When it comes to risk-taking in supply chain, transportation and logistics categories, the process often begins by identifying a problem or opportunity. You may be facing a major turnaround and wonder how to address it with a calculated risk, one where you apply current-state knowledge and determine how a change might affect the quality of process and performance.
Despite the ongoing pandemic, the best time to take a calculated risk may be right now.
Ralph Waldo Emerson once said, “Don’t be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better.”
Let’s examine risk management through the lens of a lean operations consultant. To begin, consider how the “new normal” affected the lean supply chain. Pandemic and disruption of foreign production is driving many manufacturing organizations to take the following steps.
-Explore re-shoring of sourcing for raw materials, product components and finished goods.
-Invest more C-Suite time toward solving issues within the network.
-Bring production closer to the manufacturing base to improve geographical access and mitigate risks associated with an overseas failure.
Meanwhile, lean-focused supply chain experts are charged with examining internal processes and accommodating supply chain shortfalls. Expert perspective is integral to both the continuous improvement of in-house activities and the network adjustments that come with the re-shoring of supply production.
Just as COVID-19 disrupted manufacturing networks, it created new challenges for keeping lean supply chain teams engaged. Workforce reductions and remote operating environments create hurdles for maintaining the close awareness required to identify wasteful activity and efficiency improvement opportunities.
A lean perspective in a pandemic supports supply chain corrections with turnaround timelines that do not need to be limited by social distancing and remote environments. An expert partner can help identify and execute the most effective supply network strategy, freeing up leadership to focus more time and energy on strategically advancing the business.
Critically, that partner enables you to pursue calculated risks that achieve improvement. Here are a few reasons why now may be the perfect time to pursue some of those risks.
New Manufacturing Normal
We are hearing common refrains among manufacturers across diverse industries. As seen in the examples below, the observations are similar regardless of the supply chain network.
-Manufacturing is moving toward re-shoring to reduce supply chain disruption and distance.
-Constant supply chain focus is necessary to eliminate current and future disruptions.
-Supply chain failure is the No. 1 reason a company is having issues in start-up or restart activities.
-Adjusting product mix and production set-up is a struggle.
-Lean training and learning is difficult outside the facility “Gemba,” or “where the truth can be found.”
Some companies furloughed, slowed down, or even cut back their lean teams to reduce costs. This leads to significant organizational impact, often requiring executive attention to resolve emerging network problems. Losing the process visibility provided by these experts can result in costly misalignment across an already stressed network. This loss can challenge future supply chain adjustments.
Inventory Management Problem Solving
Inventory management drives the biggest questions manufacturers encounter as they reset to serve a new normal. Common inventory problems in our assessments of manufacturers include:
-Too much inventory, not balanced or not accurate.
-Too much of the wrong inventory for the manufacturing product family mix.
-Not enough of the correct inventory to manufacture replacement parts and service clients.
-Parts inventories not adjusted after major equipment repairs.
-Single sourcing from Asia, Europe, etc.
Losing the visibility of a supply chain expert can quickly affect your transportation cost, especially in a volatile environment following a significant disruption.
Broader Effects of Lean Team Reductions
Because of the required temporary resource reduction, we can’t rely on tacit knowledge. Therefore we have to make calculated risks. Organizations that scaled back their lean team as a reaction to COVID-19 report common experiences, such as these collective cost-control repercussions:
-Quick loss of awareness to inbound ocean transportation and ensuing TL freight moves.
-Lack of preparation for spikes in air freight costs for production and parts inventory.
-Increased costs (i.e. detention fees) due to misaligned lead times and production planning.
-Capacity reduction for problem solving.
In the “old normal” environment, lean resources maintained process awareness required to exert continuous improvement. These resources also facilitated ongoing training and a perspective for applicable global practices. Losing access these resources – usually provided on-site – impedes the ability to evolve processes.
Calculated Risk Guidelines
Because of required temporary resource reduction, an organization may not be able to rely on tacit knowledge, so a calculated risk may be required. Here are 12 guidelines that will help you decide whether a risk is worth the reward.
1. Treat people like people. For some managers, there is a risk in engaging people in a conversation. Think about it, people need to talk to people. One shipping manager wanted to accomplish 100 percent on-time complete shipments. By taking a risk — talking to employees — this shipping manager met his goal. He learned the changes needed and achieved “buy in.” Create leadership time with associates to listen objectively. When people feel like they are valued contributors on the team, they become true ambassadors.
2. It’s okay to make decisions without 100% of the information. There is generally a lack of robust, easily obtainable data related to every single order. This includes carrier data, sales data, product costs, fulfillment costs and other metrics. To make this information work and support profitability, data must accumulate and consolidate to track trends, pinpoint winning/losing SKUs and single out areas where a company is exhibiting margin compression and possibly losses. Assembling an internal IT team to build a platform is expensive. It monopolizes employees’ time which could be focused on alternative and more profitable endeavors. A logistics partner can help, but not all partners bring the level of expertise and technology required in today’s evolving business environment.
