Supply Chain Matters Book Review: The Power of Resilience- How the Best Companies Manage the Unexpected
From time to time Supply Chain Matters will feature book reviews which we believe would be of value and a learning asset to our extended global supply chain management community of readers.
In this particular posting, we share our review of: The Power of Resilience, How the Best Companies Manage the Unexpected. The author, Yossi Sheffi, is a well-known thought leader among the global supply chain management community serving as the Elisha Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Transportation and Logistics. He has authored a number of previous books including: The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage and Logistics Clusters: Delivering Value and Driving Growth. Professor Sheffi was gracious to this blog by previously contributing a guest commentary related to his Logistics Clusters book.
If you have been a long time reader of this blog, you have undoubtedly read of the many disruptive events that have impacted industry and global supply chains, along with some of the consequences. Events would include Hurricane Katrina that devastated New Orleans and the U.S. Gulf Region in 2005, the 2011 devastating earthquake and tsunami that impacted Japan and the severe floods that impacted Thailand that same year. Other events we have noted, such as additional earthquakes, major factory or warehouse fires, natural disasters and product recalls continue to uncover the vulnerabilities and dependencies among today’s globally based supply chains. In this new book, Sheffi provides with in-depth case studies that illustrate how companies have prepared for, coped with, and demonstrated resilience following such disruption, along with important learning related to the encroaching threats facing today’s supply chains. Further included are the business processes, corporate culture and technology tools utilized to prepare and learn from disruption. Indeed, the interconnectedness of global economies, the lean aspects of multi-industry supply chains today, and the implications of vast arrays of information amplified by all forms of media imply that unexpected events in any corner of the globe can ripple through the supply chain and affect customers and shareholders.
This blogger, analyst and consultant thoroughly enjoyed reading this book which I managed to read cover-to-cover on a recent roundtrip coast-to-coast plane ride. The book immediately captures interest, flows from chapter to chapter and compels one to read more. I highly recommend this text to current or aspiring senior executives and supply chain leaders as a must-read regarding the mitigation and response to supply chain risk. I especially applaud Professor Sheffi for incorporating supply chain social responsibility strategies under the umbrella of risk, which it should be.
The first five chapters of this book provides various insightful case studies of companies that experienced and responded to risk events including Cisco, General Motors, Intel, Medtronic, Procter & Gamble, Western Digital and others. These case studies bring out the importance differences among business continuity planning (BCP) and business continuity response (BCR). There are examples of risk metrics such as Value-at-Risk (VaR), Time-to-Impact and Time-to-Recovery, very similar to those defined in the latest releases of the APICS Supply Chain Council’s Supply Chain Operations Process Framework model (SCOR).
Chapters 6 through 11 address the strategy, preparation, communication and supply implications of supply chain risk and resiliency. Sheffi observes: “Building a resilient enterprise involves two broad categories of options: building redundancy and building flexibility of supply chain assets and processes.” Chapter 8, Detecting Disruption, explores methods for incident monitoring, mapping the supply chain for vulnerabilities, monitoring suppliers, and a rather important section related to leveraging social media in risk detection and response. Chapter 9 is a rather important read since it explores means for securing the information supply chain and the tendencies of cyber criminals to exploit supply chain partners as targets of information security vulnerability, as was the case of the Target credit-card hack where penetration vulnerability came from the stolen login credentials of a regional store refrigeration maintenance services vendor.
Chapter 12 addresses today’s “new normal” of disruption and risk along with methods to benefit from longer-term implications. In the final two chapters, Professor Sheffi explores the growing dependency on all levels of suppliers, including those in the lower-tier of industry supply chains. Sheffi notes: “Supply chain risk management is in a race between the fragility of complex supply chains and the resilience created by better risk management.” In Chapter 13, an argument is made that systemic supply chain risk, one that can bring an entire industry to a halt, has not occurred because of the combined efforts of today’s more responsive supply chains. Sheffi opines:
“Thus, it’s hard to conclude that modern global supply chains show evidence of true systemic risks. Companies have developed efficient response mechanisms, and the same globalization trends that could create disruption risks for specific companies that use suppliers from faraway lands may also contribute to the prevention of systemic risk by spreading manufacturing capacity around the globe. Most important, global capacity for manufacturing and distribution is large, and while it is crucial for any company to prepare and respond effectively to disasters, there are always others ready to take its place if it fumbles.”
We quoted that entire passage because upon reading and contemplating the book’s case studies, we were not as sure regarding this conclusion. While many firms have been able to eventually overcome supply and services risk, the open question is scale and timing of supply continuity. Customers, consumers and activist investors are far more impatient and unforgiving today, and the clock speed of business and industry change may not tolerate forms of extended supply chain disruption. However the one conclusion that is clear is that speed, resilience and flexibility are indeed the most important capabilities of any supply chain.
