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TRANSCRIPT
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Trust Enabled™ Supply Networks
Enabling trust for collaboration, innovation and
sustainabilityAlex Todd
May 6,2008
Before I begin, I would like to thank Alan Bermingham and the SCL for inviting me to speak to you today.
First a warning, what you are about to hear challenges conventional thinking on managing supply chain risks.
My main message to you this morning is that conventional risk management thinking is increasing transaction costs and limiting opportunities to create new value. By contrast, Trust Enablement thinking seeks to reduce costs and increase the value of business relationships by minimizing process controls and bureaucratic red tape.
During my presentation I hope to provide you with:
•New insights into the value of trust for improving supply chain performance;
•A structured approach to improving conditions for trust; and
•A guide to the first steps you can take to begin introducing measures that improve levels of trust with your supply chain partners.
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TrustYour survival depends on it.
In a crisis situation, such as a natural disaster or economic collapse, people often find themselves in situations where they have to instantly organize and work together toward overcome a common threat. With events unfolding in real time, there is no time for negotiation or formality. People just need to be trusted to independently act in their mutual best interest.
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Trust = Vulnerability
You might be thinking, well it’s one thing to trust when you have no choice, but it is an entirely different think to trust and when you have the luxury of lower risk alternatives.
Who thinks this is an example of blind trust? Why?
Who thinks this is an example of informed trust? Why?
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Trust ≠ Control
By contrast, this is what control looks like. Information security imposes restrictions that assume you are a criminal.
Let me tell you a little story that contrasts control and trust from my own household that many parents of teenagers will be able to relate to.
My 13 year old daughter has a computer with Internet access in her bedroom. She spends most of her time while at home, in her room on the computer, with the door closed. As parents, my wife and I are sensitive to the threats to young girls on the Internet, so we wanted to find a way to protect her. My wife’s instinctive reaction was to move the computer to a public part of the house. We then thought we should force our daughter to keep her door open. We then contemplated installing parental controls software that would restrict what she can do with her computer. I also experimented with software that would allow me to watch her activities online in real time. We realized however, that any of these actions would signal our mistrust in our daughter’s judgment and would contribute alienating her from us and our relationship would suffer, which would have had exactly the opposite effect from our objectives.
Instead, we told her that for her protection, we would install monitoring software on her computer that would capture everything she does on the computer, buy that we would never look at the logs without her. This naturally upset her and she rebelled by refusing to use her computer for about a month. After about 6 months we received a complaint from the mother of one of our daughter’s friends about our daughter’s conduct on MSN Messenger, which would have put us in an awkward situation of having to believe either the mother or our daughter. Our daughter is now grateful that we have the monitoring software installed, because it gave us the evidence we needed to defend her position. I believe that this experience has helped to build trust and strengthen our relationship. In the 9 months since that incident I have not even contemplated accessing the logs.
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Lack of Trust is Confining
So the lesson we learned is that risk management thinking leads to instituting costly controls that are confining (isolating people from each other) and that perpetuate a downward spiral of mistrust.
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Risk Minimization ⇒ ↑ Costs
The Supply Chain Executive’s Strategic Agenda 2008
Understanding Global Supply Chain Risk: A McKinsey Global Survey
It also teaches us to question conventional wisdom about best practices. When we learn that best- in-class companies have formalized supply chain risk management practices that are more effective at minimizing risk, we should ask, “At what cost?”
It is expensive to buy insurance, buy companies in order to vertically integrate, source from redundant suppliers, pass price increases on to customers, manage redundant suppliers, and monitor performance contracts.
Moreover, these practices also actually erode trust and thereby perpetuate the problem. In other words, risk management practices create conditions that are self-defeating by actually creating a need for even more costly risk minimization measures.
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Low Cost Country Sourcing=> ↑ Total Landed Costs
“Low Cost Country Sourcing : Canadian Manufacturing Perspective”http://strategis.ic.gc.ca/epic/site/dsib -logi.nsf/en/pj00384e.html
Operational Risk Costs
Opportunistic Risk Costs?
Coordination Costs
The costs of risk management are best illustrated by Industry Canada’s recent research that found most Canadian companies sourcing from low cost countries are incurring higher total landed costs. The reason is that they have higher Coordination Costs that include mitigating risks with longer lead times and increased inventory levels, as well as deal with higher logistics costs. They also have to mitigate risks of product quality deficiencies.
