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“Business must have an appetite for category management…and procurement must create that appetite” – CPO, FTSE 100 Engineering Company, UK

We often hear the word category management, what is it? And is it different to procurement? These questions are quite common in the minds of non-supply chain professionals. We also hear sourcing, is it procurement? It is not complicated, let clear the clutter.

Category Management

Let us establish clarity about category management first. It is an organisational strategic tactic to organise the procurement function to focus on specific areas of spend. It is a silo approach to procurement. Each category is considered as a profit centre and to ensure value addition and value realisation is achieved. This approach enables the category managers to conduct in-depth market analysis to fully leverage competitive product differentiation. In summary, it is a silo approach to procurement to focus on a specific category and it could be a direct or an indirect category.

Sourcing

Sourcing, as the name implies, is a finding a source from where the goods and services can be procured. It is a subsection of the procurement, where, procurement is a function and concerned with acquiring of goods and services, sourcing is proactive activity in finding the least expensive supplier for those goods or services. Since the business profits heavily rely on finding the best source of suppliers it is considered to be the first step taken by the business before its first sale.

One can observe from the graphic that the steps involved in identifying a new component or product or service as the first step starts with requirements definition and ends with supplier management. This is very popular in the NPI (new product introduction) process.
Graphic Source:http://www.tendersinfo.com

Procurement

Finally, what is procurement, as mentioned earlier, it is a function of acquisition of the products or services identified either through category management or sourcing function. It is time to discuss a myth that one of the procurement function is to identify the need for goods and services. In the ERP/MRP era, it is the MRP that defines what product and quantity to be purchased from the selected vendors based on demand forecasting input. Whereas services are procured based on procurement requisitions. Apart from the function of purchasing, procurement function also takes care of vendor selection (in the absence of category management and sourcing function), negotiating contracts, regulatory compliance and the critical aspect of the procurement function is the total cost of ownership (TCO). What is the total cost of ownership should be explained if not this article will not be incomplete and people have to go back to google?

“Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.”

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Michael Eugene Porter is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School. Michael Porter coined the term ‘Value Chain’ was first used in his book “Competitive Advantage: Creating and Sustaining Superior Performance” (1985). The value chain is a process of translating organisational activities and its performances to gain a competitive position in the market place.
In any process, we find Core activities and Support activities that collectively deliver performance outcomes in the form of margins. Here margin refers to the profits earned for a product or service through sales revenue which is more than the sum of the cost of all activities in the value chain. Porter’s basic model as shown below identifies direct and indirect activities in any organisation which drives margins.

Porter’s value chain emphasizes on the process of how inputs change the outputs purchased by consumers which delivers competitive advantage and targeted margins of the organisation.

Core Activities (Primary Activities)
The core activities relate directly to the manufacturing, service, sale, maintenance and support of a product or service. And they consist
o Inbound logistics
o Operations
o Outbound logistics
o Marketing and Sales
o Service

Support Activities
These activities support the core functions identified above. In the above diagram. For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities.

• Procurement (purchasing)
• Human resource management
• Technology
• Infrastructure

My Perspective

In my opinion, the fundamental difference between supply chain and value chain is the element of “margin” part of Porter’s value chain. Supply Chin never deals with margins, it deals with SMART Goals, KPIs, deliverables – Quantitative and qualitative. The supply chain cannot assure margins which largely depends upon sales and sales is outside the purview of supply chain and whereas Porter’s value chain the core activities include Marketing and sales which could drive improved margins with other elements such as inbound logistics, Operations and Service supporting the improved margins.

My concept of the value chain bit different from Porter’s version. I firmly believe that People, Process and Technology is the support functions and the core functions are Supply Chain, Operations, Marketing and Sales and I firmly believe that customer service is part of Marketing and sales. If we integrate these functions and work towards organisational goal effectively we can achieve targeted margins. I am not critical about Porter’s view, but I am presenting my views as a Supply Chain professional.
Today’s world is collaborative in nature. No function is superior and no function can attain organisational goals independently. It’s a team approach. In my theory, people, process and technology enable supply chain, operations and marketing and sales to achieve competitive advantage in the market place. One more point is that the communication channel between support functions and core functions is two-way. Listen, Respond and React is the communication strategy for achieving targeted goals.

“Synergy – the bonus that is achieved when things work together harmoniously.” – Mark Twain

My value chain model:

I appreciate your views and comments.

