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Research summary

                Supply Chain Risk
                A Study of Procurement in the UK



              services for professional procurement
              www.achilles.com



T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 1   11/06/2012 13:07
The research

                                                                         Earlier this year, Achilles commissioned an
                                                                         independent research project into the perceptions
                                                                         of risk and attitudes to supplier pre‑qualification
                                                                         amongst UK procurement professionals. As a
                                                                         provider of information and services that help
                                                                         companies manage global supply chains, we
                                                                         wanted to find out more about the importance
                                                                         procurement professionals place on pre‑qualifying
                                                                         suppliers and the risks they need to manage.

                                                                         To gauge the views around pre‑qualification of
                                                                         suppliers, amongst procurement professionals
                                                                         from a number of business sectors, Achilles Group
                                                                         commissioned IFF to undertake the research.
                                                                         During December 2011 and January 2012, IFF
                                                                         interviewed 200 businesses by telephone, each
                                                                         with more than 250 employees. They asked a
                                                                         range of questions to procurement professionals
                                                                         across the six industry sectors listed below. The
                                                                         interviews in each sector were then weighted to
                                                                         be representative of the number of UK businesses
                                                                         with similar numbers of employees in that sector.
                                                                         This aimed to give the broadest possible picture of
                                                                         attitudes to pre‑qualification by sector. The sectors
                                                                         selected for the project were:

                                                                         ■ Utilities, Mining and Quarrying
                                                                         ■ Manufacturing
                                                                         ■ Construction
                                                                         ■ Wholesale and Retail
                                                                         ■ Transport, Storage and Communications

                          IFF Research                                   ■ Finance
                                                                         By asking companies from different industry
                                                                         sectors and annual turnover to contribute, we
                          Established in 1965, IFF Research is           can compare and contrast their views and the
                          one of the largest independent research        priorities they attach to risk. In turn, we aim to
                          organisations in the UK. It specialises in     draw conclusions about attitudes to risk, supply
                          researching public policy, business and        chain management, and best practice business
                          marketing issues in the UK and overseas,       approaches.
                          focusing on both private and public sectors.
                          It has particular expertise in financial
                          services, branding and communication,
                          business and enterprise, learning and skills
                          and employment and benefits; its team also
                          concentrates on healthcare, the environment
                          and the third sector.




                                                                                                                                                    3




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 2                                                                              11/06/2012 13:07
Foreword

                          At Achilles we see our role as providing services
                          that help companies to remove some of the more
                          time consuming elements of the procurement
                          process. Our services help companies
                          to identify, evaluate and monitor suppliers
                          throughout their global supply chains and enable
                          them to identify and effectively manage supply
                          chain risk.

                          We recognise that risk, and managing it, is playing
                          an increasingly large part in the world of supply
                          chains. This research provided a rare opportunity
                          to explore the ways that companies look at
                          pre‑qualifying suppliers and the risks associated
                          with supply chain management. For example, what
                          do procurement professionals perceive to be the                                  We wanted to explore the ways that companies
                          biggest risks they face? How do they manage risk                                 look at risk in different sectors, their appetite for
                          and mitigate its impacts?                                                        it, and the drivers for managing it. The research
                                                                                                           we commissioned provides an insight into what
                                                                                                           CPOs are worrying about, their greatest perceived
                                                                                                           risks, how big a risk is ‘too big’ and whether the
                                                                                                           business sector and size, influences this. We also
                                                                                                           wanted to assess the amount of risk management
                                                                                                           that is driven by the need for compliance with the
                                                                                                           law, or by the less tangible variables of brand and
                                                                                                           reputational management for that organisation.

                                                                                                           I trust that you will find this report interesting.




                                                                                                           Adrian Chamberlain, Achilles Group CEO




                          Contents

                          The research............................................................2        Pre-qualifying suppliers is the key to
                          IFF Research............................................................2        effective risk management....................................12
                          Foreword..................................................................3        Pre-qualify before tendering....................................... 13
                          Global supply chain management.                                                    The cost of pre‑qualification....................................... 14
                          A balancing act........................................................4           Data quality as a business imperative........................ 14
                             When it goes wrong....................................................... 5   Pre‑qualification, a pre-requisite for
                          What are CPOs worrying about?.............................6                      procurement best practice - confirmed................15
                          How great a risk is too great a risk? .......................8                     Conclusions................................................................. 15
                          Keeping the plates spinning.
                          Compliance, a driver or facilitator
                          for risk management?............................................10