Built into this Total Landed Cost equation are also Opportunistic Risk Costs, think of them as lack of bargaining power, that you can see when the manufacturers are broken down according to size, with 62 percent of large-size manufacturers being able to decrease their TLC through LCCS, while only 39 percent for mid-size manufacturers being able to do so.
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TradeoffRisk Costs vs. Coordination Costs
Low
Medium
High
Strategic
⇐Reso
urce Sharin
g ⇒
None
Fair ⇐
Risk Rew
ard Sharin
g ⇒
Unfair
Centralized
⇐
Decisio
n Style
⇒Dece
ntralized
Low ⇐Leve
l of Control ⇒
HighCoordination Costs
Opportunistic and Operational Risk Costs
$$
“Supply Chain Coordination and Cooperation Mechanisms: An Attribute-Based Approach ” –Lei Xu and Benita m. Bearnon, The Journal of Supply Chain Management, Winter 2006
Strategic ⇐
Resource Sharing ⇒
None
Fair ⇐Risk Reward Sharing
⇒Unfair
Centralized ⇐
Decision Style ⇒
Decentralized
Low ⇐Level of Control
⇒High
As companies try to improve quality and reliability by specifying not only the parts it needs, but also many of the activities require to produce the parts in order to ensure the suppliers’ activities mesh tightly with its own, these efforts require resources: management attention, lengthy negotiations, detailed contracts, and extensive monitoring of performance. In short, although these measures help reduce Risk Costs, they also increase CoordinationCosts. It’s always a tradeoff.
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Trust to Survive & Thrive
Time
ValueHigh
Moderate
None
Communicative
Coordinated
Trust Gap
Agility
Supply Chain Configuration Maturity
Collaborative
Co-opetitive
ExpedientExpedient
EfficientEfficient
EffectiveEffective
Innovative & Innovative & SustainableSustainable
Trust E
quity
Blazer Barn
StrategicTactical
“Trust Enabled Supply Networks: Uncovering the trust-building secrets of highly collaborative supply chains ”, Alex Todd
The most highly evolved supply networks have found an optimal balance between accepting Risk Costs and incurring Coordination Costs. Their solution has been to create conditions that give them sufficient confidence to accept higher Risks without incurring the associated Costs. Companies, such as Li & Fung, Toyota, Boeing and Linux did this by creating superior conditions for trust within their supply networks. This has also improved their resilience and agility, and has allowed them to innovate to create new competitive value. I’ll talk more about some of these companies in a few minutes.
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“Buyers tend to be reluctant players”Robert E. Speckman
Ø Shared values
Ø Common vision
Ø Merits of closer ties
Ø Sharing of key information
Ø Supply chain champion
Ø Seizing opportunities to exploit expertise/capability throughout the entire supply chain
Ø Belief that competitive success depends on the entire supply chain moving in unison
RISK MANAGEMENT
However, not surprisingly, this is not easy. Otherwise everyone would be doing it. There is a built- in, systemic resistance that comes from prevailing risk management thinking. All managers are trained and motivated to manage risks. That means to stamp them out wherever they see them. Think of risk management as a tool, such as a hammer. When a hammer is the only tool you have, everything begins to look like a nail. And you will never consider choosing a screw. So risk management thinking is not conducive to voluntarily making yourself vulnerable and accepting higher risk. In other words, risk management thinking makes it difficult to find trust-based solutions.
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Trust Enablement vs. Risk Management
Trust Enablement
Ø Trust-based
Ø Optimistic
Ø Offensive
Ø Active
Ø Stakeholder-oriented
Ø Bonus: Golden Rule compliant
Risk Management
q Control-based
q Pessimistic
q Defensive
q Passive
q Organization-oriented
q Loss: Isolated self-interest
It is for this reason that we need to explicitly consider Trust Enablement as a complementary leadership competency. Whereas risk management is all about protecting what you have, Trust Enablement is all about getting what you want. So risk management is a defensive posture, while Trust Enablement is an offensive posture. As you know, you can’t win a football game with a defensive line alone.