Yesterday, Yum Brands, operator of KFC, Pizza Hut and Taco Bell restaurant franchises and outlets, invoked business media headlines with the announcement that the firm will split-off all of its China based restaurant outlets into a separate publicly traded franchisee based company.
From our Supply Chain Matters lens, the announcement provides two important takeaways for industry supply chain communities.
The first relates to supply chain disruption and risk associated with global expansion, particularly as it relates to current conditions in China. Yum’s operations in China had accounted for nearly half of the operator’s revenues. The firm has been long cited as a fast-food and foreign brand pioneer in investing in China, having opened its first KFC restaurant in Beijing in 1987. Yum reportedly now operates 6900 restaurants across China.
In the summer of 2014 well-known global restaurant brands such as McDonald’s, Burger King and Yum Brands were each named by both Chinese media and food regulatory agencies for offering expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to a specific China based supplier, which was affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself had garnered what was reported to be a solid reputation as a quality focused food supplier. Unfortunately however, wide-scale publicity across China and continued regulatory scrutiny hampered efforts to restore consumer confidence. Since that time Yum Brands has attempted to recover from other food safety scares along with the consequent damage to its respective brands within China.
In its reporting, The Wall Street Journal indicates that one of the intents of this proposed split is to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps along the way. However, the operator desires to maintain a stream of future revenue from what remains to be a large and growing market. Hence is the proposed split involving a franchisee and royalty-based framework.
While many details of this proposed split are lacking, the gist of current reports would indicate that current Yum owned outlets across China will be franchised with a royalty arrangement back to Yum. Whether this arrangement includes an exit from supply chain operations within the country is still an open question, but by our view, seems to be a likely possibility. That would in-effect saddle the China operation with the responsibility to maintain or modify existing sources of supply and perhaps re-negotiate existing food and other supply agreements.
The implications of a pioneer such as Yum Brands making such a move is another indication of many troubling challenges that foreign-based brands are struggling with in maintaining operations within the country.
The second takeaway relates to the continuing influence that activist investors have on strategic decisions related to value-chain operations. As the WSJ notes, this week’s news comes only five days after an activist investor who proposed such a split had assumed a Yum board position. That activist investor accumulated a five percent ownership position in May and then lobbied for both a business strategy change as well as a seat on the board.
When a recognized pathfinder elects to punt from owning value-chain operations in China, it is indeed a wake-up call, especially for companies with impatient investors. China represents a vast market potential yet a multitude of complex value-chain challenges and risks, especially in the light of a troubled economy.
In our continuing efforts to provide broader market education, Supply Chain Matters provides broader awareness to advanced technology approaches that are making their way to industry settings. In this commentary, we focus on a rather unique software-centric approach to product authentication across various tiers of the finished product supply chain.
The challenges for overcoming fraudulent and counterfeit products that exist across the global supply chain remains significant. This is especially of-concern for manufacturers and/or distributors whose supply chains reside in a regulated industry or whose products are of high brand or product value. There have been many attempts to address such challenges, often resulting in added expense for marginal mitigation. Counterfeiters themselves have become far more sophisticated in their methods and in their presence.
Systech International, a long-established technology provider addressing brand protection needs, recently launched its UniSecure application. We were somewhat intrigued by this application and underlying technology and subsequently conducted a product briefing with Systech executives.
This provider has been in existence for decades, with a prior focus on manufacturing automation and vision systems that evolved into support for manufacturing item-level product serialization needs. Much of this support was focused in support of pharmaceutical, life sciences, and food and beverage manufacturers in their needs for unique product identification. Beyond these efforts, Systech began to recognize that counterfeiters have become far more sophisticated in their methods, and there was growing a need for a less infrastructure-intensive approach to supporting product authentication needs for products flowing across global supply chains.
Scientists recognized that every printed label or barcode has character and signature-unique characteristics that vary with the make and model of the specific printer at the time of printing. According to this vendor, no two labels or printed data carriers are identical and are affected by environmental factors that produce small-scale variations. The UniSecure approach is to capture these unique character elements of the printed identifier signature and store this in the Cloud, for future authentication in subsequent movements through the supply chain. Further along the supply chain, a mobile or smartphone based reader can read the existing barcode utilizing the UniScan mobile app, which sends the image to the Cloud for authentication to the original label signature to determine if that product is authentic. This unique scanning capability can also be utilized by clients to enable point-of-sale, consumer engagement or loyalty as well as product security focused processes.