     3




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 3                                                                                                                                            11/06/2012 13:07
Global supply chain
                          management.
                          A balancing act

                          Global supply chain management is not for               “It is about getting the
                          the faint hearted. Against a backdrop of highly
                          competitive, high risk, global supply chains –
                                                                                  product to the marketplace.
                          dependent on tight margins and fast paced               It starts with the sourcing
                          turnaround ‑ there are inherent risks in doing
                                                                                  of the raw materials
                          business.
                                                                                  and then right through
                          This is borne out by our research, which found
                          some interesting views and attitudes to high risk
                                                                                  to the marketplace. If
                          suppliers in the supply chain. This is illustrated by   anything goes wrong with
                          the fact that 43% of businesses were aware of a         the process it can be
                          high risk supplier failing to meet their compliance
                          requirements. Yet whatever level of risk the            catastrophic.”
                          supplier posed for the business, they were seen as
                                                                                  Wholesale and Retail sector
                          necessary links in the supply chain, and as such,
                          managed as part of ‘business as usual’. A similar
                          picture emerged across all businesses we talked
                          to. There was no significant difference between
                          sectors or turnover of the businesses either, all
                                                                                  “A supplier was fraudulently
                          faced similar risks across their own supply chains.     identifying parts. They
                                                                                  went to jail as a result. Our
                                                                                  company had to reaccredit
                                                                                  our suppliers.”
                                                                                  Transport, Storage and
                                                                                  Communications sector




                                                                                                                   4                 5




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 4                                                               11/06/2012 13:07
“The use of substandard           When it goes wrong
                                               labour by (supplier)
                                                                                 Supply chain management can be argued to have
                                               caused damage to                  been a key contributor to the negative impact
                                               our brand reputation.”            on BP’s reputation in the Gulf of Mexico. The
                                                                                 contractor responsible wasn’t BP, but it was the BP
                                               Transport, Storage and            brand, reputation and senior leadership team that
                                               Communications sector             paid the price.

                                                                                 Many household names today have suffered the
                                                                                 ignominy of reputational damage as well as a large
                                                                                 hit on their share prices, as a result of ineffectual
                                               “Because we are a water           supplier management.
                                               company, quality is an
                                                                                 Clothing manufacturing has come in for serious
                                               issue. We could be sued           scrutiny in recent years, following the exposure
                                               if something goes wrong           of practices in the factories used by low cost
                                                                                 manufacturers selling clothes in the UK. Primark’s
                                               and then there is the             issues around child labour and low wages for
                                               problem of bad publicity.”        workers in factories in the Far East had the
                                                                                 potential to damage their brand and reputation.
                                               Utilities, Mining and Quarrying   Supply chain management is playing an
                                               sector                            increasingly important part in how businesses see
                                                                                 their brand equity management.

                                                                                 The Olympic Games London 2012 is not exempt
                                                                                 from questionable supply chain management
                                                                                 practices. A recent report by the Playfair scheme
                                                                                 has identified sweatshop conditions at factories
                                                                                 in Guangdong Province in China, contracted to
                                                                                 provide mascots and badges for the London 2012
                                                                                 Olympics. A combination of low wages, excessive
                                                                                 working hours, child labour and dangerous health
                                                                                 and safety conditions, alongside audit fraud, are
                                                                                 now under investigation. All serve to impact on the
                                                                                 brand and reputation of the Olympic movement.




     5




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 5                                                                                      11/06/2012 13:07
What are CPOs worrying about?

