquake could hit the “Ring of Fire”, composed over 75% of the world’s active and dormant volcanoes and earthquakes, sometime in 2013. The “Ring of Fire” is an arc stretching from New Zealand, along the eastern edge of Asia, north across the Aleutian Islands of Alaska, and south along the coast of North and South America. Thus far, we have noted multiple reports of significant sized tremors occurring in the Ring, particularly off the coast of Japan.
Again, we do not portend to be alarmists nor do we believe that supply chain teams have to incorporate plans for any conceivable “black swan” event. However, we will continue to advise that supply chain teams need to be able to identify and quantify where potential risk exists in the extended value-chain, have certain plans to mitigate the most obvious risks, and have playbooks in-place to respond to major disruptions when they occur. New and evolving predictive analytics capabilities provide supply chain planners will the ability to conduct what-if and scenario planning around multiple potential events.
In the meantime, take heed to the latest U.S. focused study noted above. After having a few beers or some wine this weekend, check on your contingency planning related to U.S. west coast value-chain operations.