What would you do if the sole source for your most critical component of your only product suddenly decided to shut down?  Look for a tall building?  Figure how much an early retirement would cost in Guatemala?  Decide that flipping burgers was a decent career option?

If you’re on California’s central coast you simply say "I think things will somehow work out."  And probably add a "dude" and a "narly" in there somewhere.  That attitude is one of the reasons I live out here, where life is for living and not for getting uptight… even as you’re trying to live in one of the most expensive parts of the country.  And you can’t beat the local pinot noir.

At the end of 2005 Clark Foam, the largest supplier of polyurethane foam surfboard blanks for over 44 years, suddenly shut down.  This created a supply chain emergency for the large number of small shops shaping and manufacturing completed surfboards.  When Clark Foam shut down,

Shane Stoneman, a shaper in Cayucos, took a relatively laidback approach, predicting distribution logistics for new companies supplying foam would work out and surfboard makers would be able to find a regular supply of foam.

It did, as it always will.

Gardena, Calif.-based US Blanks was formed in the aftermath of Clark’s closure by two former Clark Foam employees, Kim Thress and Jeff Holtby. They started production of foam boards in September 2006.

Mr. Stoneman’s small shop hung in there during the dry spell and is now making a run of it. 

“Things are a lot better,” said Stoneman, who is using surfboard blanks primarily from a new American company, US Blanks. Stoneman uses this company, rather than overseas foam suppliers, because of its high quality. “The stuff I’m getting is fantastic,” he said.  “The company has a lot of the same production staff as Clark Foam.…I already know all of those people, and they’re supplying us with great foam consistently,” Stoneman said.  With the steady supply of high-quality foam, Stoneman has been able to increase his production by about 40 percent over last year, he said.

As a final note to this story, keep in mind that Mr. Stoneman has a tiny shop basically operating out of a converted garage.  Yet he has more wisdom and courage than most Fortune 500 CEO’s.  He understands true supply chain costs, the cost of quality, and therefore the benefits of having a supplier nearby.  He obviously watches his pennies so he can survive the downturns and be around to capitalize on the upturns.  And he gets to play with his product every day, right outside his front door.

Last month’s Knowledge@Wharton had an article titled When Local Risks Become Global Risks, which discusses how globalization has augmented the impact of local events to the level of global events.

"Many organizations and governments are still basing their decisions and actions on risk and crisis management tools developed 20 years ago," says Erwann Michel-Kerjan, managing director of Wharton’s Risk Management and Decision Processes Center. "But the hallmarks of this new century include more and more unthinkable events, previously unseen contexts, and pressure for private companies and government authorities to react extremely quickly, even when they cannot predict the impact their actions will have."

The article goes on to suggest superficial solutions such as "Country Risk Officers" and "guiding governments toward forward-thinking options."  Once again that reminds me of the TV commercial for a consultancy where the consultants run away in terror when asked to actually implement their recommendations.

But one section of the article did pique my interest, where the author discusses the "value of  security"… and how security can be a marketing tool.

"Think of buying a new car," he [Michel-Kerjan] says. "About 20 or 30 years ago, most customers did not focus on car safety, nor did car manufacturers use safety as a marketing argument. But today you see ads everywhere highlighting the safety elements of the vehicle along with five-star ratings and crash test results. Safety has become part of the intrinsic value of a car, and this is reflected in its price."

Ten years from now, Michel-Kerjan believes, security will similarly become a marketing tool. "This is even more likely to be true if the rhythm and scale of catastrophes continue to accelerate so it becomes more and more difficult to see these as low-probability, extreme events anymore. Are we ready to pay more for a more secure product or service in the same way that you do for a safer car?  I predict more companies will see security as a competitive advantage and integrate it into their business strategy."

The authors are describing the marketing value of security from the impact of global events, but think about this in terms of supply chains and their intrinsic value.  Currently the "value" of a supply chain is calculated almost purely based on the financial return it generates… using traditional accounting methods.  Companies that follow the outsourcing lemmings chasing low labor costs around the world are creating long and fragile supply chains believing that the labor cost differential is the value.