                          A recurring theme in our research is the vital part                   We found some variation in views on the next
                          played by risk management.                                            two big areas for risk depending on company
                                                                                                size. Irrespective of sector, large companies are
                          Most businesses have a lot of risks to manage                         concerned to protect their brand and reputation
                          every day – minimising exposure to these is crucial                   from damage caused by ‘weak or high risk links
                          to business survival and success. For many                            in the chain’. Smaller companies with 250+
                          procurement professionals, the risk management                        employees have concerns closer to home – and
                          ‘game’ has new rules and a playing field that                         are focusing their energies on financial survival.
                          is complex and global. Traditionally the risks
                          of supply management did not have the same                            Nearly half (48%) of companies we talked to are
                          dependency on a procurement team to get it right.                     concerned about the financial failure of suppliers’
                          But that’s changed now – and our findings see the                     businesses and put it in the top three risks they
                          role of procurement teams in risk management and                      have to manage. In addition, 33% list the financial
                          mitigation, as ‘part of the day job’.                                 failure of their own business in their risk top
                                                                                                three. In the Construction industry, 30% of those
                          40% of businesses said that their most important                      surveyed put failure of their own business as the
                          risk to manage through the procurement process                        number one risk. With the recent recession and the
                          is the “failure of a supplier to deliver in terms of                  current economic climate being unforgiving, this
                          quality, timeliness or cost”. This is consistent for                  concern has become acute. 31% of Construction
                          all sizes of organisation and across all the sectors                  businesses surveyed with 250+ employees and
                          we surveyed, with 75% of respondents putting this                     turnover of less than £25 million, see their own
                          in their ‘top three’ risks to manage. There is an                     financial failure as the most important risk.
                          obvious and immediate impact on the business if
                          the supply chain fails – in terms of product quality,
                          timing or service delivery.


                                                                 Most important risks to manage (%)

                                                Failure of a supplier to deliver                                                                40
                                              the required service in terms of
                                                    quality, timeliness or cost                                                                 75


                                             The financial failure of a supplier                                                                12
                                                               (ceases trading)                                                                 48


                                                        The risk to the reputation                                                              13
                                                                 of your business                                                               38


                                                      The financial failure of your                                                             16
                                                       business (ceases trading)                                                                33


                                              The failure of a supplier to meet                                                                 12
                                               its Health & Safety obligations                                                                  32


                                                 The risk that your business is                                                                 5
                                                           exposed to litigation                                                                24

                                     Selected as most important risk             Selected in top 3 most important risks




                                                                                                                                                       6                 7




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 6                                                                                                   11/06/2012 13:07
Achilles Group Chief Executive, Adrian Chamberlain, comments

                          “If a significant supplier of a key component or service fails to come up to the
                          mark, a business can be damaged beyond product delivery. There is the potential
                          for brand and reputational damage – and the ensuing impact on share price
                          performance. From an industrial accident with a worker killed, to a subcontractor
                          polluting a local river or using child or illegal immigrant labour in the UK or Jakarta,
                          there are obvious and immediate impacts on reputation and brand.”

                          This view is backed up with sector commentary,              Amongst the larger businesses with turnover
                          including: “We use subcontractors a lot in the              between £250 and £999 million, 23% of
                          Construction industry – and our supply chain is             organisations put the most important risk
                          international. In the last two years it feels as if we’re   faced as managing their brand and reputation.
                          just one small step away from bankruptcy.”                  Effective and proactive supply chain
                                                                                      management is therefore seen as an investment
                          Construction sector                                         in brand and reputation.



                                                      Most important risks to manage by sector (%)
                                                                                              43       Finance (13)
                             Failure to deliver service                                       42       Transport, Storage &
                                                                                              40       Communications (75)
                                   in terms of quality,
                                                                                              20       Wholesale & Retail (30)
                                    timeliness or cost
                                                                                              44       Construction (30)
                                                                                              15       Manufacturing (38)
                                                                                                       Utilities, Mining & Quarrying (14)
                                                                                              21
                                                                                              11
                                     Financial failure                                        17
                           (business ceases trading)                                          30
                                                                                              13
                                                                                              15


                                                                                              14
                                                                                              16
                                       Risk to reputation                                     10
                                             of business                                      20
                                                                                              9
                                                                                              38

                                                                                               0
                                                                                              13
                           Failure of supplier to meet                                        17
                                  its H&S obligations                                         17
                                                                                               9
                                                                                              15

                                                                                               7
                                                                                              11
                                       Financial failure                                      10
                             (supplier ceases trading)                                        13
                                                                                              15
                                                                                               8

                                                                                              14
                                                                                              5
                                     Business exposed                                         7
                                            to litigation                                     0
                                                                                              4
                                                                                              0




     7




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 7                                                                                         11/06/2012 13:07
How great a risk is too great a risk?

