Secure Supply Chain Value

Last month's Knowledge@Wharton had an article titled When Local Risks Become Global Risks, which discusses how globalization has augmented the impact of local events to the level of global events.

"Many organizations and governments are still basing their decisions and actions on risk and crisis management tools developed 20 years ago," says Erwann Michel-Kerjan, managing director of Wharton's Risk Management and Decision Processes Center. "But the hallmarks of this new century include more and more unthinkable events, previously unseen contexts, and pressure for private companies and government authorities to react extremely quickly, even when they cannot predict the impact their actions will have."

The article goes on to suggest superficial solutions such as "Country Risk Officers" and "guiding governments toward forward-thinking options."  Once again that reminds me of the TV commercial for a consultancy where the consultants run away in terror when asked to actually implement their recommendations.

But one section of the article did pique my interest, where the author discusses the "value of  security"... and how security can be a marketing tool.

"Think of buying a new car," he [Michel-Kerjan] says. "About 20 or 30 years ago, most customers did not focus on car safety, nor did car manufacturers use safety as a marketing argument. But today you see ads everywhere highlighting the safety elements of the vehicle along with five-star ratings and crash test results. Safety has become part of the intrinsic value of a car, and this is reflected in its price."

Ten years from now, Michel-Kerjan believes, security will similarly become a marketing tool. "This is even more likely to be true if the rhythm and scale of catastrophes continue to accelerate so it becomes more and more difficult to see these as low-probability, extreme events anymore. Are we ready to pay more for a more secure product or service in the same way that you do for a safer car?  I predict more companies will see security as a competitive advantage and integrate it into their business strategy."

The authors are describing the marketing value of security from the impact of global events, but think about this in terms of supply chains and their intrinsic value.  Currently the "value" of a supply chain is calculated almost purely based on the financial return it generates... using traditional accounting methods.  Companies that follow the outsourcing lemmings chasing low labor costs around the world are creating long and fragile supply chains believing that the labor cost differential is the value.

But what happens when a disruptive event occurs on the other side of the globe... perhaps in one of those low labor cost countries?  The labor cost savings, which as we frequently point out are practically irrelevant to begin with, are minor compared to the cost to the company. 

At that point a secure and reliable supply chain holds real value for the company and their customers. A company that outsources only for the very few valid reasons to outsource, creates true partnerships with suppliers, and understands the true risk, cost, and benefit of their supply chains will be a company that has more value in the future.  Contrast that to companies like the "Detroit 3" that enjoy beating up on suppliers to obtain price concessions, companies like Whirlpool and NCR that lay off thousands of years of knowledge to save a few bucks of labor by doing the same work in a different country... and shipping the product back, and companies like Boeing that have huge subassemblies built around the globe that need to be flown to final assembly operations in the U.S. 

What will be the competitive advantage of a secure supply chain in the future?  Are you calculating and analyzing it appropriately? 

Comments

[Carla Hills]

Interesting. Finding the "risk/value balance" between a captured supply chain and one that is distributed to spread the risk (such as having a single monster plant wiped out by a tornado) is an interesting conundrum. Some factors that create "secure" also create "risk". For example, at what point does proximity or distance of a supplier to the final manufacturer create value instead of risk?

[Manuel Aragon]

You said: Currently the "value" of a supply chain is calculated almost purely based on the financial return it generates... using traditional accounting methods. Companies that follow the outsourcing lemmings chasing low labor costs around the world are creating long and fragile supply chains believing that the labor cost differential is the value.

You are right, the true value is TIME, the new money.Our comment is based on our direct observation of dozens of supply chain companies in the US and abroad. Cheap, long and fragile supply chains are unreliable, prone to error, disruption and delay generating high hidden costs. These costs appear as quality failures, damaged cargo, security lapses and stolen goods. Most importantly perhaps, logistics time lines become sluggish and unpredictable. Accelerating the logistics time line while achieving predictable in and out cycle times creates higher cash to cash cycle times thus creating significant economic benefits for for buyers and sellers alike.