Assessing and managing risk: interview with IBM's Louis R. Ferretti
Five years ago, IBM went in search of a tool to help it better assess the vulnerabilities of its vast global pool of suppliers. When the company couldn't find what it needed, Lou Ferretti and his team built their own.
Peter Bradley is an award-winning career journalist with more than three decades of experience in both newspapers and national business magazines. His credentials include seven years as the transportation and supply chain editor at Purchasing Magazine and six years as the chief editor of Logistics Management.
As supply chains have become more global, the complexities of managing risk across vast and varied physical and political geographies arguably have grown by orders of magnitude. That's a lesson that IBM, one of the world's largest technology companies, has taken to heart. Beginning in 2009, the company undertook the task of building a complex supply chain risk management tool, now deployed globally, that provides managers with a way to examine supply risk in a much more robust fashion than ever before.
The team that developed the tool was headed by Louis R. Ferretti, the project executive who leads global and strategic programs within IBM's Integrated Supply Chain business unit and across its global supplier network on environmental compliance, supply chain social responsibility, conflict minerals, business continuity planning, and sustainability as well as risk management. He is also a member of IBM's corporate crisis management team.
Ferretti recently spoke to Editorial Director Peter Bradley about the development and rollout of the supply chain risk management tool.
Q: Companies have been talking about risk management for a long time. What led IBM to develop a supply chain risk tool? A: IBM, like others, has always assessed supply chain risk. Typically, we would look at whether our supplier was a single or sole source supplier and whether there was a financial risk associated with that supplier, and maybe we'd look at some logistics aspects. That was the sum total of what was done for our suppliers across the board.
But our supply chain has become global in nature. We are sourcing in probably 80 countries, and we are sourcing many times in countries where the risks are much higher. So our senior leaders asked our [chief procurement officer] what we were doing. Quickly, our CPO responded that we would work to address supplier and supply chain risk in a much broader, holistic fashion. We would cover political, financial, economic, logistics, and climatic factors. Our CPO listed probably a dozen factors that we would consider in a newer approach to risk. That was the mission that was handed over to me in 2009.
Q: Give me a sense of the timeline of the process to make that happen. A: I needed to step back. I thought that there was a supply chain risk industry, and what I would do is go find a subscription and get someone to provide me with all the information I was looking for as far as disruptions to the supply chain. After interviewing large companies and even small companies, they told us at the time that this was interesting but that nobody else was asking for it.
I figured that if they didn't have it and would have to build it, that we could probably do an equally good or better job of building it for ourselves and customizing it to our specific risk profile. We had a small core team, maybe a half-dozen people, and we started examining how we would put this together. It probably took us a little bit over a year to put our concept in place, to develop the requirements, and actually do the coding. The end result is what's known as our "Total Risk Assessment Tool and Process."
When I got this assignment, I wasn't told to build a tool. I was told to put a process in place that would assess supplier and supply chain risk and all these factors. Once we started examining the scope of risk and then looking at the data that we would need, we realized very quickly that this was not a spreadsheet tool, but it really had to be a much more sophisticated database and analytic tool [for] developing an algorithm that would look at this information and produce, as a result, the level of risk. But that is not where I started out.
Q: Prior to developing this tool, how did you assess supply risk? A: Our procurement councils—what most companies call category management groups—would look at their suppliers, and they would make a determination of the level of risk, typically based upon one or two factors: single source and financial risk. Now, the interesting thing is that comparing council to council, there was really no definition of risk. There were no criteria. Each council—we had dozens of councils—would make, I want to say, a subjective call. They really didn't have a benchmark in order to compare one with another.
Q: Let's go back to the development of the tool. What did it take to build and get this tool in place? A: We assembled a small team from procurement, engineering, GBS [IBM's Global Business Services consulting division], business integration and transformation, and the CIO's office. We determined what risks we needed to consider, what data we would need to evaluate the risks, an algorithm to assess the impact versus likelihood of an event occurring, who the users would be, what kind of training they would need, and how often to run the tool. We had to develop thresholds and metrics as well as a management system around the process. Gathering the tool requirements, tool development, and testing took about a year.