                          Complex, global supply chains, are synonymous
                          with risk. A typical business will have a range
                          of risk levels associated with suppliers – from
                          safe, low risk providers, to something far less
                                                                                                    Medium risk suppliers
                          visible or manageable at the far reaches of the
                          chain. High risk suppliers may be overseas and
                                                                                                                                      10
                          without the same commitment to compliance                                                                    0
                          or quality standards of the UK and Europe. Yet,                                                             11
                          you need them to deliver the components your                 All businesses                                 39
                                                                                                                                               22
                          products require – and at the best price. That is                                                           25
                                                                                                                                      16
                          the risk your business has agreed to take on, your
                          ‘appetite’ for risk.                                                                                        8
                                                                                                                                      0
                          The graph shows how many high risk suppliers                 Utilities, Mining                              16
                          respondents believe they have in the supply                     & Quarrying                                          30
                                                                                                                                      46
                          chain. There is little variation in the percentage                        (13)                              23
                                                                                                                                      8
                          of these high risk suppliers by size of business,
                          although there are differences by sector. Some
                                                                                                                                       8
                          sectors clearly demonstrate a greater reliance                                                               0
                          on so‑called ‘risky’ suppliers. The Construction                                                            11
                                                                                       Manufacturing                                           20
                          sector shows that 28% of companies asked in the                       (75)
                                                                                                                                      34
                                                                                                                                      27
                          survey, identified 11% or more of their suppliers as
                                                                                                                                      20
                          high risk.
                                                                                                                                      13
                          The global reach of supply chains, distant sourcing
                                                                                                                                       0
                          of information and pressure to perform in highly               Construction                                 10
                                                                                                                                               20
                          competitive marketplaces, makes it a necessity to                      (30)                                 36
                          include high risk suppliers in the supply chain. In                                                         30
                                                                                                                                      10
                          the Construction sector, for example, one in ten
                          of large businesses rely on high risk suppliers,
                                                                                                                                      10
                          defined in terms of their ability to deliver to price,                                                       0
                          time and quality. Notably, 20% of suppliers are                Wholesale &                                  13
                                                                                          Retail trade                                         23
                          considered to be high risk in the Transport, Storage                     (30)
                                                                                                                                      40
                                                                                                                                      23
                          and Communications sector.
                                                                                                                                      13

                          Today’s quality and accreditation standards are
                                                                                                                                      13
                          strong tools for managing risk – and provide a
                                                                                                                                       0
                          framework for a successful approach. As many             Transport, Storage                                  5
                          companies recognise, however, risk management            & Communications                                   52
                                                                                                                                               22
                                                                                                  (38)                                24
                          can be a hefty in‑house cost to the business.
                                                                                                                                       5


                                                                                                                                       7
                          “The work done by Achilles not only                                                                          0
                                                                                                 Finance                              14
                          enabled us to increase the quality                                         (14)                             21
                                                                                                                                               18
                                                                                                                                      21
                          of our supplier information, but also                                                                       36
                          helped us to reduce costs, risk and
                          improve effectiveness.”
                                                                                                            Mean %
                          Hector Tajahuerce, Enagas
                          Purchasing Director                                       Don’t know       100%   51-99%   11-50%   1-10%            0%




                                                                                                                                           8              9




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 8                                                                                    11/06/2012 13:07
Using information from Achilles helps
                             High risk suppliers                to mitigate risk.

                                                                “Achilles’ BuildingConfidence allows
                                                       5
                                                       2
                                                                us to drive performance improvements
                                                       6
                                                           14   with our supply chain in a way we have
                                                      18
                                                      48        never been able to do before. We are
                                                      20
                                                                able to demonstrate compliance to
                                                       0        our clients by producing PQQ and
                                                       0
                                                       8        audit information that details how we
                                                      15   11
                                                      69        manage and analyse our supply chain.”
                                                      8
                                                                Nigel McKay, Head of Procurement and
                                                       3        Supply Chain, Lend Lease EMEA
                                                       1
                                                       6
                                                      19
                                                           13
                                                      44
                                                      27        Achilles Group Chief Executive, Adrian
                                                                Chamberlain, comments
                                                      10
                                                       0        “Companies are becoming far more
                                                      10
                                                      17   17   vulnerable to supplier failures as they
                                                      40
                                                      23        become more globalised and as they
                                                                seek to offset business complexity
                                                       7
                                                       0        by outsourcing increasingly large
                                                       6
                                                      10
                                                           12   proportions of their activity to third
                                                      60
                                                      17
                                                                parties. Problems occur when a
                                                                company is not on top of its supplier
                                                      11
                                                       3        information. If you recognise you’ve
                                                       8
                                                      29
                                                           20   got high risk elements in the supply
                                                      45        chain, you are in a good position
                                                      5
                                                                to mitigate the effects. Get new
                                                       0
                                                       7
                                                                suppliers vetted properly to reduce
                                                       0
                                                           16   the chances of non delivery on a
                                                      21
                                                      36        contract at an early stage.”
                                                      36



            Nearly half of businesses regards up to 10%
            of suppliers as high risk. 8% believe more
            than half of their suppliers are high risk.




