Know your suppliers? How can you manage supplier risk?

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  • How can you manage supplier risk?Dan White

    Regional Sales DirectorBvD UK & Ireland

  • Risk its not a new issue?

    UK companies liquidated or placed into receivership in the last two weeks


    90 of those had more than 50 employees

  • What is procurement?Increase quality whilst reducing cost and avoiding risk.

  • 1. Financial risk

    2. Reputational risk

    3. Incorporating risk measures into your workflow

  • Risk: If I do this is it going to hurt?

  • Supply chains are vital to the successful performance of a company

    Deliverables against margin means procurement teams are increasingly concerned with risk and ways to identify it

    Its not as simple as I buy goods from supplier ATo make its product supplier A buys from supplier C, D and E

  • Identification of risk is a challenge

    Difficult to obtain an accurate & reliable picture of the financial health of a supplier

    Procurement professionals are not always financial analysts Where do I get data from? What does it mean?

    The right data from the right external provider can help

  • The right data from the right external provider can help

    Initially many external providers lookthe same

  • External content providers


    Quality content

    Easy to interpret

    Varied content

  • We engage with many procurement teams.

    Good procurement teams seem to be agile when it comes to identifying risk

    Make technology work for them

  • The world had changed.

    What are the alternatives to help me see risk?

  • 1. Financial Risk: New approaches to see risk

    Not moving away from traditional methods but what else is out there New companies have evolved who take a different view on risk

    Help procurement teams see the bigger picture of supplier

  • Financial Strength: A wider view

    Better to have several risk indicators than just one

  • Key supplier multi-million construction projectBasic credit score tells us this company is healthy

  • All is not well..

  • Different suppliers required different approaches

    Key strategic suppliers

    Indirect suppliers

  • Dont forget the real world

    Good providers of external content should bring other warning signs of risk

    NewsAdverse documents

    Should be easily deliverable into procurement teams

    Information knowledge - actions

  • 2. Reputational Risk

    Increase quality whilst reducing cost and avoiding risk.

    Do I really know who my supplier is?

    Child labour & other such undesirable activityLinks to criminal activity (proven or unproven)Bribery or corruption (alleged or proven)

  • Reputational Risk: Who are you working with?

  • How do we understand reputational risk?

    Aggregated content of Sanctions listsEnforcements Adverse media coverage

  • 3. How can we use external content?

  • Create a link .Internal dataExternally managed dataCommon identifier

  • Youve made the link

    its your gateway to knowledge

  • Help me see risk earlyIncrease quality whilst reducing cost and avoiding risk.

    Decline in Credit scoreAdverse documents Negative press

  • Wheres the risk in my supply chain?Increase quality whilst reducing cost and avoiding risk.

  • Where does my supplier fit?

    Increase quality whilst reducing cost and avoiding risk.

  • Connect to valuable intelligenceIncrease quality whilst reducing cost and avoiding risk.

  • Successful procurement teams use external data to:Identify riskTake steps to prevent riskEnrich knowledge

    Increase quality whilst reducing cost and avoiding risk.

    Please do visit us on stand 7

  • with emphasis on how we can use external company data to enhance capabilities and improve performance in this area

    But first

    **Wanted to put in context what risk actually meant

    What measure can we use to see if risk is as important as everyone says

    1730 went bust.

    Of these 90 were larger coys lets just think about that number for a minute

    Thats 45 a week

    9 each day

    9!Thats just UK where we know while things are tough they arent as tough as Europe in many cases so as supply chains in most cases are certainly European if not global..clearly the problem is going to be bigger

    So how do I make sure I dont have several of these in my supply chain? Or if I do how do I make sure I know about them*When pulling together I wanted to take a step back and define the role and see how risk aligned with it.

    Spoke with a number of our procurement clients to define the role whilst I didnt want a 5 page brief more of a brief statement and taking into account the key deliverables in summary they defined the role as

    Clearly this wont be news to anyone in the room.