Q: Tell me a little bit about the rollout. A: Prior to the actual rollout, we built a prototype and then ran a pilot with several users. We got excellent feedback and made changes. The CPO was a very strong proponent of using the tool. And within just about a year from the initial deployment, the Fukushima earthquake and tsunami struck Japan. The teams found the tool invaluable in gaining insight as to which suppliers we had in Japan, what commodities were made there, etc. Then later that year came the Thailand floods. After those two events, all of the procurement team members were in.
Now, this is clearly extra work for the sourcing team. We did a couple of things to ease into this. We had extensive education on not just why we were doing this but also on how the tool works; the purpose of the questions; why we would look at the country, region, suppliers, supplier sites, and the commodity—and why we chose those particular things; and then how the algorithm would take that information, weigh it, and produce a result. Then, when we had a result, what we would do with it.
Q: There must be some way for the tool to adjust to changing conditions. A: The factors that are considered in the tool are not ones where you would typically see dramatic changes from week to week, month to month, and so forth, and we don't run the tool that frequently, though we could. What really changes are situations, whether it be the Thailand floods, issues with Ukraine, the protests in Hong Kong. Those things are real time. To augment the tool's calculation on the high-risk, medium-risk, low-risk slider, you rely quite heavily on the real-time alerts. So we have a system in which we collect information around the clock, and we look at the data, the alerts, and we make a determination very quickly whether or not we think it is going to impact the supply chain only in the short term or if it is a fundamental issue that is going to change the supply chain for the longer term.
Q: What has the tool done for IBM? A: Well, overall it has raised the level of risk awareness and sensitivity. Sourcing people around the world understand that sourcing the product and getting the best price and getting it delivered on time are all necessary, but understanding the level of risk that the supplier brings as well as the part's supply chain is something that is equal to the other items.
In the Japan situation, the tool immediately told us how many suppliers we had in Japan, whether they were tier one or two, what commodities they provided, etc. The executive team could reach out to the suppliers right away and determine if the factories would be up and running and if not now, when. We had an abundance of information at our fingertips that we eventually would have gotten to, but the sooner you get this information, the more options you have to deal with the crisis because for the most part, competitors are going to the same suppliers, the same manufacturing lines, the same capacity.
Q: Do you have plans to expand the tool's scope and features? A: There are really a couple of things here. It would sure be nice if we could see a picture of the factory when our executive is talking to that top executive in Japan. Actually, we developed what we call a risk app and tested it, and we have it in play now. We are going to be using it for other aspects of IBM, so this gives us the ability to communicate on the spot.
The next thing that we have done is [a result of] the Thailand flooding. About 50 percent of the hard drive business is in Thailand, so that situation was very, very acute. We were asked to look at supply clustering. So we looked around, and we found that we do have suppliers in several sites around the world that are clustered in different geographies. So we started to look at the potential of flooding. We actually have this now; we've got a prototype that is up and running, and we are using it.
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”
That result showed that driver wages across the industry continue to increase post-pandemic, despite a challenging freight market for motor carriers. The data comes from ATA’s “Driver Compensation Study,” which asked 120 fleets, more than 150,000 employee drivers, and 14,000 independent contractors about their wage and benefit information.
Drilling into specific categories, linehaul less-than-truckload (LTL) drivers earned a median annual amount of $94,525 in 2023, while local LTL drivers earned a median of $80,680. The median annual compensation for drivers at private carriers has risen 12% since 2021, reaching $95,114 in 2023. And leased-on independent contractors for truckload carriers were paid an annual median amount of $186,016 in 2023.
The results also showed how the demographics of the industry are changing, as carriers offered smaller referral and fewer sign-on bonuses for new drivers in 2023 compared to 2021 but more frequently offered tenure bonuses to their current drivers and with a greater median value.
"While our last study, conducted in 2021, illustrated how drivers benefitted from the strongest freight environment in a generation, this latest report shows professional drivers' earnings are still rising—even in a weaker freight economy," ATA Chief Economist Bob Costello said in a release. "By offering greater tenure bonuses to their current driver force, many fleets appear to be shifting their workforce priorities from recruitment to retention."