     9




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 9                                                       11/06/2012 13:07
Keeping the plates spinning.
                          Compliance, a driver or facilitator
                          for risk management?
                          With just 5% of businesses seeing the threat of               Many companies choose to offload the mundane
                          litigation as the driver to manage risks effectively,         and time consuming administrative elements of the
                          what is driving effective compliance in the supply            procurement process to a partner they can trust.
                          chain? The rationale for risk management appears              Achilles works with many companies in this way
                          to be more closely linked to audit evidence and               – we have experience, understand the processes
                          the need to gain sector or industry‑wide quality              and can ensure the audit boxes are ticked as part
                          accreditation status. The research shows that this            of the service.
                          is consistent across all sectors. Quality standards
                          and audit, rather than business best practice or              Audits are seen as benefitting the continuous
                          proactive supply chain management, appear to be               improvement cycle – supporting both the
                          the real drivers for risk management.                         procurement team and the supplier to track and
                                                                                        improve performance. Most suppliers are willing to
                          Compliance is a ‘must have’ in the supply chain.              pay for the auditors to come in, conduct their checks
                          More than 30% of all businesses have to provide               against the agreed quality models – and give out the
                          evidence of compliance for all their sourcing                 certificates.
                          activities. This evidence is required from across
                          the spectrum of quality, finance, health and safety,          Those businesses who cared most about their
                          data security and corporate social responsibility.            reputation and brand, also asked for the evidence to
                          Recognising the importance of splitting what                  support compliance, as part of all sourcing events.
                          you have to do simply for compliance, away from               This demonstrates a clear link between larger
                          what you could achieve in the area of proactive               businesses and brand building supplier management
                          management and continuous improvement in the                  – versus the narrow focus of audit and compliance as
                          supply chain, is key.                                         a ‘necessary evil’ and administrative burden.



                                         Areas where businesses have to retain evidence of compliance,
                                            and there is a requirement for suppliers to undergo audits
                                                                                                                                  88
                                                         Quality                                                                  74    84
                                                                                                                                  83
                                                       Financial                                                                  60    72
                                                                                                                                  83    78
                                            Health & Safety                                                                       65
                                                                                                                                   80 78
                                                Environment                                                                        63
                                                                                                                                   73 70
                                               Data Security                                                                       51

                                                       Insurance                                                                   72
                                                                                                                                    0

                                      Business Continuity                                                                          70 77
                                                                                                                                   54
                          The UK Bribery Act 2010/US                                                                               66
                         Foreign Corrupt Practices Act                                                                              0
                                                           CSR                                                                     58 75
                                                                                                                                   44
                                              European Law                                                                         49
                                                                                                                                    0
                                                           None                                                                     6
                                                                                                                                    0
                                                                                      % of those collecting evidence
                                                               Require suppliers to   who require audits. There was no
                                 Collect evidence              undergo audits         meaningful variation by sector size.




                                                                                                                                                10                 1




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 10                                                                                            11/06/2012 13:07
Providing evidence of compliance is also linked                        Those businesses who selected ‘the risk to the
                          to the size of the business. Our research findings                     reputation of your business’ as the most important
                          show that 47% of the largest businesses in terms                       potential procurement risk, had to provide
                          of turnover (£1 billion +), had to provide evidence                    compliance for all their sourcing events. This
                          of compliance for all of their sourcing events. 33%                    compares to only 21% of those who considered
                          of businesses reported that their suppliers had                        ‘financial failure’ to be their biggest risk.
                          to pay for audits, although this was less common
                          amongst the largest organisations and there was
                          little variation by sector. In 35% of cases, the cost
                          was shared between the buyer and the vendor –
                          this was less common amongst companies with
                          smaller turnovers.



