72 • Supply Chain Risk Management: An Emerging Discipline
then link that technology to the product development process. While not
all new technology emanating from R&D labs will be commercially viable,
the linkage of one process to another ensures that market- ready technol-
ogy can be designed into new products. When the pieces come together,
it can create a dicult barrier for less- eective competitors to overcome.
Target Pricing. Many product development eorts will benet from tar-
get pricing (sometimes called target costing). With a traditional approach
to product development, we arrive at the selling price by combining prod-
uct costs and adding a prot margin. Unfortunately, this approach oen
overstates the price a customer will accept or ignores what competitors are
doing. It is an inwardly focused approach that does not consider the voice
of the customer. Traditional pricing also tends to minimize the impor-
tance of cost management during product design.
Target pricing is a complete reversal of traditional pricing. Under a tar-
get approach, product development teams identify the price that custom-
ers are willing to pay for a product or service. Aer identifying a target
price, prot margins are backed out to arrive at a product’s allowable costs.
If allowable costs are below current cost levels, then the design team must
identify ways to remove or lower costs or to accept a lower prot margin.
With target pricing, costs are something to manage rather than take for
granted. Surveys of competitive pressures almost always conclude that the
need to manage costs is relentless and severe. Why not manage costs early
during product development?
Subtle Control. Years ago Taguchi and Nonaka conducted a study that
identied “subtle control” as a powerful yet simple concept that execu-
tive leaders should routinely practice when teams develop new products.
8
Simply stated, subtle control is a delicate balancing act that seeks to ensure
that teams and processes proceed as expected during development but
without the need for blatant control or micromanagement by executive
leaders. Eective subtle control, which begins to resemble an organiza-
tional art form, is a product development best practice.
Executives have many ways to practice subtle control. ey can iden-
tify which projects to pursue, select leaders and members for development
teams, create and manage the development process that teams will follow,
require performance updates at regular milestones, and establish broad
performance targets that teams use when establishing their individual
goals. Subtle control recognizes that while empowerment is an attractive
idea, relinquishing complete control of product development is not quite
as attractive.
Strategic Risk • 73
Design for X. A nal practice mentioned here is something called
Design for X. Industry leaders appreciate the power of the product devel-
opment process to satisfy some important aspirations or objectives. e
term X represents dierent aspirations the development teams consider
even before beginning design work. Design for X aspirations can involve
design for quality, reliability, serviceability, sustainability, end- of- life
recycling, target price, assembly, cycle time, postponement, and even risk
management. is is a powerful concept because it ensures that important
objectives are considered early on during product development.
Integrated product development is a major source point for innovation
and growth. We know that world- class companies endorse certain prac-
tices that dierentiate their product development process from those that
are not leaders. Fortunately, what makes up this set of practices is becom-
ing increasingly clear. ese practices will also go a long way toward
reducing strategic risk exposure by improving the chances of successful
product development. ere is nothing quite like a product failure to tar-
nish a company’s brand reputation.
Bringing New Product Development
and Risk Management Together
A typical model of new product development projects, particularly at
higher technology companies, features engineering teams working quickly
and as fast as possible to develop a new product or technology. en, at
some later point, suppliers are selected to support the design. Oentimes
the selection of suppliers is not the most- thought- out part of the project,
although few companies will actually admit this. When this is the case,
it is up to the supply group aer product launch to address supply chain
risks as they materialize. is model, where risk mitigation takes prece-
dence over risk prevention, is more common than we would like to admit.
It is challenging to locate case examples where companies explicitly
address product development and supply chain risk simultaneously.
While integrated product and process development is well understood,
the integration of supply chain risk and new product development is not.
e convergence of product development and risk management is an
evolving practice that aligns well with the quality management principles
of prevention and quality at the source.
What are the characteristics of a process that simultaneously brings
together product development and risk management? First, supplier
74 • Supply Chain Risk Management: An Emerging Discipline
selection must happen early rather than later in the design process. From
a risk perspective this means that selection teams will not only consider
the traditional selection criteria they normally use when evaluating sup-
pliers, but they will also consider risk factors.
Next, each cross- functional team involved in product development,
with the help of the supply management group, will have responsibility
for identifying a set of supply chain risks that may aect their part of the
project. ese risks are collected and categorized for easy access. en,
development team members will meet regularly to review not only prod-
uct development progress but also discuss the actions taken to address
these identied risks.
Taking this a step further, the teams will estimate the probability of each
risk occurring and the impact that risk will have on product launch if it
occurs. A common approach is to arrive at a risk rating that equates with
high, medium, or low risk that reects the combined probability and impact
of a risk. Priority is then given to evaluating the higher risks to determine
what action can be taken to reduce their probability and impact, thereby
turning a higher risk into a lower designed risk prior to product launch.
