The crucial role of risk management in future supply chains

[Transcript]

[00:00:00] Jan Griffiths: Welcome to the Auto Supply Chain Prophets podcast, where we help you prepare for the future in the auto supply chain. I'm Jan Griffiths, your co-host and producer.

[00:00:13] Cathy Fisher: I'm Cathy Fisher, your podcast host. Our mission is to help automotive manufacturers recognize, prepare for, and profit from whatever comes next in the auto supply chain.

[00:00:23] Terry Onica: I'm Terry Onica, your podcast host. We'll be giving you best practices and key supply chain insights from industry leaders.

[00:00:29] Jan Griffiths: Because the auto supply chain is where the money is. Let's dive in.

Hello and welcome to another episode of the Auto Supply Chain Prophets Podcast. Let's check in with my co-host, Cathy Fisher. What have you been up to lately?

[00:00:47] Cathy Fisher: Hello, Jan. Well, I tell you what, Terry and I have had a big week. Earlier this week, we were visiting with an EV startup, and we had the opportunity to work with them through the 24 Essential Supply Chain Processes. There was a lot of "ahas" happening in that room when we were going through those 24 Essential Supply Chain Processes. Terry, what are some of the results that came out of that?

[00:01:10] Terry Onica: The results were really good. They were very happy with the entire process. What had happened with this organization is they have gotten through their initial ramp-up. And so, they're really getting ready to go into the mass production phase. So, they stopped to do a spot check to see where they were at.

And so, they leveraged our 24 Essential Supply Chain Processes to see where they were at. Now good thing that they did it after the ramp is that they were able to see how that went, what went well and what didn't. And so, it became very clear as we went through the 24 processes with them where they needed to improve.

A lot of "aha" moments. So, they really see the benefit of using automation as they begin to do their mass ramp.

[00:01:58] Jan Griffiths: Yeah. And what I love about the work that you're doing with EV startups is we all know that EV companies have trouble scaling up.

[00:02:07] Terry Onica: Absolutely.

[00:02:08] Jan Griffiths: And I have heard that just about everybody we've interviewed on this podcast, on my podcast. Yes, it's a different culture. And yes, they're really strong on innovation and technology, but when it comes to scaling and putting those strong, robust processes in place to ensure a successful launch and scaling up and continuity of supply during production, that's where they stumble. And I'm so grateful, quite frankly, that the two of you put together that 24 step process, because I would never want to have to sit down and pull all that together.

It's like you've taken all the knowledge of the industry and boiled it down into a nice, easy-to-read document. And I love that. I'm all about easy-to-read documents. Well, talking about documents, let's talk about our main focus for today's episode, which is risk management. Now, when we talk about supplier risk and supply chain risk, I will tell you in my life in supply chain, when I think about that, my mind immediately goes blank.

And I think, oh no, there's so much risk, and gosh, we've seen it, haven't we, lately? I mean, we've had COVID, we've had chip crisis, we've got the strike. There is risk at every turn and somehow supply chain leaders, we have to think about that. We have to have a process to be able to identify it, to mitigate it, to put plans in place. So, tell us about your latest white paper that you've written. So, Cathy, tell us about it.

[00:03:40] Cathy Fisher: This risk white paper that Terry and I have been working on is actually an update from some work that we put together. Oh my goodness, it's probably six or seven years ago when we first started talking to the automotive industry about the application of risk-based thinking from a quality and a supply chain standpoint.

We recognized, especially since COVID, how much more important risk is. It's always been important, right? But I think certainly the experience that all organizations, all industries even, but especially the automotive industry has experienced as a result of COVID and the resulting ripple effects, semiconductor crisis, et cetera, has really elevated the focus on risk-based thinking and incorporating risk as a key focus, not only within the organizations, but also in managing the supply chain as well.

So, we went back through the work that we had done and refreshed it with the experiences the lessons learned from the past several years since COVID. And also put a lot more emphasis on the expectations around contingency planning and helping to really clarify. Where contingency planning comes from as a result of risk analysis or performing that risk assessment up front first and then figuring out what do we really need to be building contingency plans around.

