Poor Oversight and Single-Point-of-Failure Risks Are Exposing Boardroom Shortcomings
(Originally appeared in the May 12th, 2021 'Across the Board' digital publication, a Board Director, Board Advisor, C-Level, and Business Leader publication reaching 26,500+ exceptional business leaders in over 70 countries with articles focused on leadership, strategy, and governance topics - sign up here)
As our economies and products have become more complex, so have our supply chains and the required logistics to keep everything in order. A high percentage of our products today contain thousands of parts from all over the world and the increasing need for skilled expertise in their creation. Additionally challenging, many of these products require a timely and choreographed dance in their manufacturing and installation process. Globally, times have been quite good in previous years when it came to the availability of funding and the ability to acquire needed materials, either raw or finished goods, very quickly. Numerous 'good times' practices have been expanding and flourishing for years. Utilize a 'just-in-time' supply process in an effort to reduce inventory? Great, look at all of the warehouse savings last quarter! Have only one or a considered low percentage of 'single-points-of-failure' in your manufacturing process or supply chain? All is fine, we can overnight stock should we need it! Growing supply chain risk indicators have been lurking around for years ...but have the warnings been ignored? Everyone from the entry-level logistician to the experienced supply chain executive can look like they run a tight ship during relatively stable times, but what happens when local, or global, instability arises? Look out. Add longer-term instability to the equation and the disruption is multiplied. As Warren Buffet, Chairman & CEO of Berkshire Hathaway, famously stated, “You never know who's swimming naked until the tide goes out.”
Well, the tide has recently gone out for a large number of companies and the damage is only just becoming visible. Years of supply chain and logistics comfort have created a manufacturing monster steadily crawling up the exposed, slimy waterfront. The low-tide smell is becoming increasingly palpable.
One of the most visible supply chain risks currently causing havoc is the growing semiconductor chip shortage. Many consumers are not aware of this (yet), but it has the potential to get very ugly. This semiconductor shortage has huge global implications - much greater than my friend's claim his son is depressed because the PC gaming video card he 'needs' will not be available for some time (or as the gaming supply website put it, "indefinitely").
Ford has been greatly affected by the semiconductor chip shortage. Its F-150 truck production has been cut multiple times already this year. Even with Ford's new plan to buy specialized chips directly from chipmakers, thus avoiding the middleman, they are still struggling to get what they need and have found themselves in the uncomfortable territory of taking F-150 plants offline, contemplating a temporary shutdown of others, and evaluating the cost to stockpile chips (when available) now and into the future. Ford's growing inventory of trucks not able to be sent to dealers due to missing microchips has even sparked an interesting article titled 'Stockpile of Unfinished Ford Super Duty Pickups Missing Chips Is Now Visible from Space.'
GE's Chairman & CEO, Larry Culp, citing supply chain restrictions in electronics, resin, and steel, warned that this will result in raised prices and surcharges where appropriate across their product lines.
Caterpillar, reporting strong profits in recent weeks, has warned of multiple supply chain problems that will likely affect future quarters. Caterpillar even withheld its full-year profit forecast due to what it stated as "too many uncertainties," a main component relating to their supply chain. In areas where they were able to implement workarounds, Caterpillar CEO Jim Umpleby stated on a recent analyst conference call he is convinced that these "may" lead to increased costs.
3M recently reported it saw strong demand, but was also experiencing supply chain disruptions from what it claimed were caused by the pandemic and winter storms that had driven up the price of raw materials. This case is quite interesting as it clearly shows the knock-on effects propagating across multiple industries' intertwined supply chains. Ironically, 3M was recognized in 2020 as 'Supplier of the Year' by Supply Chain Dive (a publication providing insight into the most impactful news and trends shaping supply chain management) because of its leadership and supply chain risk management that allowed the company to produce and distribute supplies in a time of unprecedented demand. In all fairness, 3M had shifted its supply chain to help meet the demand for personal protective equipment (PPE) and ramped up production of N95 respirators to combat COVID-19.
...And the list goes on. Most will aim to fully blame these supply chain issues SOLELY on the COVID pandemic, instances of inclement weather, political unrest, or a combination of all external forces. Actually, history has proven the correct 'blame' has almost always pinpointed the root cause lurking within shoddy supply chain processes and lacking robustness in the logistics realm. Not to oversimplify a complex issue, but future postmortem examinations will likely show a bulk of all compromised supply chains in recent years had not been vetted or tested to the degree in which they should have. If they had been deeply tested and vetted, it is likely a large percentage of bottlenecks and obvious 'single-point-of-failure' shortcomings would have been identified and mitigated.
I recently had the pleasure of meeting Lieutenant General Larry Wyche (ret.), CEO of Wyche Leadership & Supply Chain Consulting, Non-Executive Director, and someone I have nicknamed the "supply chain & logistics extraordinaire." I also read his book, 'Shirts Off Our Backs, Boots Off Our Feet.' You want to talk about supply chains and logistics? How about Deputy Commanding General of the U.S. Army Materiel Command (AMC), a $58 billion logistics enterprise, employing a workforce of over 120,000 soldiers, government civilians, and contractors with a presence or economic impact in all 50 U.S. states and 152 countries, in charge of 23 arsenals, maintenance depots, and manufacturing plants - supported by a supply chain of over 11,000 vendors, more than ten billion service parts in inventory, and an $11 billion annual operating budget (yes, I am aware that this is a run-on sentence...). "The corporate world is really no different when it comes to supply chains," states Mr. Wyche. "You need to see the pipeline from end-to-end, learn the entire chain for each item, and understand all the different variables involved to ensure the right supplies are delivered in the right quantities at the right time." He goes on to say something so simple, yet profound: "We must see ourselves from end-to-end."
This raises an important question - are Boards seeing themselves end-to-end as it relates to their organizations' supply chains? The Board's culpability in supply chain issues may be much more than you think. It is, after all, a risk to the organization and a likely major point of interest to a Risk Committee (or similarly tasked Board Committee). Have Boards forgotten about supply chains? At the very least, are they asking the right questions and requesting the proper data to fully understand the end-to-end risks involved?
A supply chain shortcoming is one of those issues a Board can easily push back onto management, after all, a common belief is that this is a management / operations issue. This couldn't be further from the truth. A risk of this size, with the potential negative effects to stakeholders, shareholders, and reputation, is firmly in the hands of the Board as it relates to strategy vetting and governance oversight. A Board that can warn months in advance of impending supply chain issues has my increased confidence over a Board that announces supply chain issues currently being experienced. A Board that can predict supply chain issues and work to mitigate them in advance of a full-blown crisis has my full confidence.
All supply chain and logistics challenges point to one required outcome. With varying responsibility, all levels of an organization must understand their supply chain and the current / future risks that make it vulnerable. In the boardroom, this is paramount - almost every organization, whether in manufacturing, distribution, services, etc., has direct and indirect risk exposure linking back to supply chains. In fact, supply chain risk should be added to the definition of global economy. Boards owe it to their stakeholders, shareholders, and organization served to keep it at the top of the risk list.
Is your Board versed in the organization's end-to-end supply chain risk?