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Let go to Survive
In a crisis or survival situation, over which you have little, if any, control, you are often forced to let go and hope for the best. You are forced to trust. When a business is faced with major disruptions, such as a natural disaster or financial crisis, they need to make some difficult decisions. The brave ones are most likely to survive and ultimately thrive.
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“Collaboration Rules ”, Philip Evans and Bob Wolf, Harvard Business Review, July – August 2005
On Saturday, February 1, 1997 at 4am, Aisin Seiki, a tier one supplier of brake fluid valves that supplies 99% of Toyota Japan’s operations had a catastrophic fire that destroyed it manufacturing plant. Toyota was faced with the possibility of a total shutdown, lasting months.
Within hours their engineers met with Toyota engineers and other tier-one suppliers and agreed to improvise as much as possible. Aisin sent blueprints for the valves to any supplier that requested them and distributed whatever undamaged tools, work- in-process and raw materials that could be salvaged. Everyone was surprised when a small tier-two supplier of welding electrodes was the first to deliver 1,000 production quality valves to Toyota, only 85 hours after the fire. Others followed. Roughly 2 weeks after the entire supply chain was back to full production. No-one was paid for contributing. Months later, Aisin compensated the other companies for the direct costs of valves they had delivered.
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“Trust Enabled Supply Networks: Uncovering the trust-building secrets of highly collaborative supply chains ”, Alex Todd
This is an assessment of Toyota supply network’s conditions for trust using my Trust Enablement framework. It organizes business practices according to how they contribute to achieving specific trust objectives. The left column addresses things that help develop trust, while the one on the right deals with the things that protect trust. The top row deals with longer-term, high trust. The middle row is all about fast trust, while the bottom row is about restoring lost or deficient trust.
An analysis of this case study reveals that Toyota’s supply network enjoys considerable conditions for trust. For example:
•All supply network partners and even competitors had a compelling need to collaborate for mutual benefit;
•Aisin shared their blueprints (proprietary intellectual property) and salvageable resources with other supply network partners; and
•Tier-twos voluntarily assumed leadership roles in producing the valves products.
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“Collaboration Rules ”, Philip Evans and Bob Wolf, Harvard Business Review, July – August 2005
Another example is Linux development. On Tuesday, December 2, 2003 near midnight, a systems administrator in the physics department of the University of Trieste discovered that an attacker had struck one of his Linux servers. He traced this to a vulnerability and found that also rsync, a file transfer mechanism that automatically replicates data among computers. This meant that thousands of computers worldwide were at risk.
He immediately contacted colleagues who put him in touch with a senior IS researcher in Atlanta, and a well-known Linux programmer in Australia whose doctoral thesis was on rsync. They, in turn, contacted people currently involved with rsync development who helped trace the failure line by line. By the morning Trieste time, they had found the precise location of the breach. Within 5 hours, the ad-hock team was testing the patch. By Thursday, the patch was posted and distributed worldwide.
No-one authorized or directed this effort. No-one, amateur or professional, was paid for participating, or would have been sanctioned for not doing so. No-one’s job hinged on stopping the attack. Nobody was constrained by fear of legal liability.
A loosely connected group of 20 highly skilled volunteers who had hardly ever met in person, spread across several continents accomplished in 29 hours what might have taken colleagues in adjacent cubicles weeks or moths.
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“Trust Enabled Supply Networks: Uncovering the trust-building secrets of highly collaborative supply chains ”, Alex Todd
This analysis shows that the Linux community relies more on trus t than even Toyota:
• There is a very high level of business congruence, since the employers of every expert that contributed develops products and services that work exclusively on the Linux operating system;
• The community of colleagues was able to efficiently identify and refer the top experts in their fields; and
• There was full transparency of technical issues and solutions, with collegial reputations on the line.
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Cut the Red Tape
The Toyota and Linux examples illustrate how trust in the supply network can cut through red tape to minimize coordination costs and expedite a resolution to the problem. The same principles work proactively, as a strategic consideration. For the Linux community, this is not just an isolated example of how things work in a crisis, it represents the norm of how software is developed. All Linux software development is based on voluntarycollaborations between peers in a global community of developers.