[00:04:57] Terry Onica: What's really nice about the document is that there are a lot of new people in the industry that don't necessarily understand risk management, risk assessment, or contingency planning. And so, I think it's a really excellent document to help those that are new to the automotive industry. How do I boil down these industry requirements and address risk within my organization?

[00:05:19] Jan Griffiths: Who should be involved in supply chain risk identification and contingency planning? Who needs to be involved in that? Because it can't all just lie on the shoulders of the supply chain, can it, Cathy?

[00:05:30] Cathy Fisher: No, absolutely not. This is one of the things that Terry and I noticed even before COVID when we first wrote this paper six or seven years ago. What we noticed even as a result of COVID was that a lot of organizations were still sitting in their silos in addressing risk.

And today that is just, it's not possible. You can't do that. It wasn't effective before, but it's even more ineffective now, mainly because the interconnectedness of what's happening in business and the reliance on the supply chain as well, especially as you look to the lower tiers in the automotive industry and exactly what we experience with the semiconductor crisis. So, we're really encouraging and highlighting in this updated version of the white paper that organizations come together as a cross-functional team. And when they're looking at supply chain risk, you really have to have the voice, not just of supply chain and purchasing and the voice of the supplier, but you also have to incorporate the voice of the manufacturing, the voice of the customer, of course, and even from the business perspective. So, it absolutely has got to be a cross-functional activity. And along those lines, the other mistake that we see a lot of organizations making because they're staying siloed is that when they are creating contingency plans or even doing risk assessments then they're actually missing a lot of the interfaces or interrelationships of risks and making sure that as an organization they're planning collectively for addressing those risks and that's where organizations oftentimes are going to get caught off guard when they realize those risks and they don't really have a holistic plan for addressing them.

[00:07:07] Terry Onica: You got to break down the silos and get together when it comes to looking at risk. Because in a lot of cases, there are shared risks. If there's an earthquake, it's going to affect quality, it's going to affect supply chain, manufacturing, everything, right? So, you can really come together and build one cohesive plan in a lot of cases. And if you do it independently, which I see a lot when I teach the AIAG MMOG/LE class, it's typically left to quality.

And when I say, show me your supply chain disruptions. They don't think about it, I need to look at transportation. What if my ASNs don't get there on time? Packaging. Quality people just don't think about that. And that's why you got to break down the silos and do it together.

[00:07:49] Jan Griffiths: So that's the who should be involved. But what about the when? When should people be thinking about this, Cathy?

[00:07:58] Cathy Fisher: They should be thinking about it all the time, right? Because we never know when the next crisis the next disruption is going to come along. But realistically, organizations should have a set frequency or cadence for reviewing their risks. Most definitely it should be at least annually, I would say, but especially with the types of disruptions that we've been recognizing and the pace of change that's happening right now in the automotive industry. I would say maybe even quarterly. We should be taking a look at the risks and what we've seen as best practice at some of the organizations that we work with is that the organization's leadership team cross-functionally comes together, takes a look at the previous risks that were identified, and which of those have been realized or have the potential in the future to be realized. And also, are recognizing what are some new risks that maybe were not on our radar the last time we were going through this risk assessment? Let's get those added on and start defining what is going to be our plans for addressing those risks. What kind of contingency plans do we need to have in place? The other time, obviously, is when you actually have experienced a risk, and your organization has either had to implement a contingency plan or activate some other type of business continuity activity. You certainly want to go back and review the effectiveness of the plan and the actions that were taken, and then update that plan accordingly so that you can gather those lessons learned and bring those forward for the future.

[00:09:25] Jan Griffiths: As a recovering supply chain person, I can tell you right now that my focus is all on launching new programs. It is on cost reduction, it is on logistics, and a million other things. This is the last thing I would ever want to work on ever. So, I'm going to assume that there are maybe a few people out there that feel the same way— knowing that it should be done, it must be done, but not wanting to do it and kicking the can down the road. I'm curious in terms of best practice, who's really driving this? Is it coming from the office of the CEO? Because as you said, it has to be multifunctional. Where's the impetus for this?