                                                                 Compliance and sourcing events

                                                                 % of sourcing events where companies have to
                                                                 provide evidence of compliance, by sector

                                                       Finance    7                             57                            7          14            14
                                      Transport, Storage &
                                         Communications           8              26                  13                      39                        13

                                        Wholesale & Retail             17                  23               17                     37                           7

                                                Construction      7              27                   20                     23                   23

                                              Manufacturing        11                 27                  16                      32                   15

                              Utilities, Mining, Quarrying                 23                   30                      15                   23             8



                          33% of businesses reported that their                                  57% of those who selected ‘the risk to the
                          suppliers had to pay for audits. This                                  reputation of your business’ as the most
                          was less common amongst the largest                                    important potential risk, had to provide
                          organisations and showed little variation                              compliance for all their sourcing events.
                          by sector.
                                                                                                 This compares to only 21% of those who
                          In 35% of cases the cost of audit was                                  considered ‘financial failure’ as their
                          shared between the buyer and the vendor.                               biggest risk.
                          This was less common among smaller
                          companies.
                                                                 % of sourcing events where companies have to
                                                                 provide evidence of compliance, by size

                                                  £1 Billion +                  37                    12                           47                           4

                               £251 million ‑ £999 million            13         17                  23                           36                    11

                                £26 million ‑ £250 million        10                  33                       13                 28               14

                                     Less than £25 million              18                      33                  7                   34                  7



                                                                                                                    One third (32%) of businesses
                                                                                                                    stated they had to provide
                                                                                                                    evidence of compliance for all
                                       0%              1-50%       51-99%             100%                100%      sourcing events.




     11




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 11                                                                                                                11/06/2012 13:07
Pre‑qualifying suppliers is the key to
                          effective risk management
                          Across the board, 71% of businesses rated the             The research also examines the levels of risk
                          pre‑qualifying of suppliers as ‘very important’ –         management that are driven directly by the need
                          although for some businesses it’s more important          for compliance with law or as evidence for an audit.
                          than others. For larger businesses, with turnovers        Some risk management is geared to ensuring that
                          above £1 billion, 88% rate it as ‘very important’.        the company brand and reputation are protected
                                                                                    and not left exposed as a result of the supply chain.




                                                         Importance of supplier pre-qualification

                                                           Sector

                              All businesses                           24                               71

                              Finance                                    29                            57

                              Transport, Storage &                     24                                   74
                              Communication
                                                                       23                               70
                              Wholesale & Retail

                              Construction                              27                                   73

                              Manufacturing                            23                          73

                              Utilities, Mining, Quarrying                    38                                   62




                                                           Turnover

                              All businesses                           24                               71

                              Less than £25 million                           39                                    61

                              £26 million ‑ £250 million               25                               69

                              £251 million ‑ £999 million               27                                   71

                              More than £1 billion                12                                   88


                                                             0%                                50%                                 100%



                                      Of no importance         Fairly unimportant   Fairly important              Very important




                                                                                                                                            12                 1




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 12                                                                                        11/06/2012 13:07
Pre‑qualify before tendering
                          Half of all the businesses we talked to, pre‑qualify        management as a proactive business improvement
                          more than half of their sourcing events before              tool, rather than a need to simply pass muster in
                          issuing a tender. On average, this shows that               audit, or the knee‑jerk reaction of ‘get it done at any
                          businesses pre‑qualify 58% of individual sourcing           cost’. A comment by a Manufacturing respondent
                          events. This is notable in the Transport Storage            highlights a death on the premises as a reason
                          and Communications, and Manufacturing sectors,              not to use a supplier any more. The partnership
                          where 100% pre‑qualification of suppliers is                approach builds a solid mutual understanding that
                          expected in 38% and 32% of cases, respectively.             helps to protect the brand and reputation of the
                                                                                      company.
                          Irrespective of sector, it can be argued that
                          pre‑qualification is becoming ‘business as usual’           The fact that 95% of businesses rate the
                          for the procurement teams we spoke to – as                  pre‑qualification of suppliers as important
                          the real benefits of pre‑qualification as a risk            suggests that they place greater importance on
                          management tool are recognised. Strategic and               managing risk for the business. Pre‑qualification
                          forward thinking procurement teams appear to                can give you a context and history of a supplier
                          manage suppliers in terms of building long term             and their previous performance. For example, 43%
                          partnerships. These deep and enduring business              of those surveyed, know that something has gone
                          relationships help the organisation to focus on a           wrong with a high risk supplier in the past – so risk
                          few key suppliers that are trusted for their reliability,   management is key. The more you know, the better
                          quality and risk reduction for the company overall.         you can run your business.