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Leader vs. Leadership

A leader’s job is not to work for others, it’s to help others figure out how to do it themselves and successful, to succeed beyond what they thought possible. A leader is at his best when people barely know he exists when the work is done, and the objective is fulfilled, they will say: “we did it”. When “I” is replaced with “we”, the leader’s presence is sensed.

“Leaders become great, not because of their power, but because of their ability to empower others”

Leadership is something you earn, something you’re chosen for. Leadership is all about doing the right things, millions saw the apple fall, but Newton was the one who asked why. Ultimately, leadership is not about glorious crowning acts. It’s about keeping the team focused on a goal and motivated and achieve it, especially in dynamic and challenging conditions. It is about laying the groundwork for others’ success, and then standing back and letting them shine.

The difference is that leaders embody leadership mindsets and actions. It’s who you are as a person that makes you a leader. Managing leadership actions or merely holding a leadership position does not make you an individual a leader.

To develop a vision for the organisation is leadership. To be visionary is to be a leader.
To drive people towards organisational goals is leadership. To be influential is to be a leader.
To coach others, the right things are the leadership. To model how to determine the right things is to be a leader.
To recognize opportunities is to be leadership. To solve problems is leadership.
To be wise decision-making is to be leadership. To make decisions is the leader’s job.

Some interesting quotes on leadership.

1. A leader is best when people barely know he exists when his work is done, his aim fulfilled, they will say: we did it ourselves. —Lao Tzu

2. Where there is no vision, the people perish. —Proverbs 29:18

3. I must follow the people. Am I not their leader? —Benjamin Disraeli

4. You manage things; you lead people. —Rear Admiral Grace Murray Hopper

5. The first responsibility of a leader is to define reality. The last is to say thank you. In between, the leader is a servant. —Max DePree

6. Leadership is the capacity to translate vision into reality. —Warren Bennis

7. Lead me, follow me, or get out of my way. — General George Patton

8. Before you are a leader, success is all about growing yourself. When you become a leader, success is all about growing others. —Jack Welch

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We hear this phrase “Change Management” as frequently as “Excuse me”, one has to be really excused because change management has become a fad, far from reality. Change Management is a process and a journey towards desired future state from current ineffective state. This could involve mostly people, but other elements that go through a change and they could include Business Processes, Technology, Business Activities etc.

When leaders or managers are planning to manage change, there are five key principles that need to be kept in mind:
Principle1- Different People React Differently To Change
Principle2- Everyone Has Fundamental Needs That Have To Be Met
Principle3- Change Often Involves A Loss, And People Go Through The “Loss Curve“
Principle4- Expectations Need To Be Managed Realistically
Principle5- Fears Have To Be Dealt With

Miracles do not happen, we the people and transformational leaders make it happen. Change management should be as simple as changing your attire. However, it is complicated because it deals with human behaviour and the change draws people out of their comfort zone and creates anxiety stemming out of fear of failure.

In my opinion, change management is not a business process but mindset management process. As soon as people feel comfortable with what is called as change will embrace it without any mental blocks.

It is not as simple as said and done. What it takes it to make it simple and easy to achieve? Few interesting dynamics pop-ups in my mind and they are emotional intelligence, listening skills, communication skills, ability to walk the talk. One could question that listening is part of communication skills. Technically no, practically yes. The technical definition of communication is “the imparting or exchanging of information by speaking, writing, or using some other medium”. As you can notice, listening is not part of communication. When you are unable to listen to other’s perspective, how can you exchange information effectively? Listen and Silent are spelt with same letters. Think about it. Practically, listening is part of communication because when the exchange of information is considered as an interactive process, one cannot exchange information effectively unless one understands other party’s thought process. See what happened to the patient (below graphic) on the operation table.

“We have two ears and one mouth, so we should listen more than we say.” Zeno of Citium

The idiom emotional intelligence is becoming more popular recently. But what is it? “the capacity to be aware of, control, and express one’s emotions, and to handle interpersonal relationships judiciously and empathetically.” If we dissect the definition, the critical words are aware, control, express and handle are the keywords of emotional intelligence. Be aware of the other person’s emotional state, control your emotions, express without hurting other’s emotions, and handle emotional conflict effectively. And finally, show empathy and focus on the issue and not the person.

