Manufacturing and retail enterprises have been working since the middle of the last century on collaborations in supply chain. CPFR (Collaborative Planning, Forecasting and Replenishment) had emerged as the basic mantra for success for organizations thriving on supply chain to drive efficiencies and synchronized operations. But this supreme position of CPFR is being challenged by another buzz-word, vastly accentuated by the economic downturn. This is “risk management”. Suddenly you see everyone talking about risk. Interestingly, in risk management again the complete planning-to-execution-to-monitoring cycle requires collaboration across various business functions. This led to the need for the next generation mantra – CFT-R (Cross Functional Team for Risk).
Even though the formal business practices of CPFR were delineated in 1998 by VICS Association, but the related practices in Just-in-time (JIT), Kanban and Heijunka, Just-in-sequence (JIS), Vendor managed inventory (VMI) and Efficient customer response (ECR) have been in-vogue since the 1950’s. Organizations have been collaborating not only among the different business functions within, but alos with their external enterprise partners in both upstream and downstream operations. All this was done with the objective to improve visibility across the supply chain to enable accuracy and timeliness of supply chain decisions to meet the customer demand in the most cost-effective manner.
Cost management has always been a double-edged sword to cut margins and corners. On one edge is the focus to reduce expenditure by squeezing “essentials” and eliminating the “avoidables” and on the other is the focus to reduce interest spending on debts by optimizing the available working capital. To elaborate further
Reduce expenditure: Reduce costs of goods, services and operations through multiple initiatives like Low-cost-country sourcing (LCCS), Spend Analytics (SA), Value Analysis and Value Engineering (VAVE), Lean Manufacturing (LM), Single-minute-exchange-of-dies (SMED), Distribution & Logistics Optimization etc.
Optimize Working Capital: Reduce inventory and optimize reserves (e.g. warranty reserves etc.) through inventory classification and planning, cycle counting, lead-time optimization (LTO), improve accuracy in demand forecasting etc.
As enterprises went ahead reducing buffers, cutting corners and increasing inter-dependence among collaborating partners, there emerged a new challenge in the horizon…. that of risks. For instance, a violation of material specifications in a plant at one corner of the world would have its ramifications across the globe with diverted supplies, stock-outs, plant closures, warranties and recalls, dissatisfied customers, litigations and liabilities. The cohesive intertwined network has summarily enhanced the risks in the supply chain.
Some organizations have adopted a stop-gap mechanism to appoint “Chief Risk Officers” (CRO) to police the risk-prone operations. Since this “arrangement” has been done from a financial reporting perspective, it has its inbuilt limitations. Whereas financial wizards appointed as CROs in Banks and Financial institutions have been successful, their success in manufacturing and retail enterprises driven by supply chains is yet to be realized. My view of the limitations is basically borne out by the fact that such risk management mechanisms would be more “reactive” instead of preventive.
As I have seen in many organizations what is required is to set up a Cross-functional team for risk (CFT-R) which includes persons from multiple domains and business functions (like finance, HR, production, quality, procurement, marketing etc.) coming together as a team. The objective of this team would be to evaluate multiple dimensions of risks and its impact on business, identify the root causes of these risks and take actions to eliminate them from the root. This type of approach is necessary for two main reasons:
Ownership of risk: with a financial wizard as the CRO, core business functions in manufacturing and retail tend to either conceal facts or push responsibility of decision making to the CRO for any perceived risk. In such an environment decision making would be delayed, disjointed and divergent to business objectives.
Prevention of risk: a business manager is the best judge for identifying the root cause of risk. Active involvement in a CFT (cross functional team) would inspire them to device means and methods to eliminate current risks and prevent potential future risks as well.
Having worked in different business functions and with multiple brands as external advisor, I have observed that the manufacturing and retail industry is in favour of sharing the burden of risk between finance, operations, Engg, quality, procurement, sales & service and if necessary with external strategic partners as well. Such cross-functional team approach in identifying and mitigating risks would evolve as the next generation of collaboration in the risky supply chains of the twenty first century.