But what happens when a disruptive event occurs on the other side of the globe… perhaps in one of those low labor cost countries?  The labor cost savings, which as we frequently point out are practically irrelevant to begin with, are minor compared to the cost to the company. 

At that point a secure and reliable supply chain holds real value for the company and their customers. A company that outsources only for the very few valid reasons to outsource, creates true partnerships with suppliers, and understands the true risk, cost, and benefit of their supply chains will be a company that has more value in the future.  Contrast that to companies like the "Detroit 3" that enjoy beating up on suppliers to obtain price concessions, companies like Whirlpool and NCR that lay off thousands of years of knowledge to save a few bucks of labor by doing the same work in a different country… and shipping the product back, and companies like Boeing that have huge subassemblies built around the globe that need to be flown to final assembly operations in the U.S. 

What will be the competitive advantage of a secure supply chain in the future?  Are you calculating and analyzing it appropriately? 

I came across a rather inane article not long ago in which some self-proclaimed expert on supplier development argued that companies should focus on helping their suppliers become profitable, rather than helping them become lean.  It begs the obvious question of whether it is possible to understand lean manufacturing any less than this ‘expert’ does.  The bigger issue, however, is the whole notion of supplier development.  When did establishing a relationship with a supplier become the business equivalent of having a dead-beat brother in law move into your spare bedroom?

Lean training courses are packed with folks from small and midsized manufacturers who are there solely because a major customer told them to attend.  Left to their own devices, none of these folks would give lean a second thought.  The likelihood of any real improvement arising from a lean transformation driven by customer coercion is pretty slim.

Several years ago I was taught a management technique that has served me well.  The way it works is, when someone comes to you with a problem, you should imagine a good sized monkey perched on their back.  What that person envisions is the monkey jumping from his or her back to yours.  Your challenge as a manager is to take very good care of the monkey – to love it and feed it – but to be absolutely sure that when the person leaves your office, they take their monkey with them.

As a purchasing manager, I long believed the situation was about the same.  A supplier’s inability to meet the terms necessary to support their customers and make a profit is their monkey.  I would help in any reasonable way I could, but at the end of the day, managing their business is their responsibility and they have to make the right commitments and decisions.

There is nothing in this that minimizes the value of supplier partnerships.  Partnerships, however, are formed between equals.  According to Merriam-Webster, partnerships assume joint rights and responsibilities.  Much of what passes for supplier development is a heavy handed, dominating customer telling a submissive supplier how to run their business.  That is hardly a picture of joint rights and responsibilities.

The automotive suppliers are lining up to file for bankruptcy, crying that GM and Ford’s loss of market share trickles down to lower demand for them, ruining their businesses.  I suspect that, if they were to define themselves as manufacturers, fully capable of making a lot of things for a lot of customers in a lot of industries, they might see things differently.  Instead they have operated as subservient step children, managing their businesses as the GM and Ford supplier development folks have dictated.

Upstream manufacturers who pursue lean only how and if they are driven to do so by their customers are bound to fail.  Suppliers must take responsibility for their own development and their own profitability.  The performance monkey is theirs alone, and, while pushing the care and feeding of the monkey off on their customer may seem harmless in the short term, the customer will eventually starve that monkey.

Organic cucumbers, vegetarians, global warming… and lean manufacturing.  An unlikely combination?  Not in the latest issue of Grist Magazine, which provides "environmental news and commentary."

In a very well-written article, Supply and Da Man, Joel Makower discusses the potential for savings by "greening" the supply chain.  The classic example is by using more energy efficient lighting, where in the case of Baxter it saved almost $50 million.  But as that company soon realized, significant additional savings are possible by pushing "green" up and down the supply chain.  Baxter is extending the concept from raw materials all the way into the hospitals of its final customers, such as new raw materials to help reduce the amount of hospital waste.