“As more and more artificial intelligence is entering into the world, more and more emotional intelligence must enter into leadership.” – Amit Ray

In the change management mode, the leaders and the change managers talk a lot to convince people about the change and that is ‘talk the talk’. However, to make the change successful, it is absolutely necessary to ‘Walk the talk’. This means actions speak louder than words. Words are critical as all the people involved in the change process may not have very good comprehending abilities. Hence, it is absolutely necessary to convey the change in as many ways as possible. It could be a good idea to display posters about the change with motivational quotes such as, “Be the change that you wish to see in the world.”; “Everyone thinks of changing the world, but no one thinks of changing himself.”; “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.”; “Yesterday I was clever, so I wanted to change the world. Today I am wise, so I am changing myself.”; “He who rejects change is the architect of decay”; “We can do it together”; “We can do it!”.

In this article, I have put the cart in front of the horse. I should have discussed the barriers to the change management before addressing those challenges. I have worked for a CEO who wanted the solution first and the problem next. I have followed his philosophy in articulating about the change management. Now let us look at the barriers.

“The only walls that exist are those you have placed in your mind. And whatever obstacles you conceive, exist only because you have forgotten what you have already achieved.” Suzy Kassem

In my opinion, there are no barriers to change, they are virtual barriers, let us examine them. The first one is “Resistance to Change”. The resistance could be political or mind block arising out of fear of failure. And the direct resistance could be due to fear of unknown and indirect due to political reasons.

Before embarking on the change it is necessary to understand the current state (organisational cultural scan) even before thinking about the change. Some traditional organisations may not be ready for change, they are used to doing things in their own way and style. The culture, processes and systems of large organizations dwarf the complexity of a change management idea/attempt. Please remember that an architect wouldn’t renovate a building without looking at the existing blueprints. The current state of the organisation is the blueprint for the change management process.

Managing changes in any organization can be compared to repairing an aircraft when airborne. Change is always a moving target because as we travel through the change journey, expectations change, business dynamics change and outcomes also could change. Long drawn change process may have many integration points that are potential to fail.

In current globalised economy, business is dynamic and fast paced which initiates change management. External factors such as competition play a vital role. In many cases, external forces drive organizational change. Competition, external threats, technological change, market conditions and economic forces are all common drivers of change. Organizations may expedite a change in response to external threats.

Change is not compulsory and at the same time one cannot exist and grow without change. Change is inevitable.

“After all, if you do not resist the apparently inevitable, you will never know how inevitable the inevitable was.” – Terry Eagleton

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Supply Chain superiority determines organizational competitiveness.  Some believe that supply chain superiority or excellence is achieved with the help of three elements; process, people and technology.  Another group would advocate continuous improvement, benchmarking and KPIs, and innovative thinking would lead to supply chain excellence.  Do you think these factors drive the excellence?  My answer would be, yes and no.  Yes because these are fundamental requirements of any supply chain but beyond these elements something else works behind the scene to improve your supply chain effectiveness.

In order to make all above mentioned factors to work effectively three factors are critical.  The first and foremost is Collaborative Relationships.  The other two factors are Trust and Commitment.  In my opinion supply chain is all about managing relationships, demonstrating trust in relationships and committing to the core objectives. Let me explain how my theory works.  The below given graphic would explain various supply chain relationships:

As you can see from the above graphic supply chain manages internal and external relationships with various agencies.  Supply Chain relationship with Sales and Marketing, Manufacturing, Logistics, and various Vendors will ensure that the right product is made available at the right time and place at the right cost.  Sales team relationships with agents, distributors, retailers and consumers will make organizations grow and become competitive.

People make things happen, technology give us the ability to establish supply chain visibility and the process drives the activities.  However, all these factors could function in a silo apporach and make supply chains fail.  What is required is an integrated approach and integration is possible by establishing trusting relationships.  Effective relationship management can provide a positive contribution to sustainable supply chain superiority and also help to satisfy stakeholder interests.

Many organizations end up with huge inventories and wrong product on shelf and mounting supply chain costs.  The main reason for this catastrophe is lack of trusting relationships among supply chain partners.  In my opinion all above are supply chain partners.  The partners could include internal members as well as external members.  What is evident is that supply chain fails if the partners working for individual benefits without a common goal.  Someone said, we all stumble, that’s why it’s a comfort to go hand in hand.