A high- risk designation might result from relying on a critical material
that is volatile in terms of price and availability. e design team might qual-
ify a less volatile material that could serve as a substitute if necessary. Or, a
design team might be uncomfortable with the use of a single supplier. Here,
the supply group might prequalify a secondary source to mitigate that risk.
e objective here is to launch a product with as few unresolved risks
as possible. Any outstanding higher risks at product launch are an admis-
sion by the development team that it has decided, for whatever reason,
to accept that risk. Any accepted higher risks should be kept to an abso-
lute minimum.
THE ART AND SCIENCE OF NOT GETTING
CAUGHT BY SURPRISE
It would be quite a challenge to nd an executive who says he or she enjoys
getting caught o guard. Unfortunately, a lack of external intelligence can
clearly lead to surprises that elevate strategic risk. External intelligence
consists of the data, information, and knowledge that come from outside
your company, including macroeconomic changes, legal and regulatory
Strategic Risk • 75
changes, industry trends and changes, supplier and competitor actions,
social and labor force trends, customer expectations, technology innova-
tions, and risk factors. Two challenges associated with external intelli-
gence are that either we have information overload or we have our heads in
the sand and fail to see what is going on around us. e underlying objec-
tive of external intelligence is to avoid surprises that mess up our lives.
A concept related to external intelligence is a company’s EIQ, or external
intelligence quotient. EIQ represents how well your rm collects, assesses,
and acts upon relevant external data, information, and knowledge. is is
a particularly relevant risk management concept. When a lower organiza-
tional level senses a signicant event about to happen (or has happened),
how quickly is it before that event is part of an executive discussion? Let’s
further subdivide external intelligence into two primary groups: market
intelligence and supply market intelligence.
Consider a recent case with clear strategic risk implications. Next-
generation smartphones are starting to feature biometric security devices
to read ngerprints, which will enable a user to securely speed electronic
payments and retrieve music, documents, and les from cloud storage. In
2012 Apple bought ngerprint- sensor company AuthenTec for $350 million,
an amount of money that is pocket change to Apple.
9
Shortly aer the pur-
chase the newly acquired company stopped selling its product to HP, Dell,
Lenovo, and Apple’s nemesis, Samsung. If this technology proves to be a
game changer, and many observers expect that biometrics will be a disruptive
technology, Apple could secure a strategic market advantage over companies
that suddenly saw their primary source of biometric technology disappear.
External intelligence is intended to help avoid waking up one day and nding
another company disrupting, perhaps irreparably, your supply market.
Market Intelligence. Market intelligence deals with everyday informa-
tion about developments in the external marketing environment. It is very
much oriented toward the customer and the downstream part of the sup-
ply chain. A market intelligence system is a set of procedures and sources
used to obtain that intelligence. Most rms rely on market intelligence
systems and marketing research to gain external knowledge about their
markets. Companies can take a variety of steps to improve the quality of
their market intelligence systems, including the following:
• Establish 1-800 phone number or web- based customer feedback tools
• Set up a customer advisory board made up of representative custom-
ers or the company’s largest customers
76 • Supply Chain Risk Management: An Emerging Discipline
• Purchase market intelligence information from outside providers
• Create a process to circulate relevant news stories and other infor-
mation eciently across your company
• Train and motivate the sales force to spot and report new develop-
ments in your marketplace
• Encourage distributors, retailers, and other intermediaries to pass
along important market intelligence
• Buy a competitor’s product
• Attend trade shows
• Subscribe to trade journals
• Review competitor brochures and websites
• Survey customers directly
Supply Market Intelligence. Supply market intelligence (SMI) is the
output from obtaining and analyzing information relevant to a company’s
current and potential supply markets for the purpose of managing risk
and supporting eective decisions. Four levels of supply market intelli-
gence exist:
• Macroenvironment. is includes information about market dynam-
ics and global economic conditions, world trade, demographics,
political climate, environment, and technology.
• Country level. is category includes economic topics specic to a
country, such as the location of free trade zones, the tax environ-
ment, labor availability, population size and trends, and regulatory
bodies. It also includes information about cultural issues, political
climate and stability, and national holidays.
10
• Industry and commodity. is relates to the size and relative
strength of industries and the worldwide users of commodities.
• Supplier. is category relates to the number of potential suppli-
ers that exist, the products and services they provide, their size and
capabilities, and location.
Let’s provide several examples showing the linkage between a lack of
supply market intelligence and strategic risk. Warnings from a supply
market intelligence network could help avoid nasty surprises later.
Rare Earth Elements and Chinese Market Dominance. It is a safe bet
that many companies rely on rare earth metals somewhere in their supply
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