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Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
Guy Allen February 26th 2014
©ALL RIGHTS RESERVED - Confidential
Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
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.
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Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain
The Whole Thing Solved in One Equation:
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Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain
Supply Side Risk – all risks of interest to the Procurement function, whether related to the supply of physical goods or not
Definitions
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Risk Management in the Supply Chain
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Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
Identify
Evaluate
Treat
Residual Risk Monitor
Elements of Risk Management
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Risk Management in the Supply Chain
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
Elements of Risk Management
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Risk Management in the Supply Chain
Evaluation
What is the likelihood of the risk?
What is its impact?
Defined in terms of impact to the organization’s objectives
Elements of Risk Management
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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
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Risk Management in the Supply Chain
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
Elements of Risk Management
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Risk Management in the Supply Chain
Mitigation, Contingency
Plan
Mitigation Contingency
Plan, Monitor
URGENT REMEDIAL ACTION,
MONITOR
Tolerate, Observe
Mitigation, Contingency
Plan
Mitigation Contingency
Plan, Monitor
Tolerate, No Action
Tolerate, Observe
Mitigation, Contingency
Plan
Elements of Risk Management
Risk Evaluation Matrix Im
pac
t
Likelihood L H M
L H
M
©ALL RIGHTS RESERVED - Confidential
Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
Mitigation, Contingency
Plan
Mitigation Contingency
Plan, Monitor
URGENT REMEDIAL ACTION,
MONITOR
Tolerate, Observe
Mitigation, Contingency
Plan
Mitigation Contingency
Plan, Monitor
Tolerate, No Action
Tolerate, Observe
Mitigation, Contingency
Plan
Elements of Risk Management
Risk Evaluation Matrix Im
pac
t
Likelihood L H M
L H
M
3
2
4 1
6
5
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Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
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Risk Management in the Supply Chain
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
Elements of Risk Management
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Risk Management in the Supply Chain
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Risk Management in the Supply Chain
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Risk Management in the Supply Chain
Residual Risks
‘The cost of doing business’
Will vary according to organisation's ‘Risk Tolerance’
Acceptance of potential of litigation, disputes, fines, disruption, costs
Elements of Risk Management
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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
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Risk Management in the Supply Chain
Getting the Mandate
Establish a Procurement Risk Council - Operations
- Manufacturing
- Marketing/PR
- Finance
Agree target outcome
Share the responsibility
Driving a Risk Management Programme
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Risk Management in the Supply Chain Procurement Risk Identification
Availability (of Resources)
Cost
Quality
Service
Innovation
Reputation Risk Identification
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Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain Procurement Risk - Identify
Risk Identification (an answer) - Availability - Reputation - Quality - Cost - Service - Innovation
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Risk Management in the Supply Chain
- 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!
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Risk Management in the Supply Chain
Availability
Financial Audit
Dual Source
Safety Stock
Generic Design
Contingency Planning
Exclusivity or Preferential Supply
Supplier Acquisition
Procurement Risks - Treat
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Risk Management in the Supply Chain
Reputation – The film that tarnished a reputation
Procurement Risks - Identify
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
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Risk Management in the Supply Chain
Reputation
Policy
Source Selection
Audit Agencies
Response Action Plan
Procurement Risks – Treat
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Risk Management in the Supply Chain
Quality Example – The Cement that Killed
Procurement Risks - Identify
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
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Risk Management in the Supply Chain
Quality
Design
Source Selection
Measurement (SPC)
Auditing
Consequential Damages
Procurement Risks - Treat
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Risk Management in the Supply Chain
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
Procurement Risks - Identify
Cost – The Contract that Bankrupted a National Icon
Rolls Royce was nationalized, and Lockheed had to pay £110,000 more per engine
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Risk Management in the Supply Chain
Cost
Contractual arrangements
Commodity and Currency Hedging
Needs to be geared to your organisation's market, strategic objectives and risk tolerance
Procurement Risks - Treat
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Risk Management in the Supply Chain
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
Procurement Risks - Identify
Innovation – The Camera that Disappeared
You can now buy an instant camera film, though marketed by Fujifilm and others
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Risk Management in the Supply Chain
Innovation
SRM
Market Reviews
Joint Ventures/Collaborations
‘Art of the Possible’ sessions
Contractual Structure (particularly cost down requirements)
Procurement Risks - Treat
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Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain
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
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Risk Management in the Supply Chain
THANK YOU!
Please feel free to contact me on
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Risk Management in the Supply Chain Procurement Risks - Treat
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