Acquisition Risk Analysis

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Probabilistic risk analysis methodology enahancing decision making capabilities for procurement and contract awards.

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Acquisition Risk Analysis

  1. 1. Getting What you Paid for…..<br />Acquisition Risk Analysis<br />Omnia Paratus Corporation<br />
  2. 2. A recent poll showed that 68% of companies experienced financial losses directly related to Supply Chain disruptions<br />Most of the financial impacts were related to supplier performance that did not meet demand requirements, and delayed, damaged or misdirected shipments.<br />The majority of companies polled are in the early stages or have yet to think about integrating Risk Management into their Supply Chain<br /> Supplier related risks are most often identified after contract award is a program issue, not a risk:<br />Supplier shipment delay <br />Supplier capacity exceeded<br />Unable to meet technical requirements <br />1st Article or Flight Test failures<br />Parts damaged during shipment or rejected during quality inspection<br />Schedule delays caused by supplier performance can have an equal or greater financial impact to a program’s bottom line, but are often overshadowed budget impacts due to supplier cost overruns<br />
  3. 3. Incumbent<br />Supplier w/ Existing Capabilities<br />New Supplier<br />Client <br />Example<br />Best Value Analysis (BVA) is the most common Acquisition Analysis technique used, but it falls short in quantifying risk impacts<br />Score based on savings to program ~$300K<br />Technical Score based on:<br />- New Capability to Supplier<br />- Technical deviations req’d based on proposal<br />- 1st Article & Flight Req’d based on Customer reqt’s<br />BVA considers not only cost, but other quantifiable and non-quantifiable factors supporting an investment decision<br />Utilizes weighting scales for analyzing “True” program value of supplier bids<br />Can include, but is not limited to, performance, producibility, reliability, maintainability, and supportability enhancements<br />Intended to select the source offering the greatest overall benefit in response to the requirement<br />
  4. 4. Below is the fall out from the BVA on the previous screen, highlighting the realized cost and schedule impacts of undocumented risks <br />Design changes resulting from Technical deviations resulted in cost growth to original purchase order<br />Technical Deviations required by Supplier<br />Impact from production delays of 4 weeks<br />Program Award fee lost resulting in Supplier delays cause IMS milestones to be missed<br />Orders placed were against original design and fulfilled by Incumbent suppler<br />Fees required to get Incumbent supplier operations back up and minimize delay of deliveries to Customer<br />$390K overrun was a direct loss of company profit<br />Performing a sample analysis of a new supplier shows the potential risks that may be incurred when basing decisions on costs alone<br />Technical requirements outside current capabilities<br />Schedule impact due from potential delay of 1st Article Testing or Flight Test Requirements<br />Cost growth due to technical deviation’s required<br />Impact to Operations due to late supplier deliveries <br />
  5. 5. Integrating Risk Management directly into the acquisition analysis process is seamless and beneficial for forward planning Program Mgt <br />Request for ProposalDevelopment<br />Proposal Evaluation<br />Contract Award <br /><ul><li>Analyze potential risk impact and mitigation posture relating to supplier proposal’s
  6. 6. Develop and issue RFPs based on a standard format; collect vendor proposals
  7. 7. Evaluate proposals using a clear and structured evaluation mechanism and methodology</li></ul>Description<br /><ul><li>Assess program requirements
  8. 8. Assess supplier capabilities
  9. 9. Assessment methodology & criteria development
  10. 10. Define risk parameters
  11. 11. RFP responses collection
  12. 12. Technical and contractual / procedural evaluation
  13. 13. Risk identification
  14. 14. Risk ratings defined
  15. 15. Supplier proposal risk analysis
  16. 16. Identify potential mitigation plans
  17. 17. Assess mitigation posture
  18. 18. Integration of risk impact into program budget and schedule</li></ul>Activities<br /><ul><li>Detailed functional and technical requirements
  19. 19. Evaluation methodology
  20. 20. Scoring model for RFP evaluation
  21. 21. Vendor bidders list
  22. 22. RFP document
  23. 23. Risk rating scales & categories
  24. 24. Technical, contractual / procedural and commercial evaluation of proposals
  25. 25. List of potential risks and risk ratings within individual proposals
  26. 26. Pre-Mitigation Analysis
  27. 27. Post-Mitigation Analysis and Effectiveness
  28. 28. Program level risk adjusted cost and schedule analysis
  29. 29. Supplier selection
  30. 30. Contract Award</li></ul>Outcome<br />Compare supplier risk profile at proposal evaluation completion to determine outstanding risk exposure. <br />Assess program requirements, supplier capabilities and evaluation criteria to establish RFP<br />Provide insight into where supplier risks affect the program and uncover their true impacts.<br />
  31. 31. Supplier B<br />Supplier A<br />Supplier C<br />Monte Carlo simulations are utilized in order to quantified potential risk impacts within, supplier bids which can be compared <br />Supplier A<br />Supplier B<br />Supplier C<br />Illustrative<br />$700,000,000<br />$600,000,000<br />$500,000,000<br />Confidence Level Chosen<br />
  32. 32. Supplier Initial Cost<br />Risk Exposure<br />Side-by-side risk exposure calculations provides leadership with comparative insights into supplier potential costs impacts<br />Analysis will lead to a cumulative assessment of the total risk exposure and the potential impact to program budget.<br />All costs reported at the 90% confidence interval.<br />$39,100<br />Potential Risk Impact $179K<br />Potential Risk Impact $99K<br />Potential Risk Impact $25K<br />Program Cost (in thousands)<br />Illustrative<br />Component budget $500K<br />
  33. 33. Risk adjusted delivery schedules are then compared to determine the potential risk impact to program’s operations<br />Supplier A<br />Supplier B<br />Supplier C<br />Illustrative<br />Illustrative<br />Illustrative<br />Material Resource Planning requirement for this component is 04/25/2010<br />
  34. 34. The risk-adjusted cost and schedule results can be used as justification for contract award, as outlined in FAR’s Part 7 & 15<br />Initial review of Supplier bids would indicate “C” as the supplier of choice<br />Based on Supplier B & C delivery metrics and potential risk, schedule impact could result in more than a 3 months past MRP requirements<br />Based on supplier C’s lack of technical capabilities and schedule risk to operations, risk impact could equate to ~$100K over component budget<br />Based on risk adjusted Cost & Schedule proposal analysis supplier “A” should receive program consensus for contract award based on least amount of risk exposure to the program<br />
  35. 35. Given these potential benefits, a few key considerations are worth noting<br />In order to have a successful portfolio risk management process, it’s important that the constituent components of the program have sufficiently mature supply chain management and risk management processes.<br />Integration of acquisition risk analysis into a program’s budget and schedule is necessary to capture the magnitude of potential program risk impact by a single supplier<br />Identifying risks within a proposal enables forward looking program management that can be streamlined into existing risk database’s for future risk management planning and mitigation.<br />Qualitative risk analysis provides enhanced proposal evidentiary support and solid justification for awarding contracts<br />The success of a supply chain risk management program requires the consistent and active support of program leadership in order to be successful.<br />
  36. 36. For more information on how acquisition risk analysis can be applied to your specific challenges, please:<br />Contact:<br />James Taylor<br />Huntsville, Alabama<br />310-462-6878<br />James.Taylor@omniaparatus.com<br />

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