Supply Chain Matters has previously highlighted newer smart labeling technology just coming to market that opens opportunities to address both supply chain authentication and consumer engagement processes by leveraging existing near-field cellular (NFC) and other internal Wi-Fi communication networks
Thus far, pilots involve scanning of products by wholesalers and distributors, but some customers have plans to deploy the technology further into fulfillment channels. We probed whether existing high-speed label readers could be leveraged for volume scanning but that seems to be a work-in-progress at this point, subject to customer and vendor investment needs.
A further promising use of this technology is described in product recall situations where products can be scanned to determine if specific products are subject to withdrawal from the supply chain.
Industry pilots of the UniSecure technology are underway across multiple industry verticals to including pharmaceutical, animal health, precious metals and consumer goods focused supply chain settings.
UniSecure is a unique approach, one that bears watching for broader deployment use cases and overall scalability. The uniqueness stems from its software-centric emphasis along with its leveraging of existing item-level identification processes across the supply chain.
When it comes to certain cases related to food safety, the wheels of justice turn mighty slow. But recently, the judicial system has sent a powerful and far-reaching message to the food and other consumer products focused industry and to their respective supply chain partners.
In early 2009, there was an incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by Peanut Corporation of America (PCA). That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.
Four former executives of PCA and a related company faced criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria. The 76 count indictment included charges of conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials alleged that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA).
This week, a U.S. District Court judge sentenced two former plant managers at the PCA Georgia peanut processing plant identified in the 2009 incident to six year and three year prison sentences. Both would have probably faced higher sentences if they had faced trial and not pleaded guilty. Both made deals with prosecutors to testify against Stewart Parnell, the owner of PCA. The Georgia plant’s quality control manager received a five year prison sentence.
Last week, Parnell was sentenced to 28 years in prison after being found guilty on 67 criminal counts. Some noted that the Parnell sentence was too harsh, especially in the light of convictions in similar salmonella related cases.
According to a published AP report syndicated on Manufacturing.net:
“Investigators discovered the Georgia plant had a leaky roof, roaches and evidence of rodents, all ingredients for brewing salmonella. They also uncovered emails and records showing food confirmed by lab tests to contain salmonella was shipped to customers anyway. Other batches were never tested at all, but got shipped with fake lab records stating that salmonella screenings turned out negative.”
Once more, tainted peanut products were shipped up the supply chain to other producers who used them to make snack crackers and other products.
Parnell’s attorneys blamed the scheming on the two former plant mangers. They argued Parnell, who ran the business from his home, was a poor manager who failed to keep up with his employees’ actions.
It may indeed seem that the wheels of justice do turn slow, six years in this case. But a strong and powerful message has been administered, one that will reverberate across food and consumer goods supply chains. Food safety is paramount and knowingly and willingly supporting or advocating the shipment of tainted food or improper quality monitoring processes will have a consequence, one that has taken on even more meaning.
I recently came across a report from business network CNBC that had the eye-gripping title; Why US Manufacturers are Nixing the US for China. The premise of this report was that the combination of applied robotics and the devalued yuan are now lowering manufacturing costs for the global manufacturing hub. This was not the only report we have seen that suddenly trumps the new attractiveness for sourcing in China. However, industry sourcing teams need to be cautious and thorough in their positioning and weighting of manufacturing sourcing decisions.
The argument seems compelling. Chinese factories are cutting prices because their costs are going down as a result of devaluation of China’s currency, not to mention that the current downswing impacting China’s economy has motivated many manufacturers to become more aggressive in preserving existing business or seeking additional customers.
The other compelling force noted was the offset of raising direct labor costs by the shift to more automated manufacturing enabled by robotics. However, a recent posting by China Tech provides a different picture or reality, with the headline: The manufacturing boom in Guangdong is over’: Industrial robot makers the latest to get swallowed up by China’s economic slowdown. A senior salesperson of a leading Chinese robotics firm predicts that only 5 percent of current robotics producers will survive in the next two years because manufacturers do not have the available capital to invest in automation. Apparently many Chinese robotic manufacturers set overly aggressive sales targets and did not factor an economic downturn. Declaring that the export-led boom in coastal region Guangdong is over, exports continue to decline every month.
The specific geography of Guangdong is a key since this was the former lower cost direct labor manufacturing region for apparel, footwear, toys and electronics that can benefit from the application of robotics and automation. Instead, manufacturing has shifted to more interior regions of China, seeking lower direct labor costs.
A separate recent article states that the world’s largest contract manufacturer Foxconn, has throttled back its robotics targets to target 30 percent automation in its factories by 2020. Previous reports had cited a 70 percent target. This report indicates that Foxconn’s Chinese factories, including those in Shenzhen, have 50,000 fully functional robots currently operating. Replicating human tasks in high volumes is not as easy as it seems.
While both outlined factors, the devaluation of Chinese currency and the promise of increased automation to offset increasing direct labor costs would appear to be a compelling argument to once again consider China for manufacturing sourcing, we advise caution for manufacturers and retailers.