[00:10:09] Cathy Fisher: I definitely feel it needs to come from the office of the CEO and what's interesting when we look at how our clients currently are addressing risk and especially contingency planning because of the requirements that sit in ISO 9001, IATF 16949 from a quality perspective, typically it's the quality leadership or quality manager that's taking the lead and bringing folks together or putting together these risk assessments and contingency plans.

Unfortunately, they may not have the right. reach and leverage in the organization to bring all parties together, and certainly, they're not necessarily going to have that broad-based perspective that the CEO's office can then encourage when we get all those leaders from the different sectors of the business sitting together and assessing those risks.

The other thing too is that the ownership of those risks ultimately lands with the CEO, and with the top leadership of the organization and especially the contingency plan. So when I go into organizations and contingency planning has been delegated to another department, I'm like, this is not a good situation because the resources that are going to be necessary to support that contingency plan, the focus on testing performing routine drills around those contingency plans, and even just the global perspective of the types of risks that are emerging may not be within the organization. And typically, the CEO has a lot more external focus in terms of the position of their business relative to the overall industry and just even to the global markets that they're serving.

[00:11:43] Terry Onica: Let me give you a great example. Why should you do this, and why should you do it now? Not kick the can down the road. So, several years ago, I was out working with a supplier who was getting their Q1 from Ford. I was going through all the MMOG/LE requirements on the delivery side. We got to contingency planning and I was going through a list. Do you have a backup generator? I could not believe the supplier had no plan for backup power, none. I said you got to get it. They were kicking and screaming, no, we don't. I'm like, yes, you have to have a backup generator. You've got to have some method. So, kicking and screaming, they went ahead they did it. Fast forward, they get their Q1. Two weeks later, the power goes out. They said, Terry, if you had not pushed me to get backup generation, two weeks after getting Q1, I would have shut Ford down. Two weeks. So, you think, it's not going to happen to me? And thank God they did it because they were prepared.

[00:12:45] Jan Griffiths: Now we're getting it right. So now we're getting into this realm of unplanned cost, and there is not a business out there, there's not a CFO out there that absolutely hates unplanned cost. So, what this does is it puts you in a better position not only to prevent, but perhaps manage that unplanned cost so that it is as minimal as possible. So, the impact of the bottom line is as low as it could possibly be. It sounds simple, but that's it really, isn't it?

[00:13:21] Cathy Fisher: Absolutely. And I'm glad you brought up the point about cost because this is yet another reason why we have to address risk cross-functional. We have to have the CEO at the table because ultimately, they're going to make the decisions about where money is spent, whether it's proactively to satisfy customers or proactively to address risks.

So when you look at risks that may impact the organization, it's very important that as part of that risk assessment, you're looking at what could be the financial impact to our business; if we shut our customer down, if we are not able to continue running our operations and paying our employees, if we're having to shift our supply from a current supplier to another supplier, or even shift our entire production to another location to overcome a disruption that may happen in our plant.

All of those scenarios have costs associated with them. And it's not impossible to figure out what those costs are. I mean, that information can be generated. It's not necessarily going to be 100 percent accurate, but as long as you have a general idea of what those costs are going to entail, that'll help the organization in prioritizing the resources. It'll also help in terms of the organization determining where should we focus our time and efforts in communication, drilling the process, making sure that those contingency plan actions of business continuity activities are going to be viable when we find ourselves in that disruption.

[00:14:51] Jan Griffiths: When organizations are evaluating risk, what's that scope look like?

[00:14:57] Cathy Fisher: That's a great question. Oftentimes, organizations are pretty decent in recognizing risks that may impact within their own business. But one of the things I think that's really come to a realization, at least for the clients that we work with, is that it's not only looking at the risks that perhaps your suppliers may impact your organization, what's happening inside of your business, but what about risks from your customer side? What if your customer shuts down? What if your customer delays the launch of a program? What if your customer decides to go in a different direction in terms of the markets that they're pursuing? Those types of risks are definitely going to have an impact on your organization. And we want to make sure that as you are assessing potential risks and also going through your contingency planning, that you're considering the upward risks as well as the downward risks, you know, up the supply chain as well as back behind in the supply basis and identifying risks.

