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DE
NV
ER FALL
SU MMIT
2014
Why Third Party Management Matters
Risky Business:
Cardinal Health
Patrick EckhertDirector of Procurement
Xchanging
Dan RoehrsSenior Vice President
www.sig.org/eval
DE
NV
ER FALL
SU MMIT
2014
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How?
Supplier Risk Management
Fall Summit 2014, Denver CO
Vendor Relationship Risk Management – what if……..?
! What would the impact be to YOU (personally AND organizationally) if a
strategic / critical vendor failed?
! How confident are we that one or more of our critical vendors are not in
financial difficulty?
! How would our stakeholders react to the failure of a critical vendor?
! What would the impact be to your reputation if one of our vendors
causes a major security breach?
! How do we effectively assess and monitor current and potential vendors’
financial and operational health?
! What actions would we take if a vendor were to face difficulties, or
causes difficulties for / to you?
Vendor Risk Management – today’s realities
• As the economic climate continues to stagnate or deteriorate, you should be concerned
about the viability of critical or strategic vendors
• The impact of vendor failure could prove to be significant, including:
• Disruption of service and product delivery
• Reputational damage
• Business continuity
• Loss of revenue
• Threat to competitive advantage
• Significant use of management time sourcing alternative vendors
• Potential business failure
• VRM maintains an up-to-date view of the operational and financial position of strategic
critical vendors
• Vendor risk issues are increasingly board-level concerns due to the severe financial,
operational and strategic consequences disruption can cause. This is coupled with greater
shareholder scrutiny, who want confirmation that you are robustly managing vendors to
limit vendor risk
Vendor Risk Management – benefits
Through an effective supplier risk management program, you will be
responding faster to the increased volatility and pressures stemming from
globalization, outsourcing, the current economic environment. An effective
Supplier Risk Management framework will:
Ensure or improve the
continuity of services
through early
warning systems
and enhanced vendor
information
Proactively address
critical concerns by
facilitating better
communication and
relationships with
vendors
Increase control over
potential disruptions
in our supply chain
and increase our
ability to proactively
mitigate risk
Minimize or eliminate
unplanned reactive
costs such as finding
alternative vendors
at short notice
Embed the improved
vendor risk
management
framework across
all aspects of vendor /
Sourcing and LOB
activity
Provide stakeholders
with reassurance
about the control
corporate services
has over the risks
in the supply chain
Performance
CAUSES
(Categories of
Predictive Measures)
DISRUPTION
EVENTS
CONSEQUENCES
(Impacts)
Human Resources
Supply Chain Disruption
Financial Health
Environmental
Relationship
Quality, Delivery, Service Problems
Supplier Union Strike,Ownership Change, Workforce Disruption
Supplier LockedTier II Stoppage
Supplier Bankruptcy (or financial distress)
Disasters (Weather, Earthquake, Terrorists)
Misalignment of Interests
Finished Goods Shipments Stopped
Locate and Ramp Up Back up Supplier
Emergency Buy and Shipments
Brand / Reputation
Market Share Loss
EFFECTS
Revenue
Losses
and
Recovery
Expenses
OTHER
IMPACTS
Foregone
Income
Emergency Rework / Rushed FG Shipments
Recall for Quality Issues
Sudden Loss of Supplier
Supplier
Attributes
Situational
Factors
Elements of Supplier Risk and Consequences of Failure
GEO - Political
Nobody is safe….
Sample Risk and Criticality Segmentation Questions
Risk Question 1: Has the supplier been involved in a supply disruption for our
business in the last 12 months?
Objective: Assess historical continuity of supply abilities
3) More than Once: There was more than one supply disruption in the last 12 months
2) Once: There was one supply disruption in the last 12 months
1) No: No supply disruptions
Sample Risk and Criticality Segmentation Questions
Risk Question 2: How likely is there to be a significant dip in the supplier’s financial
viability or solvency in the coming 12 months?
Objective: Assess near-term supplier solvency risk
3) Very Likely: Multiple areas of concern (e.g. significant weakening of supplier
financial ratios, difficult macro economic conditions for industry, etc.)