Mutual trust was defined as “a shared belief that you can depend on each other to achieve a common purpose”.  Trust plays a crucial role in strengthening relationships and organisational changes and it is a critical component in building a collaborative relationship among supply chain partners. Trust creates an increase in openness among partners involved and it is perceived as a result of effective collaborative relationships and leading to higher levels of partner/customer satisfaction.  Trust is not gained in a day or two; trust is built up over a series of interpersonal encounters, in which the parties establish reciprocal obligations.

“An ounce of performance is worth pounds of promises”. In order to turn your promises into performance you need commitment. The third ingredient for the supply chain success recipe is commitment; commitment means to show loyalty, duty or pledge to the core organizational values.  In a partnership commitment plays a vital role along with trust. Someone rightly said, “unless commitment is made, there are only promises and hopes; but no plans.” Unless the supply chain partners are committed to a common goal which could deliver mutual benefits, it would be a challenge to establish a trusting and successful relationship.

According to a recent report from Boston-based AMR Research Inc., “companies that excel in supply-chain operations perform better in almost every financial measure of success. Where supply chain excellence improves demand-forecast accuracy, companies have a 5% higher profit margin, 15% less inventory, up to 17% stronger “perfect order” ratings, and 35% shorter cash-to-cash cycle times than their peers. Companies with higher perfect-order performance have higher earnings per share, a better return on assets, and higher profit margins — roughly 1% higher for every three percentage-point improvement in perfect orders”.  In order to achieve these two key measures (i.e. demand forecast accuracy and perfect order performance), committed collaborative and trusting relationships are crucial.

Hachiko – A Dog’s Story motivated me to write this article. This story is based on a true incident from Japan. This story is about the relationships, trust and commitment shown by a dog and also explains how invincible bonds form instantaneously in the most unlikely situations. We do not realize the value of relationships until reality bites.

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Tom Peter once said, “Do what you do best and outsource the rest”. It is a common practice to outsource logistics and supply chain activities.  One would be surprised to know that some organizations strongly believe in insourcing logistics activities.  The recent study by CAPGEMINI (2010) revealed few interesting facts on insourcing.

  1. On an average of 24% of outsourcing companies indicated that they would be returning to insourcing some of their logistics activities, and 36% of 3PL respondents observe that some of their customers are insourcing certain logistics activities.
  2. “Transportation is most Outsourced”.
  3. The percentages of 3PL users outsourcing individual logistics activities (versus overall outsourcing) tend to be higher in Europe and Asia Pacific than in North America or Latin America.
  4. The gap between expectation and satisfaction with regard to 3PL IT capability is widening (54%).

The outsourcing survey conducted by CILTUK revealed that logistics service providers (3PLs) are seen as:

  • “A necessary evil“
  • “They are only in it to make money these days”
  • “Deliver poorer service for disputed financial advantage”.

Further, the same report revealed that 52% of the respondents indicated that the length of the contract reduced.  Outsourcing community is aggressive and they do not mince words in sending out a strong message to 3PLs, “don’t sell me what YOU want, show me what I NEED”.  In 2009 UK’s largest retailer, Tesco, has decided to take some of its distribution operations in-house. The move follows a company review of supply chain strategy.

What prompts them to Insource?

The CAPGEMINI 2010 outsourcing review listed 12 different reasons for insourcing.  And they include:

  1. Logistics is a core competency at our firm – 19%;
  2. Cost reductions would not be experienced – 15%;
  3. Control over the outsourced function(s) would diminish – 14%;
  4. Logistics too important to consider outsourcing – 13%;
  5. Service level commitments would not be realized – 11%;
  6. We have more logistics expertise than most 3PL providers – 10%
  7. Corporate philosophy excludes the use of outsourced logistics providers – 9%
  8. Too difficult to integrate our IT systems with the 3PL’s systems – 8%
  9. Global capabilities of 3PLs need improvement – 6%
  10. Issues relating to security of shipments – 5%
  11. We previously outsourced logistics, and chose not to continue – 5%
  12. Inability of 3PL providers to form meaningful and trusting relationships – 3%

Now let us review top 5 reasons individually and understand whether they are true or system failure is causing outsourcing to fail.

1.Logistics is a core competency at our firm:  What is core competency? Core competencies are the key skills, characteristics and assets that any organisation brings to the marketplace. These competencies, on an organisational level, are a synergistic blending of the core competencies that people in the organisation individually bring to work every day.

If we go by the above definition, Logistics is the core competency of any 3PL company because managing logistics activities is their core business. Interestingly, one of the main objectives of outsourcing is to focus on core competency.  Modern globalized companies are described as “intellectual holding companies” because they focus so strongly on their core technologies while they purchase other services from companies that excel at delivering them. Thus, their entire operations function at a high level, yet they do not have to maintain high cost infrastructure. They get world-class capabilities without the risks involved in developing them.  With rapid globalization, it would be next to impossible to compete in a global platform without strategic alliances.  In my opinion, this reason is a myth.

2. Cost reductions would not be experienced: This could be true to some extent.  In my opinion shippers equally share the responsibility for this blame.  During the initial phase of data collection, 3PL seek the existing costs, business processes, business volume etc., in order to understand the size of the business and develop a cost sheet.  Often it was reported that the shippers are hesitant to provide this information citing confidentiality as a reason. Outsourcing should be considered as a strategic solution and the service provider should be considered as a strategic partner.  Unless transparency is established, relationships do not flourish and this is one of the fallout.  If the shipper could provide all required information to the 3PL and insist on the 3PL to provide the costing using ABB (activity based budget), this may not happen. If necessary go for an open book method which would establish transparency. Many shippers believe that they have very limited role to play in the outsourcing process.  Outsourcing is a marriage; it may not work well for the organization unless both parties involved work for common objective with mutual interest.  CAPGEMINI 2010 report reveals that outsourcing companies have reported 15% cost savings, 25% reduction in capital deployment, and 11% reduction in inventory.  In my opinion if the outsourcing process is managed well one can avoid this problem.

3. Control over the outsourced function(s) would diminish: In my opinion it is a myth.  It is true that the shipper may not have transactional control but the overall control will not diminish.  Again the responsibility lies with the shipper.  If the shipper is able to develop KPIs for all the outsourced activities and monitor the KPIs regularly, one may not lose control over operations.  In my recently published article, I have identified 32 different KPIs for warehousing function only.  An effective set of interlocking performance indicators provides operational feedback to the enterprise and helps them in directing the 3PL operator effectively.  Instead of describing an operation as appalling, if one can explain that 75% of transactions failed to meet the expectations, it would deliver a better message.  Controls will never be outsourced, what are outsourced is transactional operations.

4. Logistics too important to consider outsourcing: There is no doubt Logistics is important function.  Seamless flow of material information keeps the business moving forward. However, some of the activities within logistics function are mundane in nature.  These activities can be outsourced and allow logistics/supply chain manager to focus on the value addition instead of managing day-to-day routine functions. Hence, it is necessary to develop a strategy on outsourcing and identify non-core activities and also develop a SWOT analysis to understand threats and weaknesses of outsourcing.  Routine functions such as transportation and warehousing are non-core functions in my opinion.  One can outsource them and save costs.  In current economic conditions it would be next to impossible to develop infrastructure globally, it would be advisable to farm partnerships and strategic alliances to save costs and expand globally.

5. Service level commitments would not be realized: It is true to some extent.  Again the shippers shares 50% responsibility for this blame.  As long as the shipper is able to define the measurable service levels and monitor the same periodically and works with the 3PL proactively, this could be avoided.  Operational efficiency should be measured on a daily basis.  Some of the Fortune 500 Companies recruit specialists or appoint lead logistics service providers to monitor their operations. Nicholas and Amrik of Monash University indicated that formulating and quantifying the requirements was an obstacle to outsourcing in Australia.  If you are not sure what to expect out of outsourcing, you have no right to complain about the service levels. Effective operational control will ensure high level of service levels.  CAPGEMINI 2010 review reveals that 29% improvement in average order cycle length, order fill rate improved by 11% and whereas order accuracy improved by 7% through outsourcing.

Other reasons include; organizational logistics expertise.  3PL service providers globally consolidated their positions and are able to provide cutting edge solutions which individual organizations cannot afford.  IT integration is very simple now days.  Without penetrating firewalls one can exchange information through EDI and integration may not be necessary.  3PL capability improvement is an on-going issue; shippers may have work with the 3PLs to get what they want.