    So taking into account this thing called riskWhere does risk fit into the day to day life of a procurement professional and what sort of risks should be considered

    When we look at risk its easier to split into the 2 main areas we commonly find procurement teams want to understand when considering supplier risk



    And then having done that options to integrate these into existing workflow processes

    .We all know it can be easy to run a risk score on a supplier when onboaring which is never reviewed or monitored again.**Risk is always a balance.

    Whilst we know a supplier can deliver significant advantages, if we spend time integrating them into the supply chain are they going to deliver?

    And whilst we know many do work out.there may be one that doesnt

    .at some stage is it going to come back and bite me?

    Amongst other things something thats lurking in the back of everyones mind when they sign a contract with a key supplier*But first to put it all in context.

    We know supply chain risk is a strategic issue

    I dont need to tell you that the economic world today: a tough place to be Extremely challenging trading conditions for suppliers = increase in risk = risk penetrating into supply chain

    As the business world becomes more competitive and complex and the pressure on margins increases, so have the supply chains that organisations depend on and knowing how vital supply chains are to organisations then stress/risk in these chains is not a thing that procurement directors like to think about at night.

    Risk, whilst its always been important is really coming to the fore and an area where were finding more and more procurement teams want to spend more time*So how do we go about looking at risk?

    Weve mentioned supply chains have become more complex, & particularly as supply chains spread geographically and in cases increasingly infiltrate on emerging markets getting reliable data is difficult

    Especially if youre not an expert in data - in where to go, what to look for, is it free? Can I rely on it? What do I do with it?

    far better at this point to reach out to an established provider in this area who professional collate and maintain this data content, and more importantly are on hand to help you understand itSo ok we know data can help but what should you look for in a good external provider?

    After all to the untrained eye many look the same hopefully were not all that fat

    To me one law firm..**The point here isnt to review data providers but more & more weve seen focus by procurement teams move from domestic required 15 years ago to very much a global view

    International content available has developed in line with requirements that has meant more visibility into suppliers along with technology that allows the information to be more accessible and better understood that ever before

    Dont need to stress that point short of strategic decisions are made with ext data very often being a factor inaccurate data can hurt a business

    More and more pro teams dont just want financial content they want additional content that helps them really understand a supplier in its wider context*

    Successful procurement teams seem to be pro-active when it comes to measures to help them see risk essentially they dont want to be caught out

    They know there has been advances in technology and content offered by external providers which can offer significant advantages

    They seem to embrace new ideas to help drive risk down and offer additional benefits

    *So when we take into account risk & its importance in todays world we also find ourselves at a time as difficult in our history to predict it!!

    Dont want to bring back any nightmares

    Having been in the market for a number of years

    More and more procurement teams were asking us what else is out there to help with risk finding that more and more basic credit scores or other methods werent telling the whole story and leading to nasty surprises in cases. A reliance on simple scores in isolation werent always giving a true picture of riskcan we base a score developed in 2001 against the climate in 2013?Scores based on pay-decs may not reflect more fundamental issues with a balance sheet or sector companies generally tend to pay the phone and electricity billsThe bottomline is when companies are in trouble they make every effort to hide this so scores heavily influenced by the balance sheet in isolation didnt always reflect more fundamental issues

    And I dont want to go on about the rating agencies failure to predict the banking crisis between that and issues with existing scoring many proc teams started to look at options -

    what other ways were out there to do this? Led to a number of approaches so ok BvD you play in this area what are the options?

    Help varied from team to team, some wanted raw data others wanted help in interpreting what data meant

    what could we do to help/what other alternatives could we find

    approached a number of modeling coys who took a different viewsome approached usAnd we started to develop ways to provide alternatives to existing methods or at very least comes at the problem from a different angle


    Evolution not revolution important to add that I dont think any financial model will be a 180 approach

    Some coys taken it on themselves to look at this differently

    We found a new breed of mathematical modelers, predictive modelers out there, and in some cases expert in developing propensity models, whilst financial history was a factor they came round to developing models that looked at the liklihood a coy would be around in 18/24/36 months time.