2) Somewhat Likely: Some concern in one area (e.g., some weakening of
certain financial ratios)
1) Unlikely: All risk indicators are positive (e.g. solid financial ratios, no major
employee/legal/regulatory issues, etc.)
Sample Risk and Criticality Segmentation Questions
Criticality Question 1: As a customer, what level of access (compared to our
competitors) do we have to unique solutions provided by the supplier?
Objective: Identify unique supplier capabilities that positively impact our
profitability
3) Preferred: Preferred access to supplier’s unique products/services which
positively impact our revenue/cost structure
2) Equal: Equal access to supplier’s unique products/services which positively
impact our revenue cost/structure
1) None: Supplier doesn’t have a unique product/service that positively impact
our revenue cost/structure
Sample Risk and Criticality Segmentation Questions
Criticality Question 2: How likely is this supplier to develop a breakthrough
Technology or process in the next three years that will give us competitive
advantage?
Objective: Assess supplier’s future capabilities
3) Very Likely: In process of negotiating access to new products which will give us
an advantage
2) Somewhat Likely: Known to be developing products which will give us an
advantage
1) Unlikely: Nothing known about new products which are relevant to us
Sample Risk and Criticality Segmentation Questions
Criticality Question 3: What is the level of sharing of business critical data (e.g.,
customer data) and intellectual property with this supplier?
Objective: Determine level of integration with supplier
3) Significant: Open-book policy; effective joint ventures
2) Moderate: Sharing restricted to selected projects/areas
1) Little: Arms-length relationship
Sample Risk and Criticality Segmentation Questions
Criticality Question 4: For the primary product obtained from this supplier, what is the
level of difficulty in switching to another supplier or bringing in-house within 12 months
Objective: Assess dependency and switching costs
3) Significant: Switching would require developing a new supplier’s capabilities and
would create significant business disruption
2) Moderate: Alternate suppliers available; switching would just require careful
coordination
1) Little: Could readily switch to another supplier
Sample Risk and Criticality Segmentation Questions
Criticality Question 5: How much impact does this supplier have on our critical
regulatory compliance, safety obligations or product quality?
Objective: Assess our exposure to supplier relationship
3) Significant: Supplier’s product/service can easily create liabilities and
reputation risk for us
2) Moderate: Supplier’s product/service can create liabilities and reputation risk
for one portion of our organization
1) Little: Supplier’s product/service does not pose unusual risk
Sample Risk and Criticality Segmentation Questions
Criticality Question 6: How much impact does this supplier have on customer
retention or service?
Objective: Assess the supplier’s impact on our store customer retention/service
3) Significant: Supplier’s product/service is critical to our customer’s experience
2) Moderate: Supplier’s product/service is indirectly related to our customer’s
experience
1) Little: Supplier’s product/service is far removed from our store experience
Risk Model –Risk Response
Awareness Prevention Remediation Knowledge
• Probability and
Impact
• Recognition of
effects of risk on:
- service levels
- brand and reputation
- service levels
- consumer perception
- vendor viability
• Awareness on internal,
external and regulatory
environment
• Goal is to recognize,
reduce or mitigate the
likelihood of service
disruptions, brand and
reputation tarnishment
and comply with
regulatory issues
• Key processes include:
- risk assessment
- risk identification
- risk segmentation
- risk management
- risk monitoring
- change management
- score carding
- on boarding
• Goal is to identify
procedures for
managing 4 stages of
disruption
- interruption
- response
- recovery
- restoration of service
• minimize or eliminate
impact on:
- services
- brand
- reputation
- business impact
- time
- cost / revenue
- resources
• Determine most
appropriate focus level
• Goal is to learn from
experience and to
hold vendors
accountable for the
consequences of their
actions
• Modify standard
procedures resultant
from lessons learned
• Establish a basis of
vendor interaction
• Formalized activity
•
Thank You
DE
NV
ER FALL
SU MMIT
2014
Session #11
Risky Business: Why Third Party Management Matters
Patrick Eckhert
Cardinal [email protected]
Dan Roehrs
Xchanging864-384-7122
Speakers:
