Learning from Risk Management Leaders • 277
Over the years this company has developed various approaches, some
of which are quite sophisticated, to analyze its products. While provid-
ing a solid foundation upon which to carry out detailed analyses, these
approaches did not necessarily provide the insight required for altering
product cost structures and winning new orders. is case describes
the development of a collaborative cost management approach that was
applied to a complex product that is no longer needed by the U.S. military,
the company’s primary customer. is pending loss of sales clearly repre-
sented a strategic risk to the company. A new, more competitive approach
was needed to compete for sales from international customers.
is company decided to target an international customer to replace the
expected loss of sales from its primary customer. e defense contractor
believed this opportunity presented an ideal opportunity to develop a new
and collaborative approach to cost management. is opportunity became
the pilot program for a new process that identies and then manages every
cost element and driver within a complex product. International custom-
ers do not have pockets that are as deep as the Pentagon, making cost
reduction an absolute necessity when competing for foreign contracts.
A Collaborative Approach to Cost Management
An internal cross- functional team undertook the task of documenting
the current state of the product, including an extensive analysis of every
cost element and driver. e company needed a complete cost picture so
it could identify where opportunities to reduce costs existed. e result
of this initiative was the most detailed “as is” analysis ever performed
by this company. e primary objective of this exercise was to identify
where design exibility, and therefore potential cost reduction opportuni-
ties, might exist. e team examined areas as basic as quality, delivery,
and operations to identify cost reduction opportunities. It also analyzed
every cost component all the way to its manufacturing line cost, including
machine times, labor rate and times, material costs, and costs of goods
sold. Extensive cost models were developed, much more so than what could
have been developed with existing methodologies. e analysis revealed
that materials made up 50% of total product costs, a nding that made it
clear that suppliers were going to be an integral part of this process.
Aer completing its current state analysis, the company conducted a
two- day workshop with company engineers and designers. e rst part
of the workshop featured the creative generation of cost reduction ideas
278 • Supply Chain Risk Management: An Emerging Discipline
while the second part involved identifying potential savings. e partici-
pants also identied the cost of implementing an idea, including the cost
to document an idea and verify its feasibility, as well as the cost to put an
idea in place. While some ideas related to internal control and manufac-
turing, supplier- provided materials, as mentioned, comprised the major-
ity of costs. is should come as no surprise as companies increasingly
outsource greater amounts of value- add to suppliers, particularly in com-
plex products like the one featured here.
At this point a decision was made to involve suppliers to generate addi-
tional cost ideas. Twenty current suppliers participated in a workshop that
lasted one- and- a-half days. e company also invited potential suppliers
to broaden the domain of innovation. Participants were divided into six
smaller groups according to specic tracks or topics. During these work-
shops suppliers identied more than 150 cost- reduction ideas.
Aer the workshop the defense contractor evaluated the feasibility of
each idea and veried whether suppliers could follow through on what
they said they could do. e accepted ideas from suppliers were expected
to result in more than 20% lower product costs. Moving forward, the cost
management team met every week to update the supply chain’s progress
on these ideas.
A risk when using revised cost gures is actually achieving those gures
during production. To mitigate this risk the defense contractor’s spread-
sheets included a risk factor column that adjusted the savings expected for
items due to any uncertainty. is adjustment percentage was agreed to
by a team that was familiar with the relative magnitude of potential risks
across the various ideas.
Even aer all this eort to lower product costs, the defense contractor
did not win the new foreign contract. So, was all this worth it? e answer
is a resounding yes. Perhaps most importantly, this company became
familiar with a collaborative process that will help it better understand
and manage costs across its current and future programs. And this com-
pany’s primary customer enjoyed cost benets through lower pricing for
its remaining orders. is experience revealed in no uncertain terms the
important role that suppliers play when managing supply chain costs.
Looking ahead, collaborative cost management will allow this company
to become increasingly competitive as it applies its newfound cost man-
agement prowess to other products and opportunities.
Learning from Risk Management Leaders • 279
LEARNING ABOUT RISK THE HARD WAY AT J. C. PENNEY
Few would argue that hiring a new CEO is not a strategic decision.
Dissatised with J. C. Penney’s lackluster performance, the company’s
board of directors took a bold step and hired Ron Johnson, the chief exec-
utive who reinvented retailing at Apple. All the new CEO had to do was
arrive at Penney’s corporate headquarters in Texas on the corporate jet
(which he reportedly did weekly from his home in California as he lived
during the week in a high- end hotel in Dallas), spread some Apple pixie
dust, sit back, and watch good things happen. What could possibly go
wrong? Apparently, a lot could go wrong. Aer only 17months, J. C.
Penney’s board ousted the CEO. is case is featured here because of its
abundant risk- related lessons.
If anyone ever doubts that pricing is a strategic variable, look no fur-
ther than what happened at J. C. Penney. Shortly aer arriving, Johnson
decided that the company’s reliance on coupons and deep price discounts
were simply not right for the retailer. Apparently, he also was not too fond
of xed checkout stations and cash registers. He allowed employees to wear
whatever they wanted, similar to the approach at Apple where employ-
ees walk around with mobile checkout devices. Unfortunately, customers
could not always gure out who was an employee or where to pay for their
purchases.
7
Customer confusion soon reigned.
