February 6, 2013FMI and GMA Supply Chain ConferenceProactive Value Chain Risk Management
A.T. Kearney - GMA Conference Feb 6, 2013 2External events, internal structural designs and humanbiases have a ripple effect and impact acrossthe a company’s value chainThe role of Value Chain leaders has never beenmore critical to proactively managing this risk…and ultimately your company’s success“The inability to predict outliers implies the inability to predict the course of history,”Nassim Nicholas Taleb, The Black Swan. The Impact of the Highly ImprobableWhy is this relevant to you?The speed of business is hasteningGrowing regulatory, economic andgeopolitical uncertainty
A.T. Kearney - GMA Conference Feb 6, 2013 3In a more uncertain world, macro-economic, businessecosystem and organizational factors accelerate business risks• Resource scarcity & price volatility• Consumer demographics and preferences• Technology disruption• Longer, more complex supply chains• Increased portfolio complexity• Shortened response times• Regulation & activism• No risk governance• Limited coordination and poor capabilities• Ignore the improbableExample Risk DriversBusinessRiskProbability xImpactMacro-economicBusinessEcosystemOrganization
A.T. Kearney - GMA Conference Feb 6, 2013 4Hyper connectivity amplifies effects of macro-economic factors on business• 35% increase inavg. unit laborcosts since 2007• Emergingeconomies haveovertakenadvanced ones inoutputSources: EIU, Dow Jones, UN, IMF, comScore, CMO Council, World Intellectual Property Organization, OEDC Environmental Outlook,World Bank, A.T. Kearney analysisKey Macro-Economic FactorsIncreasingGlobalization• 5% CAGR infood prices from2000 – 2011• 47% of world willbe battling severewater stress by2030ResourceScarcity & PriceVolatility• 54% ofconsumers willend loyalty if notgiven customofferings• More internetusers have usedsocial networksthan emailConsumerPreferences• 70M boomers willretire by 2030,leaving35M jobs unfilled• 11% reduction inglobal workingage population by2050Demographics• Asia R&Dspending at 9%growth rate vs.N. America 2%• 27% CAGR inpatentapplications fromAsia vs. 4% fromUS (’00-’10)TechnologyGrowth
A.T. Kearney - GMA Conference Feb 6, 2013 5Business / industry ecosystem factors are manifestedin a variety of trendsLong, ComplexSupply ChainsIncreasedportfoliocomplexityShortenedResponseTimesNew CustomerEngagementModelsWar forTalentRegulation &activism• Over 50% ofCPG identifiedSupply Chaininefficiency asa major gap• Lack offlexiblemanufacturingassets is a keybarrier to NewProductDevelopment• Supply chainleaders have87% moreavg. inventoryturns per yearthan laggards• Online RetailIndustry in theUS will beworth $279Billion in 2015,a 50%increase• 65% of globalcompanies and80% inadvancedeconomiesface talentshortages• U.S. bordersinspected 3.3billion lbs ofimported meatand poultryproducts• >65% expectan increase inproductvariations• Avg. # SKUsincrease inUS grocerystores(‘05 vs. ‘11):– Fruit: +38%– Vegetables:+37%• Retailers arecompeting ondelivery times(same daydelivery)• 42% ofmillennialswant option ofonlinepurchase withreturn to storeoption• 31%employersworldwidecannot fillpositions• FDA WarningLetters: 44%increase in2012Sources: World Economic Forum, IBM, Juniper Research, CSCO, Manpower, Wipro, Towers Watson, Chain Link Research, U.S. CensusBureau, Global Simplicity Index, Forrester, Kantar Retail Analysis, Forrester, A.T. Kearney analysisExample Business Ecosystem Factors
A.T. Kearney - GMA Conference Feb 6, 2013 6Human BiasesInternally, structural designs and human factors don’thelp us manage risk eitherInternal Challenges to Risk ManagementWhat other challenges is your company facing in managing risk?No RiskGovernanceLimitedCoordinationPoorCapabilitiesPast, NotFuture FocusIgnore RootCausesIgnore theImprobableOrganizationDeficiencies
A.T. Kearney - GMA Conference Feb 6, 2013 7Leaders manage their exposure to risk through a delicatebalance of management objectives and actionsAdvantageTake the hillResilienceProtect home turfRecoveryRun for(re)coverObjectivesActionFirefighting Strategic FocusNarrowBroadA.T. Kearney Risk AmbitionLeaders intentionallyapply a different level of“ambition” based on thetype and level ofexposure
A.T. Kearney - GMA Conference Feb 6, 2013 8A.T. Kearney Risk Ambition• ANTICIPATE FUTUREenvironmental requirementsand consumer demands• ACTIVELY MANAGE brandimage – resilience in light ofFoxconn working conditions• RESPOND to the Gulf of Mexicooil spillThis balance is observed in all companies to varying degrees –but more often is an afterthought rather than forethoughtAdvantageTake the hillResilienceProtect home turfRecoveryRun for(re)coverObjectivesActionFirefighting Strategic FocusNarrowBroad