However, in my opinion there are two genuine reasons and they are security risks and relationships failure.  I have discussed in length about the supply chain security risks in an outsourced environment earlier.  It is a genuine reason and 3PLs are expected improve their performance on this subject.  As mentioned earlier outsourcing is like a marriage.  As long as it is not a marriage of convenience and both the partners are willing to invest time and effort to make the relationships work, the pact should be successful.  The outsourcing goes through three phases before it firms up as a relationship.  The initial phase is known as courtship where everyone is happy.  The second phase would be hardship where the shipper notices inefficiencies and the 3PL struggles with resources and cost overruns.  The third phase is battleship, in this phase both the parties involved are in a mood to terminate the relationship because of mounting issues.  If both parties proactively work and sort out issues through well-defined escalation process, the outsourcing moves into a relationship mode.

Many organizations get caught up in the hype of the outsourcing craze and forget that it is a complex business strategy and lack of strategy, lack of top level management commitment and not dedicating best and brightest internal resources could lead to outsourcing disasters.  If organizations embark on outsourcing with one dimensional approach of saving costs, it would be a big business risk and will have long lasting implications on the business.  Ideally develop an organizational strategy, create an outsourcing frame work, and seek professional help (if necessary) to handle the process and select the right match (3PL) and this should work as mantra for outsourcing success.

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on behalf of a third party

Image by Lєaтнєянєaят via Flickr

At the outset I would like to clarify that this article is not going to deal with outsourcing risks.  The focus is on Supply Chain risks in an outsourced environment.  Risk in managing supply chains is high due to several reasons such as Terrorism, Shrinkage, Quality, Natural disasters, IP Thefts, and Vandalism etc.  The risk magnifies if the some or total operations are outsourced. Twenty five percent CAPGEMINI 2010 outsourcing survey participants have indicated that loss of control as one of the reasons for not outsourcing.

In order to outsource and to mitigate the supply chain risks collaboration becomes very critical in an outsourced environment.  According to CAPGEMINI 2007 report practitioners reveal a gap between the desire to work collaboratively with 3PLs and how to go about it. Collaboration means equal participation whereas 35% of the CAPGEMINI 2005 survey participants have indicated that the time and effort spent on managing Logistics functions not reduced.  This could mean practitioners believe that outsourcing means total responsibility transfer to 3PLs and no participation or minimal participation from their side.  Outsourcing means handing over the control over operations to a third party but the ownership rests with the outsourcing companies and they cannot disown the responsibility. One should clearly understand that the outsourcing is confined to activity but not the function.  The functional responsibility rests with the outsourcing company and they may have to execute the activity in collaboration with the service provider.

Time and again shippers (outsourcing companies) repeatedly pointed out that 3PL (third party logistics) companies do not have the project management capabilities and they fail during the transition due to lack of industry specific knowledge and also due to lack of process integration capability across supply chain. These teething issues if not addressed properly could lead to relationship failures.  Hence, the problem is not supply chain risks but the lack of collaboration in tackling the issues.  In order to highlight the seriousness of the issue, I reviewed the last five CAPGEMINI outsourcing surveys and the trend indicates consistency.

In my opinion, top three reasons that could lead to supply chain risks in an outsourced environment would be lack of project management skills, unsatisfactory transition and lack of knowledge based skills.  Surprisingly the feedback over the last five years was consistent and we see 20% improvement in case of knowledge based skills.  This could be due to more skilled force joining 3PL companies and we have seen recently 3PL companies recruiting practitioners as subject matter experts and to manage the projects.  What is disturbing is that on an average 15% survey respondents have indicated that 3PLs are unable to form meaningful and trusting relationships.  In my opinion this is a cause of concern.  The recent survey conducted by CAPGEMINI (2009) indicated that only 25% of the shippers felt that the outsourcing is “extremely successful” and further 64% participants felt that outsourcing is “somewhat successful”.   If the outsourcing community is not totally happy with the outsourcing outcomes or performance, managing risks through collaboration could become a serious issue.

How secure are the shippers about the security provided by 3PL companies?

The 2008 CAPGEMINI survey did indicate that majority of the respondents are comfortable with the security arrangements.  Around 22% have indicated somewhat secure and 2% indicated that not secure.  Supply Chain security is paramount and even if 2% were unhappy, it needs immediate attention.  These risks could lead to major customer satisfaction issues.  That could be the reason why 25% non-outsourcing respondents (2009 survey) indicated that they do not outsource due to loss of control over operations.  Some of the serious security breaches indicated in the 2008 survey included the following:

  1. In one case, 2GB branded USB sticks were replaced with 1GB but appeared as 2GB to users.
  2. Another case involved falsified Italian airplane parts that were later rumoured to have contributed to accidents.