[00:15:54] Terry Onica: And the other thing you need to think about is also risk appetite. You got to look at your strategy and say, "Do we have the appetite to address this risk?" We often hear about going with a low-cost supplier, right? So, we're going to do that. But did you think about all the total costs of that supplier and all the potential things that could go wrong with that supplier outside of just going for that business on the piece price? So that risk appetite becomes really important.

[00:16:25] Jan Griffiths: All my career, I have seen total acquisition cost models and very few people pay any attention to them. And it does come back to exactly this point that you're talking about now, Terry, and that is risk appetite. And yes, many times in my career, I've been pushed into the direction of the low-cost supplier and the low piece price.

As a supply chain leader, and our audience are all supply chain leaders, why would I devote my time and attention to reading this white paper? What am I going to get out of it?

[00:17:03] Terry Onica: The readers will get out of the white paper is a good overview of risk what the requirements are because we talk about the requirements that are in IATF and MMO/GLE. So, you understand what it's going to take to be compliant. We walk through what should be on a good contingency plan. So, you'll get that step by step, what should actually go in there? Because oftentimes when I look at contingency plans, I have literally seen plans where there's just a contact name. And if we're short on parts, the answer to that is stock more parts. Well, if I'm going to contingency plan, and my plan was just to carry more inventory, well, that helped— or I wish to say not. So, making sure that they're really robust, and this will really outline all those components that need to be there. And Cathy, what would you like to say as well?

[00:17:57] Cathy Fisher: One of the other things that we've added into this white paper is the perspective of what we've been seeing in the industry. One of the considerations about risk is we oftentimes think about risk as inhibiting innovation or inhibiting trying out new things, and that's actually the opposite. When we do thorough risk analysis and establish appropriate contingency plan and business continuity plans, it actually liberates the organization to be able to take more chances to be able to innovate and try out new things with an understanding about what could be the impact to our business.

What could be the impact to our customers and other stakeholders when we are innovating and we're able to realize if we have not the desired result out of those innovations, we understand what the impact is going to be. We don't have any surprises on the other side of that. So, you know, embracing risk assessment and risk-based thinking in your business is it actually helps you be a better innovator than if you're just not looking at the risks at all.

[00:19:02] Jan Griffiths: Okay, I'm sold. I want to read it. We will drop a link in the show notes below. I'm curious: with all the work that you've done around this, what is the most important action that auto suppliers should take to proactively manage supply chain risk?

[00:19:19] Cathy Fisher: Yeah, I would say the first thing is that we should be identifying risks and we should also be reviewing our plans on a frequent basis as well to make sure that we have viable plans to address when those risks are realized within the business.

[00:19:35] Jan Griffiths: Yeah. Terry?

[00:19:37] Terry Onica: I think to proactively manage risk, again, you need to be sitting down, like we said, a few times a year because they change, right? A pandemic was not a risk on anybody's radar several years ago. So, to keep looking at risk, like Cathy said, I'd be doing it once a quarter if anything new bubbles up.

[00:19:56] Jan Griffiths: Yeah, and our culture in automotive is very much of whatever happens, we'll figure it out. We're the firefighter, right? Chip crisis, COVID, it's okay. We'll get in there and we'll muscle through it and make it happen. And sometimes that's a great part of our culture because it does help us get through a crisis situation, but not really, not in terms of the way that this industry is changing. Things are coming at us fast and furious. So, there is a culture shift in that we need to spend more time proactively planning, even though it's the last thing on our agenda. The way the industry is transforming, this is the perfect time to be bringing a cross-functional team together having the risk and contingency plan discussion. All right, thank you both. Risk management. It is time for us all to spend more time understanding risk, putting together contingency plans, and doing this on a regular basis. Thanks, Cathy and Terry for bringing this to our attention today.

[00:21:08] Cathy Fisher: Thank you, Jan.

[00:21:09] Terry Onica: Thanks, Jan.

[00:21:13] Jan Griffiths: Are you ready to find the money in your supply chain? Visit www.autosupplychainprophets.com to learn how or click the link in the show notes below.