A.T. Kearney - GMA Conference Feb 6, 2013 9• Rogue behavior• War for talent• Market liquidity• Interest rate volatility• Global economicvolatility• Disruptive businessmodels• Execution error• Non-compliance• Regulatoryscrutiny (Health,Safety, Finance,etc. )• Decision making andmonitoring• Code of conductRealizing your ambition starts with a holistic view of risk acrossseven areas of impact to your organizationA.T. Kearney’s VistaTM Risk Framework and Examples• Loss of IP• Compromiseof assetsBusiness &CommercialEnterprise&GovernanceFinancialRegulatoryOperationalPeopleSecuritySource: A.T. Kearney
A.T. Kearney - GMA Conference Feb 6, 2013 10To get started, we need to think about the building blocks forproactive risk management and ourselves a few basic questionsBuilding blocks for proactive risk management
A.T. Kearney - GMA Conference Feb 6, 2013 11Risk governance must align with business objectives andensure a single vernacular for risk prioritization and tradeoffs• Align risk management strategyand vision to business objectives• Employ single risk vocabularywithin / across functions and BUs forprioritization and tradeoffs• Establish cross-functional teamand accountability to set policy andensure “hand-offs” between verticals• Separate actions from oversight/audit roles to ensure proper checksand balancesHow do you do on managingtradeoffs?Select leading risk practices - Governance• Is it clear how your companymanages risk tradeoffs / prioritiesacross enterprise?• Is there a common company-widerisk vernacular?PracticesKey Questions
A.T. Kearney - GMA Conference Feb 6, 2013 12Risk scorecards should include leading and lagging indicatorsas well as internal and external performance measures• Employ a mix of both leading andlagging indicators for riskmanagement• Metrics should measure bothinternal performance as well asmonitor external events and drivers• Ensure definition of metrics andcalculations are standardized withinand across functions and businessunitsSelect leading risk practices - Metrics• Do you know your risk exposuretoday?• Are you improving?PracticesKey QuestionsAre your metrics consistentlydefined, tracked andcommunicated?
A.T. Kearney - GMA Conference Feb 6, 2013 13Process rigor must combine discipline with new techniques tobetter understand a broader set of risks and opportunities• Map product value chains onperiodic basis to understandvulnerabilities, identify key risks andmitigation actions• Leverage advanced techniques tobetter understand improbable events• Pursue value chain collaborationto unlock new value and bettermanage key ecosystem risks• Ensure key business practicesincorporate sufficient riskconsiderationsSelect leading risk practices – Process Rigor• What techniques and tools dodecision makers use to identify risk?• Do all business processes reflectappropriate risk considerations?• How frequently does your companyreassess its vulnerabilities?PracticesKey QuestionsHow do you do on managingtradeoffs?
A.T. Kearney - GMA Conference Feb 6, 2013 14Underlying any risk management capability is data visibility anda means to “connect the dots” across disparate input signals• Build data transparency acrossvalue chain to prioritize risks andmitigation• Use data mining and predictiveanalytic techniques to analyze pastactivities to forecast future behavior• Establish means to learn, synthesizeinformation and “connect the dots”across disparate input signals• Collaborate with partners to sharedata and analytical modelsSelect leading risk practices – Analytical Tools• Do you have transparency acrossyour product value chain?• What tools & techniques are used tomonitor risk and risk managementpractices?PracticesKey QuestionsDo you have 20-20 visionacross your entire value chain?
A.T. Kearney - GMA Conference Feb 6, 2013 15Finally, risk management is most effective and truly proactivewhen it is a part of the culture: a forethought vs. an afterthought• Recognize and reward those thateffectively manage or capitalize onrisk• Ownership of risk transcendstypical organization boundaries• Acknowledge and embrace riskand uncertainty – take controlrather than be a victim and make itwork to your advantageSelect leading risk practices – People and Culture• Is risk a part of your day-to-daydialogue and planning?PracticesKey QuestionsIs risk a forethought or anafterthought in yourorganization?
A.T. Kearney - GMA Conference Feb 6, 2013 16How well organized are your building blocks for proactive riskmanagement?Elements of a risk management operating model