The primary lesson learned from the initial wave of strategic sourcing decisions that favored China so many years ago was the one-dimensional view that weighted so many industry sourcing decisions. That sole weighting was the attractive cost of direct labor.
Industries have since learned that intellectual property protection, added logistics and transportation costs and the risks inherent within China and across global distribution networks are all added factors. The same holds true for current decisions, but the assumptions have somewhat changed.
More and more manufacturing has moved to the interior regions of China, requiring added logistics and transportation factors. The global transportation industry has its own set of problems. Ocean container carriers are in a race of survival of the fittest, those with the biggest ships, lowest costs and highest revenue potential. Air freight capacity has been dramatically reduced, and existing air service comes with a premium. Last year’s massive disruption involving U.S. West Coast ports provided a lesson in overburdened port infrastructure and increased transportation risks. Supply chain teams must now balance their transportation risks among both U.S. East and West Coast port entries. For Europe based firms, a massive overcapacity of ocean container vessels on the China to Europe segment has yet to shake out as to which multi-carrier network will garner the most leverage in shipping rates.
China’s leaders are desperately trying to move the economy to one of consumption-based vs. the prior export led, and that will drive capital availability. A consumption-based economy places the priority on China’s own manufacturers and service providers to fuel job growth and compete for business within China. The government has identified strategic industries that will fuel China’s economic growth over the next five years and they will have access to advanced research and needed capital. If you happen to compete in these industries, your business risks are magnified, especially if you source within China. Consider the recent challenges of Western brands competing within China, as their supply chains came under attack for poor quality or sub-standard practices.
Technology is a new imperative, particularly in gaining end-to-end and multi-tiered supply chain visibility across global supply networks.
The takeaway of our commentary is to not be swayed by a singular trend or singular factors. Sourcing decisions continue to require a holistic analysis that not only includes the cost of manufacturing, but the various other factors related to landed costs, inventory investment, security of information and added supply chain risks.
A given in today’s increasingly competitive global economy is that change is a constant, and assumptions prevalent today will be different in the not too distant future.
Industry supply chain teams have hopefully learned that strategic sourcing decisions need to stand the test of landed costs, market access, supply chain resiliency and risk mitigation. While China will remain an important and meaningful source of manufacturing and value-chain capability, industry supply chain teams will require a balanced global approach in sourcing, one that spans cost, technology capabilities, IP protection and risk mitigation.
Supply Chain Matters provides a follow-up to our prior commentary: high tech supply chains- increased risks associated with global access. In that commentary, we posed the question of balancing the need of high tech firms for increased market access to China’s market with the added risks of intellectual property protection. Leading up to the visit by Chinese President Xi Jinping to the United States last week, prominent high tech firms elected to seek favor and seek new deals with Chinese partners.
The U.S.-China summit managed to yield some significant deals. On Friday, both countries agreed not to direct or support cyber-attacks that steal corporate information for economic benefit. The countries further agreed to cooperate more closely on the investigation of cybercrimes along with the creation of a high-level working group to combat such attacks. However, beyond the agreement are the actions and will of enforcement. President Obama declared: “We (United States) will be watching carefully as to make an assessment as to whether progress has been made in this area.” President Xi declared that the proper approach was to strengthen cooperation to avoid confrontation and politicization of the issue.
Prior to his summit meeting with President Obama, President Xi Jinping hosted an Internet Industry Forum meeting of prominent corporate high tech executives at the Seattle campus of Microsoft. In its reporting, The Seattle Times features a photo of the prominent high tech CEO’s invited to attend. The optics are stark. The CEO of Alibaba, Amazon, Apple, Cisco, Facebook, IBM, Lenovo, among others are shown as participants. U.S. and China based alike. The Times notes: “Based on the attendance for what was essentially a photo-op in Redmond, that tech industry is betting that their future relies on China.”
In conjunction with the Seattle and Washington meetings, Cisco Systems announced a partnership with China based Inspur Group Co. In June, Cisco indicated that it was prepared to invest more than $10 billion in China over the next several years. The irony of the current announcement was that Cisco was the key supplier to help build China’s internal Internet and was later accused of spying on Chinese citizens. Now its CEO declares: “There are certain geopolitical dynamics that we have to navigate.”
As we along with business media has noted, Chinese authorities have informed state-owned companies and agencies to buy more locally owned and produced high tech equipment and that has accelerated the strategic importance of domestic technology. Foreign based high tech companies now have to pick their partners in order to continue to expand revenues in China.
Surely not as a coincidence, India’s Prime Minister Narendra Modi visited Silicon Valley last week and made time to speak with prominent high tech and consumer electronics executives about investments in the country.
Market and technology access along with job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies. There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and far more competitive supply chains.