    Help procurement teams see the bigger picture of supplier healthat this point!! we are not there to say these scores and right or wrong, or are more valuable than other scores we are not there to provide the answers but more to raise the questions when it comes to supplier healthBut as a proc proff I would rather raise questions early as I have more insight to risk than being provided with a false impression of supplier health before I incorporate it into my supply chain


    So we know that risk is hard to see indeed companies in stress will try very hard to hide this and so by looking at the problem from several angles often helps.

    Bringing together an variety of opinions allows more questions to be asked of a supplier than a single view.

    So in conjunction with some of our proc and credit risk clients it has led us to develop this thing we call financial strength

    *So I just want to stop at this point to look at a couple of examples as it helps underwrite the areas discussed apologies for screenshots

    Traditional method of credit scoring based on several factors but heavily influenced by a balance sheet.

    Doesnt always tell the whole story for all the reasons weve just discussed

    Viewed in isolation it tells us this company is healthy

    Run analysis of numerous failed coys many had healthy scores.

    REMEMBER that no provider is ever right more of an opinion that asks the questions for you? We dont like to give people the answers

    But when we start to incorporate a couple different views

    First we see a provider (ModeFinance..) who review a whole range of issues and provide a rating to help buyers scale this coy as to how healthy it is..*Vadis - *CRIF base analysis on sectors to determine good/bad performance *And its much the same story if we look at most victims of the credit crunch in a number of sectors

    the signs are clearly there for procurement teams who are serious about understanding risk

    Healthy credit score but the wider view is very different

    HOWEVER its important to note that although some ratings can see risk better than others they are not the sole indicator of supplier performance, and are still only a guide to help procurement teams at least take a view of the financial risk.**Tell the Telent story re Crossrail

    Right external content can help

    *The ability of an external content provider to deliver additional data other than just financial can be a real advantage.

    Whilst ratings are valuable often there are events that may indicate issues with a supplierJob cuts site closures adverse documents


    This data needs to be streamlined and delivered to the right people at the right time,

    Buyers need to act on the knowledge that a news story provides,

    Successful procurement shouldnt miss this information..because there is technology out there that helps us deliver it*What risks do suppliers present to our reputation?

    An increased focus for many procurement teams

    Risk can come in other forms than just financial..

    No one likes the thought of their reputation built over years ruined overnight by damaging links in their supply chain

    Im sure I only have to mention the word Horse

    As supply chains have become more complex so have the possibilities of being linked with someone you didnt know about*Now weve been working with procurement teams with regards to coy ownership for years and we know the core uses of something like an ownership tree

    For example group spend what other opps do I have to procure within the same corporate group more and more we find its helping them understand who they are really working with

    Now additionally people are wanting to understand other elements of this coy - to run checks on directors of the coy to ensure theyre not linked to any undesirable activity but more and more companies want to understand if there are individual owners behind a company Im sure many of you will be familiar with the term beneficial owner

    Is he a politically exposed person?

    Is he linked with any activities you would want to be aware of?

    I will move on quickly!*We know theres been huge increase in legislation over the years in areas such as money laundering and links to criminal activity which in turn have brought this to the fore.Youll remember even over the past 12 months there have been a few high profile cases of banks being in breach of AML legApart from the damage it did to their profits, more and more it is about the risk of reputational damage. Clearly reputation risk is not just isolated to banks and so this is an increasing focus for many coys - and this in turn has lead to providers appearing who can help companies see the risks in this space

    Bringing together over 600 global sanctions lists easy view of the data

    Has this company been linked to any adverse media..

    Reputation risk should be considered as part of the procedures for thorough risk assesment when reviewing a supplier

    So are experiences with...