Other companies have taken note, and the EPA has started a public-private partnership called the Green Suppliers Network to help suppliers and manufacturers eliminate waste, save money, and reduce their environmental impact.  Members, such as Abbott Labs, GM, Herman Miller, Pratt & Whitney, and Johnson & Johnson come from a wide variety of industries.

What is pretty impressive is that this environmental activist author gets lean right.  He discusses how lean focuses on the elimination of waste, creating the benefits of faster cycle times, improved productivity, higher quality, and increased flexibility.  And he even talks about continuous one piece flow and how just in time requires supply chain reliability.  He could run circles around some of the baffoons that write for the Wall Street Journal or various other top tier newspapers that continue to miss the point of lean.

And he’s right.  Lean manufacturing and green thinking (or "supply chain environmental management") are in many ways naturally symbiotic.  And he’s realistic… "In the end, it’s the economics, stupid.  If ou can convince the powers that be that there’s a way to save money beyond the purchase price you can break through the purchasing department’s traditional reluctance to change vendors."

In your search for waste, take a step beyond the traditional steps of turning out the bathroom lights and see where you can leverage green to save money (increase value…) at your suppliers and customers. 

We’ve talked about this before… what happens to supply chain risk when you become very, very lean?  In the June 17th issue of The Economist there’s an article entitled "When the Chain Breaks", which is yet another misinterpretation of lean supply chains.  Andrew Leonard also discusses it in an article in Salon.

Once again a few classic examples are used to illustrate the supposed dangers of sole-source supply chains… as if that was truly a requirement of lean.  A fire at a Philips semiconductor plant in New Mexico creates a global shortage of a key cell phone chip, so Nokia immediately locked up the rest of the world supply leaving Ericsson shut down for months.  The Long Beach port strike, the earthquake in Taiwan, 9/11, and the truckers strike in the UK are other examples.

But as usual it confuses risk, lean, flexibility, fragility, and sole sourcing.  They are not the same, nor are the mutually exclusive.  To be lean you don’t necessarily have to sole source.  To mitigate risk you don’t necessarily have to have multiple sources.  You can be flexible and sole-sourced.  A lean supply chain doesn’t have to be fragile.  It all depends on the specific circumstances, and more importantly it depends on what is the best way to maximize value to the customer.

The article briefly touches on this by discussing Toyota in Europe, but it doesn’t grasp the impact and importance of what they do.  The company builds over 600,000 cars in Europe each year, and in typical Toyota fashion most of the 200 tier-1 suppliers are located nearby.  Toyota emphasizes cooperative communication between all of the suppliers, and this creates substantial sharing of business information.  This gives them a heads up to potential supply issues ranging from raw material shortages to supplier bankruptcy, thereby allowing for swift pre-emptive action to prevent supply disruptions. 

Likewise Nokia in the original example had contingency plans in place.  They were sole-sourced, yet they knew where they could turn to in the event of a critical disruption.  When the Long Beach port strike happened, Dell already had plans in place to charter aircraft to deliver parts from Asian suppliers.  Whether Dell’s long supply chain that results from chasing cheap parts to Asia is truly lean is another [sad] story, but the point here is that they had a plan.

Contrast that to the adversarial (to put it mildly) nature of the supplier relationships between GM and Ford and their suppliers, which are focused almost exclusively on cost reduction.  This is yet another reason why GM and Ford will probably never become truly lean.  And Ericsson apparently sole-sourced without a supply disruption plan… perhaps a form of looking lean instead of being lean.

The Economist article ends with the suggestion that the limits of globalization may be defined by the management of supply chain risk, with the supposition that the global risk from man-made and natural disasters is increasing, therefore supply chain risk must also be increasing.  An interesting idea, but I don’t buy the underlying premise.  A global supply chain is not necessarily more risky than a domestic one (here’s one reason), supply chain risk has been managed since the days of when the ancient Greeks had to decide how much treasure to load on a ship vs how much they could afford if it sank, and leading-edge technology almost always initally comes from a single source.

There has always been risk, especially with sole-sourcing, but success is based on how that risk is managed… while being focused on maximizing value to the customer.