Supply Chain security is critical to all industries but it is vital for some specific industries where any security breach could be life and death question and the example could be food contamination.  58% Food and beverages industry respondents in 2008 survey indicated that spoilage of food products creating a health risk as the biggest risk. The above mentioned survey did indicate that 3% Food and Beverage industry respondents were not secure about the arrangement, which is really a cause of concern.  Tampering was reported as the second biggest threat (45%) for life sciences and pharmaceutical companies.  This is also a life threatening risk.

Type of Supply Chain Risks:

One can divide the risks into two categories, the first one dealing with 3PL operational efficiency related risks and the second one dealing with generic supply chain risks. The trends reveal some interesting facts.

The top three risks, theft of material, material tampering and theft intellectual capital were predominant in Asia compared to global trends.  The risk of terrorist attacks and the disruptions due to natural disasters are the two top risks in North America.  Whereas Latin America faces serious supply chain risks from, smuggling of other material with the shipments, Vandalism and Spoilage of food products leading to health risks.  Europe is a mixed bag, it also faces all risks but the thefts and thefts of Intellectual capital are over and above the average global percentage.

The first three supply chain risks identified as 3PL operational efficiency related risks are quite common even in insourced operations.  As warehousing and distribution function is a non-core activity for many organizations, organizations should work in collaboration with the service provider to minimize the risks and operational disruptions.

Enhance Supply Chain Security:

Risks are inevitable and outsourcing is unavoidable (encouraged due to various benefits of outsourcing).  Hence, it is necessary to enhance the supply chain security with the help of service providers.  CAPGEMINI 2008 survey identified 12 enhancements and the participants have identified gaps in enhancing the security.  The below given chart is developed based on the data published in the above mentioned survey:

If we review top three gaps, any one would understand that it is not a challenging task to improve security.  What is lacking is proactive approach from both the shipper and the service provider.  Lack of proactive reporting with regard to thefts or any other risks is the biggest complaint by the outsourcing community and this continues to haunt the 3PL industry even today.  In most of the cases, the customer (shipper) gets to know first about the incident.  This is really frustrating for the practitioners.

RFID tags are virtually impossible to copy, making them suitable to security applications. According to “The pros and cons of RFID in supply chain management” article the cost of goods lost within supply chains among the European companies was 50 Million euros a day and the same report indicated that up to US$30 billion worth of goods are being lost each year within supply chain.  However, recent development are encouraging, one of the biggest retailer (Wal-Mart) introduced mandates for RFID adoption.

Providing alternative routing for shipments is a possibility.  However, in the peak seasons such as Christmas and Chinese New Year time it would be next to impossible for rerouting keeping in view of very limited options.

Collaboration:

Collaboration is all about working together.  The CAPGEMINI 2008 survey published how the shipper and service provider are collaborating by industry.  What is heartening to note is that 48% shippers are willing to collaborate with the service provider to enhance the supply chain security to a limited extent.  Retail dominates this segment (57%), followed by Life Science (51%) and Chemical (50%).  Thefts are very high in retail whether the operations are outsourced or insourced and life science and chemical industries face more risks if they fail to collaborate with the service providers to achieve selected security improvements.  The 2008 CAPGEMINI report indicates that the higher the company’s revenue, the more likely they are collaborating beef up security measures.

Supply chain efficiency is the back bone of organizational excellence.  According to one estimate supply chain disruptions could result in 40 percent decline in share price.  Prof. Vinod Singhal of DuPree College of Management, Georgia Institute of Technology indicated that material shortages could contribute 7.5% reduction in share value on a given day.

Today’s business success to great extent depends on logistics and supply chain performance and the role of Supply chain has never been as critical as it is today. Supply Chain speed and flexibility have become two key levers for competitive differentiation and increased profitability. In order to compete effectively in the market place Supply Chain managers drive cost improvements and that could lead to some supply chain risks.

“Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement,” says William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich.

Today’s supply chain professionals recognize the risk as part and parcel of supply chain management and at the same time outsourcing is also inevitable.  Hence, the trick lies in identifying the risk and mitigating the same with the help of supply chain partner.  Proactive approach and collaboration minimizes the risk element in Supply Chain.

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