Risk Management in the Supply Chain

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In many organisations, Procurement is beginning to see Risk as part of their responsibilities, second only to savings. In this presentation we will look at identifying risk and consider how it might be treated to arrive at the best Risk solution for your organisation.

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Risk Management in the Supply Chain

  1. 1. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Guy Allen February 26th 2014
  2. 2. ©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.
  3. 3. ©ALL RIGHTS RESERVED - Confidential 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
  4. 4. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain The Whole Thing Solved in One Equation:
  5. 5. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  6. 6. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  7. 7. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain
  8. 8. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Identify Evaluate Treat Residual RiskMonitor Elements of Risk Management
  9. 9. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  10. 10. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  11. 11. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Elements of Risk Management Risk Evaluation Matrix Impact Likelihood L HM LHM 3 2 4 1 6 5
  12. 12. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  13. 13. ©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 Impact Likelihood L HM LHM
  14. 14. ©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 Impact Likelihood L HM LHM 3 2 4 1 6 5
  15. 15. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain
  16. 16. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  17. 17. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain
  18. 18. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain
  19. 19. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  20. 20. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  21. 21. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  22. 22. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Procurement Risk Identification Availability (of Resources) Cost Quality Service Innovation Reputation Risk Identification
  23. 23. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  24. 24. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Procurement Risk - Identify Risk Identification (an answer) - Availability - Reputation - Quality - Cost - Service - Innovation
  25. 25. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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!
  26. 26. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  27. 27. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  28. 28. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Reputation Policy Source Selection Audit Agencies Response Action Plan Procurement Risks – Treat
  29. 29. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  30. 30. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Quality Design Source Selection Measurement (SPC) Auditing Consequential Damages Procurement Risks - Treat
  31. 31. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  32. 32. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  33. 33. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  34. 34. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  35. 35. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  36. 36. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain Scanning of local news services against pre determined parametersReputation Analysis of natural phenomenon eg earthquake activityEnvironment Alert status by supplier based on previous experienceConfidence Analysis of Annual ReportsFinancial Analysts reports and predictionsMarket Analysis Assessment of Supplier QA measurementsQuality Dynamic assessment of changes in spend and invoicing profilesSpend Analysis Constant review of shipping and freight progressTransportation Procurement Risks - Monitor
  37. 37. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  38. 38. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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
  39. 39. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Risk Management in the Supply Chain THANK YOU! Please feel free to contact me on guyallen@realworldsourcing.com
  40. 40. ©ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing 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 ConsPros

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