More on Scenario Planning - 5 Thoughts for Surviving the Supply Chain Downturn

 "You can be wrong half the time and still make a fortune"

I am reading a fabulous book about managing your emotions as it relates to investing. The book is titled, "The Psychology of Money" and, as you can imagine, my mind went to supply chain strategies and how this psychology can apply. My mind also went to a theme I have been writing about relative to scenario planning. 

The quote above is from the lead page in Chapter 6 titled, "Tails, You Win". and it truly embodies a lot of what scenario planning is about. Here are the key lessons:

1. Your Business Plan Cannot Depend on Perfection:  Whenever I see someone developing a plan the first question I ask them is, "What if assumption [fill in the blank] is not accurate? What happens to the plan? If they cannot answer that question or the answer is the plan falls apart, then there is no plan. There are numerous sayings on this but it all comes down to not developing a plan which relies on a hole in one. Holes in one rarely happen. "The more you need specific elements of a plan to be true, the more fragile [the plan] becomes".
   
   
2. The Plan "Bets the Farm": The quote from the book which applies here is: "Few gains are so great that they're worth wiping yourself (or your business) out over. When I hear people say they are going to be the "Amazon of..." or the "Tesla of...." I know the plan is doomed. Going to Vegas and putting it all on one number is not a strategy.
   
   
3. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan. The follow on quote to this is, "you plan, God laughs". The author reinforces over and over again that "A plan is only useful if it can survive reality. And a future filled with unknowns is everyone's reality".  Bottom line is you must plan on the plan not going the way you want it to. 
   
   
4. Margin of safety / room for error: Allow for margins. It is one reason why leverage really can be a problem. Using leverage in financing removes a lot of the margin for safety and then you are back to violating rule 1 - you are hoping for perfection. 
   
   
5. Develop a barbelled personality - be optimistic about the future, but paranoid about what will prevent you from getting to the future. Andy Grove, founder of Intel, wrote a book titled, "Only the Paranoid Survive" and he was write. However, you must also be optimistic (not blindly) about the future. The future curve is almost always up and to the right for great plans as long as they meet these rules. 

These rules are just fantastic reminders of what makes a great business strategy and makes a business that can survive both the great times and the not so great times, like freight and supply chain entities are seeing now. 

Since it is July 3d and I am off tomorrow, I will leave you with a fantastic patriotic song. As a veteran, I am "Proud to be an American". 

Cyber Attacks: How We Have Moved From Corporate Espionage to Corporate Warfare

A great posting over at Supply Chain Matters relative to the impact of cyber attacks on Just in Time (JIT) businesses.  A simple cyber attack can now shut down your tier 1 and tier 2 suppliers which will bring a JIT supply chain to a screeching halt.

You should read this article and understand the points of vulnerability in your supply chain for cyber attacks:

1. Aggregators and Service Providers: You may have a process which you are not even aware of where data goes from you to a third party, it is manipulated, then sent back to you. Simple process.  But if that third party is not certified and is rendered useless by an attack it can shut your processes down.  Think about it this way:
   
   - You are using a third party company to take demand information and create a production forecast and schedule.
    - That schedule or forecast is then fed back to you and input into your MRP.
    - The third party is attached by cyber criminals
    - Your production shuts down.
   
2. Tier II and Tier III Suppliers: There is a reason they are able to cut costs and sell to you cheaper.   There is something they no longer are doing.  Don't let them compromise on cyber security and you need to follow up and check and check.  If their plant goes down, the JIT supply chain goes down with it.
   
3. Think Global: Remember, your suppliers have suppliers in countries you may not be able to point out on a map.  Make sure you can map out your supply chain then overlay a heat map of where cyber attacks come from.  This will help you identify your vulnerabilities.  

A very good article, I encourage you to go read it and you, as a supply chain leader, must be at the front of developing a cyber security effort.  

What is a Supply Chain To Do In Age of Global Disruption?

I have been following the election and subsequent transition for a long time now and of course have opinions on a lot of items.  However, as I keep seeing the "Tweet" storms relative to imports, global supply chains, and re-shoring I keep thinking about the supply chain implications.  So, I ask the question, "What is a Supply Chain To Do"?

The proposals being made would fundamentally change the economics on a lot of business decisions relative to the development and build out of supply chains.  One example is the proposed "Border Tax" which could be as much as 35% on imports.  As the Wall Street Journal pointed out, President Elect Trump is even threatening a foreign company, BMW, with a "border tax" if they move production to Mexico.   The Wall Street Journal reports toy manufacturers are struggling with what should they do in this age of the popular uprising against global supply chains.  And, even Constellation Brands is "bracing themselves" for this tax.

For those deeply involved in global supply chains the question being asked is just exactly what should they do in 2017?  Do they develop supply chains as if this is not happening? Do they retreat and prepare for this tax by re-shoring? Do they automate (keep plants in the US but eliminate people?  All of these questions are up in the air and the uncertainty of whether the threats are real or just political positioning will cause supply chain investment to slow down.

Companies can do one of three things:

1. Stop major investment and wait for more certainty.
2. Continue to invest and "take a bet" where this will land
3. Ignore it and fight it - risking one morning that the CEO wakes up one morning and finds their stock down 10% due to a pointed tweet. 

So far what I think we are seeing is number 1 in action.  When Ford decided to not move production to Mexico it really was not about moving jobs back to the US but rather about stopping production, leaving the investment half done and just using the current facilities they have. 

When Carrier said they would not move production they did say they would automate.  This has the same effect as moving. 

In conclusion, I think a couple of things (non political, just economics):

1. Global supply chains are here to stay and no one can stop them or revert them.  How can toy manufacturers all of a sudden make affordable toys in the US?  The infrastructure for the global supply chains have already been built.  They are not changing. 
2. Any time you introduce economic distortion (i.e. a border tax or favoring one industry over another) you risk abnormal behavior in investment.  Eventually this falls apart and a collapse occurs. 
3. When you threaten major disruption you force things to get put on hold until clarity emerges. 

So, I believe 2017 could be a year of a standstill in terms of capital investment.  Far more clarity is needed before major investments can be made.  The job of the new administration will be to give that clarity sooner rather than later and this will allow supply chain experts to move on and continue to develop sophisticated and global supply chains.