With minimal testing Johnson moved quickly to change Penney’s busi-
ness model, an act of hubris that the company may never fully recover
from. He pursued an “everyday low prices” model with prices that were not
necessarily the lowest. And, at least to Johnson, it was obvious that Penney’s
customers wanted new high- end brands. Bring on the new brands!
While Johnson eventually scrapped his new pricing approach, the dam-
age was already done as customers headed for the exits. Unfortunately,
new customers did not arrive to replace those who le. Repositioning a
lower- end department store as one with high- end styles requires careful
planning, positioning, and execution, something that did not take place
as Johnson rushed to change almost everything quickly.
8
And a total mis-
reading of the customer is usually not a good thing. As one marketing pro-
fessor noted, “Ron Johnson was clueless about what makes shopping fun
for women. It’s the thrill of the hunt, not the buying. Women love to shop
280 • Supply Chain Risk Management: An Emerging Discipline
and deals are what make the game worth playing. It took billions of dollars
of lost sales, lost market cap, and over a year of embarrassing performance
for Johnson to realize this truth.”
9
e company has since announced the
closing of dozens of stores. Its very survival is even in question. e unfor-
tunate reality is that strategic risk is the ultimate risk.
What lessons should we take from the J. C. Penney saga? First, pilot test-
ing is a legitimate risk management approach when changing something
as strategic as a company’s business model. And while testing takes time, it
is usually time well spent. e author of a Harvard Business Review article
on data analytics posed an interesting question. In his article he stated,
“Imagine if Ron Johnson’s tenure at J. C. Penney had involved small- scale,
data- driven experiments rather than wholesale changes.”
10
Second, truly
understanding the customer and what motivates her is invaluable. is
may be Johnson’s biggest mistake throughout this ordeal. ird, just
because an idea worked in one industry does not make it an automatic
winner in another. Apple and J. C. Penney have very dierent retail out-
lets, products, and customers.
It is also a good thing to learn from the experience of others. When
Macy’s acquired May department stores in 2006, a chain that relied heav-
ily on coupons to attract customers, it decided to wean May’s customers
o those dreaded coupons. A year later Macy’s abandoned that strategy,
acknowledging publicly that pulling back on coupons was the company’s
biggest mistake in the acquisition. Another lesson is that when recruit-
ing leaders, it is a good idea to make sure they believe in the organiza-
tion and what it stands for. Some critics concluded there wasn’t anything
about Penney’s that Ron Johnson actually liked. Finally, be careful that
changes don’t confuse the customer. J. C. Penney told customers to expect
low prices, just not the lowest. Were customers really getting a deal?
ey weren’t sure, and that did nothing to help Ron Johnson’s cause.
Unfortunately, some lessons are learned the hard way.
CONCLUDING THOUGHTS
A major take- away from this chapter should be the recognition that many
dierent and creative ways are available for managing supply chain risk.
Just as there is an abundance of supply chain risks, so too there is an
abundance of approaches for addressing these risks. No “cookie cutter”
Learning from Risk Management Leaders • 281
approach is available that will be everything to everyone. e domain of
risk management tools, techniques, and approaches is broad.
Excluding the J. C. Penney example, certain commonalities characterize
the companies featured here. First and foremost, these companies could
not wait for others to develop solutions that satisfy their specic needs.
While we expect an abundance of risk management tools and systems to
become commercially available over the next 5 to 10years, and of course
there are tools available now, the companies featured here feel, at least for
now, they are best served by their own internal development capabilities.
Second, these companies know they have not completed their risk man-
agement journey. In fact, these companies would likely admit they have
merely taken a series of steps in what will be a continuous journey. Few
expect supply chain risk to magically disappear anytime soon.
Something else these companies have in common is they are develop-
ing a corporate culture that understands the importance of supply chain
risk management. ey understand that supply chain risk management
represents that place within our thought process where supply chain man-
agement and risk management intersect. And this intersection is becom-
ing an embedded part of how each company operates. Finally, a detailed
analysis at each company would surely reveal a risk champion or group
that is not at all satised with the status quo regarding risk management.
ey understand that supply chain risk management is becoming a criti-
cal business process that aects a company’s strategic success. ey will
stay at the forefront of risk management leader ship.
ENDNOTES
1. Accessed from http://www.bostonscientic.com/ templatedata/ imports/ HTML/
product- safety- information.html.
2. Carson, Christine. “Navigating reats.” Boeing Frontiers, (September 2012): 32.
3. Carbone, James. “IBM Identies and Eliminates Supply Chain Risk.” Accessed
from http://www.digikey.com/ supply- chain- hq/ us/ en/ articles/ supply- chain/ ibm-
identies- and- eliminates- supply- chain- risk/1507; and “IBM Details Its Total
Risk Assessment Tool for Supply Management at CSCMP.” Accessed from
SCDigest’s On- Target e- Magazine, October 12, 2011, http://www.scdigest.com/
ontarget/11-10-012-3_IBM_Supply_Chain_Risk.php?cid=5054.
4. Bennett, Je. “Delphi Roars Back from the Brink.” e Wall Street Journal,
November11, 2013: B1.
5. Siegfried, Mary. “Precision Tool Tackles Complex Task.” Inside Supply Management,
(April 2011): 24.
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