3. Understand your true fulfillment cost. This is key to the kind of risk you might take. Plan for every part. When COVID-19 emerged and your single-sourced supply was overseas, how did the organization react and why? What was the dual sourcing strategic and tactical plan? When did you last compare the cost of buying in the United States to a foreign vendor? What are the fulfillment costs from SKU inception to customers—warehousing, transportation, packaging, delivery, returns and tracking—until product delivery? Without knowing total fulfillment cost of a U.S. supplier, the true landed cost is just a guess.
4. Strive to make your customers happy. The booming e-commerce marketplace is opening doors to new growth opportunities. To achieve success in these uncertain times, organizations must remain nimble enough to shift a supply chain network and adjust processes to meet fluctuating demand. Shrewd executives who prioritize supply chain performance are positioning their companies to control costs and exceed customer expectations. Post-pandemic planning offers organizations a new opportunity to assess potential risks and plan alternative responses. Proper contingency planning today positions organizations for growth and profitability tomorrow. It allows for establishing and maintaining customer service at the highest levels while controlling costs.
5. Create a plan that considers risk and incorporates this risk management checklist:
-Identify all potential risks.
-Measure frequency and severity of each risk.
-Determine what accepting the risk looks like. Why is this move a benefit?
-Identify and brainstorm solutions to achieve the desired outcome.
-Implement the best scenario.
-Monitor, measure and verbally report on the results that drive change.
If an organization develops a risk culture, it becomes more resilient and adaptable. A risk management approach to planning works in our “new normal.”
6. Take a calculated risk on training. Look at the business as the proverbial lemonade stand. Let’s say the goal is to produce higher throughput. How can this be accomplished? Training will open a team’s eyes to new solutions and applicable case studies. If the struggle is “getting out of the sand box,” consider serious team training. Solve problems together. Learn from each other. Share experiences. People are hungry to do something different and better. Training can show everyone the way.
7. Measure what you want to change and calculate the universal risk. Does the organization have the correct tracking system? Consider a review and update of the order-to-cash business process and begin to identify problems. It’s not always inexpensive to do this. Take a lean journey with a consultant. Recently, a $250,000 consultant’s fee saved a company over $8 million because the consultant worked with management and ameliorated the risk that the company’s team was assigned to solve. Sometimes multi-million-dollar problems can only be solved by a consultant because the corporate team is too close to the problem.
8. Expect some changes to produce no measurable ROI. Does the company have an environment where your employees can speak for the president? Do they know the values your organization cherishes? Why is it a great place to work and a perfect supplier for your customers? Sometimes leadership needs to spend time with employees to communicate the business case of sincerity, understand messaging response and exhibit love for your brand. But it takes a commitment—and time. Start with a good elevator speech.
9. Your controller knows the pain points. While your CFO watches assets, liabilities and cash flows, the controller knows your pain points. To target problem areas fast, start with the CFO for balance sheet items and the controller for day-to-day problems. Involve the controller in meetings that affect the supply chain and welcome new ideas to the team. The insight may identify opportunities otherwise overlooked.
10. Fix the easy “waste” first. Sometimes the simple changes, which come with little risk, can make a big difference. Eliminate these waste areas immediately.
-Reduce the number of people who double-check orders. Ask why?
-End process and systems redundancy of employees repeating the same tasks.
-Send emails on a need-to-know basis and reduce FYI copies.
-Identify work-arounds to change the basic system. Ask why, set a plan and eliminate them!
11. Change the corporate operating discipline. When a company decides to take risk, leaders need to create a system to support a calculated risk. It must be acceptable to take risk. This is the climate and messaging required. Engage an outside consultant to make this happen. Your team may have 50 great ideas to solve a problem. Now the job is to determine which solution has the greatest return for the least risk. A consultant is a neutral party with expertise to separate fact from emotion.
12. Learn from the big guys. There is a reason why lean operations personnel study Toyota, General Motors and Honda production systems. Their systems work! They study the true fulfillment costs for each part and SKU. They learned that dual- and even triple-sourcing is the answer, not a single source. They know U.S. suppliers can be cost-competitive with overseas options. Research how these companies approach risk, improve quality and incentivize employees.
Conclusion
It is paramount to understand that calculated risks produce better results at companies that build a culture that accepts risk. To know where to take a risk, you need to identify where processes and systems are falling down.
It is OK to fail. The smaller the problem scope, the smaller the risk. If you solve many small problems, the cumulative savings add up. Think of this as a compounding mutual fund in which you invest and monitor growth.
Remember that problems are not solved by vice presidents or directors. Problems are solved by the collaborative efforts of a team whose members are receptive to every valued voice.
Schedule a lean supply chain consultation today to begin to establish efficient processes that control cost and improve service. These experts have the knowledge, tools and expertise to help your organization take the risk out of risk-taking.