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Orchestrators ↓ Transaction Costsn Recruit participants into process
networkn Structure appropriate incentives for
participants; encourage increasing specialization over time
n Define standards for communication, coordination
n Dynamically create tailored business processes—involving multiple service providers—to meet customer needs
n Assume ultimate responsibility for end product
n Develop and manage performance feedback loops to facilitate learning
n Cultivate deep understanding of processes and practices to improve quality, speed, cost -competitiveness of network continually
“Loosening up: How processnetworks unlock thepower of specialization” - JohnSeely Brown, Scott Durchslag , and John Hagel III
Li & Fung, is a Hong Kong–based trading company. Li & Fung makes no products of its own. Rather, it “orchestrates” the production of goods by others, drawing on a vast global network of highly focused providers to arrange for private- label manufacturing, primarily on behalf of US and European clothiers. For a specific product or client, Li & Fung assembles a customized set of specialized providers to handle everything from product development to the sourcing of raw materials, production planning and management, and, eventually, shipping.
If glitches pop up at any stage of the intricate process along the network, the company can quickly shift an activity from one provider to another. Such flexibility promotes high-output performance. Rather than squeeze supply chain costs by tightly integrating activities, Li & Fung gains efficiencies through the specialization of suppliers.
This is also an example of using intermediaries to protect trust by prevent ingsupply chains from breaking down because of mutual misgivings among chain partners. Li & Fung enforces a code of ethics precluding Asian network members from using child labor or bribing government officials. It also denies multinational companies access to its network if they make frivolous demands on suppliers or refuse to take delivery of products at contracted prices. Li &Fung’s reputation for integrity reduces the need for formal contracts.
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Share Risk to ↓ Coordination Costs
Source: Report on Business, May 2008
Boeing’s revolutionary new Dreamliner, 787, aircraft is being built by breaking all the rules of established best practices for building aircraft. Not only is the planes skin made entirely of carbon fiber, a light weight, ultra-strong plastic, instead of aluminum, but also the supply network configuration and manufacturing processes for an aircraft have also been literally reinvented.
Because of very ambitious business requirements in a highly competitive airline industry and the technical challenges of designing and building this incredible complex product, Boeing decided to trust its suppliers to design and build major sections of the plane. 70% of the plane is built bysuppliers in 10 countries. Boeing performs the final plane assembly by putting together only 6 major completed sections of the plane.
Boeing’s supply chain works well because all players equally share the risks, costs, and rewards of doing business together. As an example, Airbus, which manufactures its planes in plants throughout the E.U. suffered significant order cancellations from U.S. customers, due to production delays of its SuperJumboA380. Boeing is experiencing similar delays for its Dreamliner, without any order cancellations. This is also an example of supply chain resiliency.
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↑ Trust to ↓ Transaction Costs
and ↑ Sustainability & Innovation
So our examples have shown how Li & Fung reduces risk costs for customers, and how Toyota’s supply network was able to reduce coordination costs in a crisis. They have also shown how Boeing and Linux have been able to create richer conditions for trust that facilitate deeper supply network collaboration that creates new value for sustainable competitive advantage through innovation.
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Begin Now
1. Assess the relative roles of control vs. trust in your key supply chain relationships.
2. Identify the relationships that would produce the most value (↓ transaction costs) if you could improve conditions for trust.
3. Define the critical things you will need to trust in order to begin releasing control.
The good news is that you too can begin to reduce coordination costs that can help you survive the impending economic slowdown and prosper as conditions improve:
1. Start thinking about what you and your supply chain partners are trying to control vs. where you are relying more on trust;
2. Identify your business relationships that are most valuable and could benefit most by improving levels of trust; and
3. Then meet with those partners to identify the critical things that would need to be trusted in order to start releasing control.
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Risk Management Heroes
Deciding to trust is not for the faint of heart. However, it becomes an easier decision in a crisis situation, such as when it is a matter of survival.
The Chinese symbol for “crisis” wisely consists of two symbols: one for “danger”; the other for “opportunity”.
Similarly, in Western societies, heroes are honoured for willingly walking into “danger” to seize a noble “opportunity”.
In risk management, the heroes are those who seek “opportunities” for trust-based relationships.
How many of you will emerge from the next economic “crisis” as risk management heroes?
