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Electronics Production | January 18, 2012

It’s Time to Look Forward: Risk Factors #7 - 9

(Part seven in the series on why risk in the global electronics industry has increased over 45% in the past four years).
In the closing paragraph of article number 6 of this Risk Series I mentioned that “Risk is not always a noun (i.e. a probability) as it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements tend to pile one on top of another.

When I wrote these words, in my mind’s eye, I saw a stack of irregularly shaped blocks struggling to remain vertical. The vision of a Jenga game where no one wins as each bock is so interdependently connected that if even one was removed the entire pile would topple.

Not a pretty picture but here’s what it looked like…

At the top of the stack was the destabilizing influence of price reductions during periods of increasing cost being wobbled by the reduction of internal resources at OEMS just below it, then in the middle a shrinking demand cycle struggling to counterbalance the ever increasing velocity of change in business, and on the bottom, the process of geographic concentration slowing crushing the principle of institutional continuity out of shape.

But it wasn’t this image that worried me the most, as we spend a great deal of time at CBA thinking about how these individual pieces interact AND how their shapes evolve over time.

What worried me was the platform they were sitting on, a three legged stool of:

- Unpredictable capital markets
- Geopolitical unrest and instability
- Overtaxed infrastructure in low cost regions

Why are these three elements so worrisome? Because, in spite of what you might see or hear from your favorite news source, geopolitical and geo-economics outcomes are simply beyond anyone’s ability to forecast.

Meteorological analysis is a good comparable, as even after centuries of study and the development of very sophisticated modeling software running on the world’s best supercomputers the farther you go out in time with weather forecasts the broader the range of error becomes.

Same-day forecasts are usually pretty good, five to seven day projections are a crap-shoot and beyond that it literally becomes a “guess”. The reason is simple; there are just too many variables. A butterfly flaps its wings in Singapore and three weeks later a hurricane begins to form over the Atlantic Ocean.

So given this reality how do you deal with unmanageable risks?

Our recommendation is “change the game.” Playing Jenga in business is a bad idea to start with but then doing it on an unstable, unpredictable platform makes it even worst. A better game would be one that eliminates the “vertical stacking” of risk variables so that when the platform does begin to shake (which it inevitably will even if we can’t predict when) the blocks might move around a bit but hopefully won’t all fall off the stool.

What’s better than Jenga?

How about going back to the basics, like the fundamental tenets of business that we all learned and have practiced for many years? I know you know them…

- Create innovative products
- Produce them to high standards
- Sell them at competitive prices
- Enrich the customer experience
- Build lasting value for your stakeholders
- Be a good corporate citizen

Obviously each of these objectives can be fulfilled in countless ways, which is exactly as it should be. Business is all about creativity and competition; no one deserves or is given a free-pass. Success is only granted to those who are the most creative and diligent and then only until they are replaced by someone who can play the game even better.

This means that winning isn’t easy and unfortunately, perhaps because of human nature – perhaps because we’ve lost our moral compass, it has become far too easy to drift off the highroad into a swampland composed of…

- Me too solutions
- Marginal quality
- Pricing gamesmanship
- Enriching yourself at your customers’ expense
- Short term thinking
- Exploitation

Which I believe is the poisoned well from which excessive risk springs.

In this series we have reviewed each of the nine elements of risk that have more than doubled our Composite Business Index over the past four years.

Including:

1. Prices are down but costs are up
2. Fewer resources at OEMs worldwide
3. The demand cycle has shortened
4. Businesses are operating at higher velocities
5. Supply chain concentration in Asia
6. Loss of institutional continuity
7. Unpredictable capital markets
8. Geopolitical unrest and instability
9. Overtaxed infrastructure in low cost regions

Wherever possible we have offered suggestions and alternatives. Where options were few we have provided insights gained from watching this situation develop. We have tried to be direct and unambiguous in our presentation of the facts.

We have already notified our Outsourcing Navigator Council membership that we have raised our risk advice to “LIKELY” meaning that on an industry average basis it is now likely that an OEM will experience a serious disruption in their supply-solution in CY2012.

Yes, the current situation is that bad.

Bottom-line, do yourself and your stakeholders a favor and do something – TODAY – to start mitigating risk. Looking over your shoulder is a waste time you can’t afford; the risk is directly in front of you!

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Source: Find more here.

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