Supply Network Risk – Learning from Past Mistakes
Performance Metrics for Today’s Market
More than twenty years ago, I authored an article on performance metrics which was subsequently published in “Handbook for Productivity Measurement and Improvement” by Productivity Press in 1993. It is interesting to revisit this article and reassess where we are today.
At the time, the United States was dealing with the impact of Japanese companies, specifically within the auto industry, moving to take a dominant position in the US market. Clearly, we had not been paying appropriate attention to the performance metrics that mattered to our customer base. Apparent lack of attention to quality within the US auto industry had driven many auto buyers to perceive autos made by Toyota and Honda as having superior product quality. Buyers were correct and market share continued to deteriorate* for US companies from nearly 75% at that time to less than 45% in 2012. The auto industry was not the only industry impacted by performance paradigms that focused management on less than adequate metrics.
Now some twenty years later, with what today can only be described as a truly global economy, we continue to fail to understand the lessons from the past. The global business community is no longer dominated by the industrial base of the US. Rather it is a new environment that requires new perspectives and new metrics for appropriate evaluation of organizational strengths and weaknesses. It is almost too trite to say that Supply Networks have gone global. Globalization of supplier networks has presented a clear and present danger to companies and investors alike. Nowhere within an annual report or the SEC filings required for US base corporations can you develop an understanding of the magnitude and scope of risk inherent within the supply network. The risk present in this greatly expanded network of suppliers for companies that have been actively moving away from vertical integration is substantial and growing daily. Failure within the supply network is the number one risk for companies today. The general lack of understanding of this risk and lack of appropriate metrics and monitoring systems is presenting unprecedented challenges for continuity of supply.
While some might relate this to the sustainability of the company, that is a broader issue. Continuity of supply is not as complex an issue, but today, supply network risk is virtually ignored. Decisions are made every day by buyers deep within the procurement organization of companies that unknowingly can and do risk the very survival of the company without appropriate visibility. Those who drive for cost savings, along with the predominantly antagonistic relationship between supplier and buyer, have failed to understand or evaluate the risk being assumed within the network of supplier’s suppliers in the ever expanding network.
With the advent of globalization of manufacturing which we have seen over the past several decades, companies with a keen view of supplier’s supplier performance metrics are inclined to be more aware of the risk issues. As an example, the Chinese have been spending the past decade or two locking up resources around the world to secure the long term continuity of their emerging industrial base. Their move into control of rare Earth elements is a perfect example. Today, with more than 97% of these elements, they have assured themselves of a viable market for the foreseeable future. They have explored the African continent with technicians looking for opportunities to secure raw materials for upcoming decades. There are very few North American companies that have taken this kind of long view to secure their continuity of supply. One that we can name is Delta Airlines, having acquired a refinery to insure supply of basic fuel. (It is interesting to note they were highly criticized for making this investment.) Another company looking at the long term is Barrick Gold, having invested in a refinery and a tire line in Japan. Barrick took these actions several years ago recognizing that both fuel and tires were critical to their ongoing ability to operate.
Until companies understand the need to critically evaluate the risk within the supply network and take actions that are both practical and endurable, we will continue to see “surprises” in business failures caused by supply networks.