Risk Management in the Supply Chain

©ALL RIGHTS RESERVED - Confidential

Spend Matters UK/Europe Real World Sourcing

Risk Management in the Supply Chain

Guy Allen February 26th 2014




Introduction

The Real World Sourcing Series is a series of 6 sessions covering hot topics for procurement professionals.

The series is promoted and supported by BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited).

Guy Allen started his procurement career with Ford Motor Company, moving through IBM, SmithKline Beecham and GSK , becoming CPO for Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a Managing Partner. Guy has since left 4C and started his own consultancy, Real World Sourcing Limited.




Agenda 1. Defining Risk Management

2. Elements of Managing Risk

3. Driving a Procurement Risk Management Programme

4. Procurement Risk Identification and Treatment

5. Final Thoughts




The Whole Thing Solved in One Equation:




Risk - the effect of uncertainty on objectives, whether positive or negative (ISO 31000)

Risk Management - the identification, assessment, and prioritisation of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events

Definitions




Supply Side Risk – all risks of interest to the Procurement function, whether related to the supply of physical goods or not

Definitions







Identify

Evaluate

Treat

Residual Risk Monitor

Elements of Risk Management




Identification

What are the likely impacts to the organisation’s key strategies?

Can be driven by brainstorming, checklists (derived from experience) or inspections

New risks will arise and old ones diminish





Evaluation

What is the likelihood of the risk?

What is its impact?

Defined in terms of impact to the organization’s objectives




Risk Management in the Supply Chain Elements of Risk Management

Risk Evaluation Matrix Im

pac

t

Likelihood L H M

L H

M

3

2

4 1

6

5




Treatment Avoid

Share

Reduce Impact

Reduce Frequency

Approach is dependent on a few key parameters

Risk Appetite – pursuit of risk

Risk Tolerance – willingness to bear perceived risk

Resources





Mitigation, Contingency

Plan

Mitigation Contingency

Plan, Monitor

URGENT REMEDIAL ACTION,

MONITOR

Tolerate, Observe


Plan


Plan, Monitor

Tolerate, No Action

Tolerate, Observe


Plan



pac

t

Likelihood L H M

L H

M





Plan


Plan, Monitor

URGENT REMEDIAL ACTION,

MONITOR

Tolerate, Observe


Plan


Plan, Monitor

Tolerate, No Action

Tolerate, Observe


Plan



pac

t

Likelihood L H M

L H

M

3

2

4 1

6

5







The definition of Low /Medium/High impact will depend on the organisation

In some cases being out of stock is not a problem, in others its disastrous

Component failure in a car could have deadly consequences

A smart phone component failure is more likely to have financial impacts











Residual Risks

‘The cost of doing business’

Will vary according to organisation's ‘Risk Tolerance’

Acceptance of potential of litigation, disputes, fines, disruption, costs




Risk Management in the Supply Chain Driving a Risk Management Programme

Supply Risk Management Programme

What is important to

your organization?

What is their tolerance for

risk?

What can they afford?

Making it Work in Procurement




Getting the Mandate

Establish a Procurement Risk Council - Operations

- Manufacturing

- Marketing/PR

- Finance

Agree target outcome

Share the responsibility

Driving a Risk Management Programme



Risk Management in the Supply Chain Procurement Risk Identification

Availability (of Resources)

Cost

Quality

Service

Innovation

Reputation Risk Identification




Task1

On your tables discuss these areas of risk and add to them if you feel something is missing

Then place the areas in order of most concern

Availability (of Resources)

Cost

Quality

Service

Innovation

Reputation



Risk Management in the Supply Chain Procurement Risk - Identify

Risk Identification (an answer) - Availability - Reputation - Quality - Cost - Service - Innovation




- Windscreen washer bottle

- Tool resourced to new supplier

- No production for 6 weeks

- Vehicles stockpiled for 4 weeks

- Significant increase in unit price

Procurement Risks - Identify

Availability - The bottle that stopped Ford from shipping

We didn’t make the same mistake with the steering wheel!




Availability

Financial Audit

Dual Source

Safety Stock

Generic Design

Contingency Planning

Exclusivity or Preferential Supply

Supplier Acquisition

Procurement Risks - Treat




Reputation – The film that tarnished a reputation


BBC Panorama condemned use of child labour in Primark factories

PR disaster for Primark

Primark became the ‘Poster Boy of Child Labour’

However the BBC subsequently apologised to Primark for using film footage that was not genuine




Reputation

Policy

Source Selection

Audit Agencies

Response Action Plan

Procurement Risks – Treat




Quality Example – The Cement that Killed


BP Deepwater Rig Explosion caused by weak cement around the well

Failure in the testing regime both in operation and interpretation

The cost of a proper quality check was estimated at $128k

11 lives lost, BP lost $10bn, incalculable environmental damage




Quality

Design

Source Selection

Measurement (SPC)

Auditing

Consequential Damages





The Rolls Royce RB211 was developed specifically for Lockheed in the late 1960’s/early 70’s

Purchase price was set in US dollars

All Rolls Royce's’ development costs were in UK Sterling

A 20% move in the $ to £ ex rate meant the engine cost more to make than the sales price


Cost – The Contract that Bankrupted a National Icon

Rolls Royce was nationalized, and Lockheed had to pay £110,000 more per engine




Cost

Contractual arrangements

Commodity and Currency Hedging

Needs to be geared to your organisation's market, strategic objectives and risk tolerance





Polaroid Cameras produced ‘instant’ pictures

In the 1970’s a billion Polaroid pictures were taken every year, and the company employed 21,000 staff

Revenues peaked in 1991....within 10 years the company was gone


Innovation – The Camera that Disappeared

You can now buy an instant camera film, though marketed by Fujifilm and others




Innovation

SRM

Market Reviews

Joint Ventures/Collaborations

‘Art of the Possible’ sessions

Contractual Structure (particularly cost down requirements)





Monitor – TASK 2 You are shipping finished goods from China to the UK retail market

Supply is a critical concern to you

What factors might you monitor to give you early warning of a supply problem?

Procurement Risks - Monitor




Scanning of local news services against pre determined parameters Reputation

Analysis of natural phenomenon eg earthquake activity Environment

Alert status by supplier based on previous experience Confidence

Analysis of Annual Reports Financial

Analysts reports and predictions Market Analysis

Assessment of Supplier QA measurements Quality

Dynamic assessment of changes in spend and invoicing profiles Spend Analysis

Constant review of shipping and freight progress Transportation

Procurement Risks - Monitor




Final Thoughts

Your risk management approach needs to be aligned to your organisation's objectives, tolerance of risk, and available resources

Align your activity according to its likelihood and impact

Some risks you have to live with – develop contingency plans

Do not go it alone – you will not provide your organization with an effective programme if you do

In Summary




Real World Sourcing Scholarship

• £2500 towards any procurement based training

• Log on to the BravoSolution Education Network with the details you’ll receive tomorrow

• Complete the certification programme

• Check your ranking!

• The winner will be announced at the Sourcing Experts Dinner in December




THANK YOU!

Please feel free to contact me on

[email protected]

mailto:[email protected]



Risk Management in the Supply Chain Procurement Risks - Treat

Futures

No premium

Easy to contract

Transparent

Commitment

Margin Call

Only for quoted commodities

Options

No commitment

Standardized or bespoke

Premium Cost

Complex to use

Swaps

Not limited to quoted

commodities

Easy to use

Commitment

Lack of transparency C

on

s

P

ros

Business

Risk Management in the Supply Chain