                          These relationships link back to company vision
                          and long term plans ‑ seeing supply chain




                                                          Sourcing events and pre-qualification

                                                                                                   0                 0% Pre-qualified
                            Utilities, Mining                                                     67                 1-50% Pre-qualified
                               & Quarrying                                                        34    47           50-99% Pre-qualified
                                                                                                   0                 100% Pre-qualified

                                                                                                   7                  Mean %
                                                                                                  33
                             Manufacturing                                                        18    63
                                                                                                  32

                                                                                                   0
                                                                                                  35
                               Construction                                                       43    64
                                                                                                  14

                                                                                                   15
                               Wholesale &                                                         34
                                                                                                        48       50% of businesses
                                Retail trade                                                       30
                                                                                                   15
                                                                                                                 pre-qualify over
                                                                                                                 half their sourcing
                                                                                                   5
                             Transport,                                                                          events prior to
                                                                                                  28
                             Storage &                                                            25    67       issuing the tender.
                         Communications                                                           38
                                                                                                                 On average,
                                                                                                  7
                                                                                                                 businesses
                                                                                                  35
                                      Finance                                                     14    49       pre-qualify 58% of
                                                                                                  21             all sourcing events.




     13




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 13                                                                                            11/06/2012 13:07
The cost of pre‑qualification
                          For many procurement teams, recognition of             the UK and Europe, by taking away the burdens of
                          how important it is to pre‑qualify suppliers has       administration, audit and compliance. Outsourcing
                          to be secondary to the costs associated with           this part of the procurement process can be cost
                          this part of the procurement process. As an            effective for many businesses. It can also help to
                          effective way to manage risk and protect your          avoid the pitfalls associated with maintaining up
                          business, pre‑qualification is widely agreed to        to date information and data sets – as well as the
                          be business best practice. However, it is time         age‑old problem of managing a supply chain. By
                          consuming and expensive for an in‑house team           drawing on multiple databases. This is, in itself, a
                          to manage. At Achilles, we support businesses in       very risky business.



                          Data quality as a business imperative
                          Chris Hornung, Group Operations Director at            Procurement teams are busy people. Across all
                          Achilles explains: “We have experience of working      sectors, the median number of sourcing events
                          with 750 of the world’s largest organisations. The     managed by each member of the team is 25.
                          general perception of new customers is that their      The figure is higher in the Wholesale and Retail
                          data is of good quality, however once we start         sector – with 50 events a year – and lower across
                          the processes of contacting their supply chain we      Manufacturing and Transport sectors – with 20 in
                          often find 50% of supplier contact information is      each.
                          out of date or incorrect.”
                                                                                 The companies we asked, pre‑qualify on average
                          There are costs associated with poor data ‑ one        58% of these sourcing events. The proportion is
                          of the most expensive being that poor business         lowest in the Wholesale and Retail sector – with on
                          decisions are made on a shaky foundation of            average 48% pre‑qualified. Businesses devoted
                          unsound supplier information. If the data is not       on average 4.9 days to pre‑qualification activities
                          fit for purpose, there might be a requirement          per sourcing event – although this is higher in
                          to invest in IT projects to build new systems or       the Manufacturing (5.7) and Transport, Storage
                          databases. This too, is expensive and requires         and Communications (5.5) sectors and lower in
                          an extensive and on‑going requirement for              Construction (2.7) and Wholesale and Retail (2.4).
                          staff training and IT support. Again, the pain
                          can be alleviated by outsourcing to experts.           Interestingly, businesses with one supplier
                          Achilles collects, qualifies, evaluates and            database devoted 3.1 days on average,
                          monitors suppliers on behalf of buyers worldwide       whereas those companies running multiple
                          which streamlines the procurement process              databases devoted 6.9 days – more than twice
                          considerably.                                          as much time to pre-qualify a supplier.




                                                “I knew there would be a cost benefit to the industry
                                                in providing this service. We alone saved a massive
                                                £500,000 within the first year of joining the scheme –
                                                excellent is the only word for it.”
                                                Nigel McKay, Head of Procurement and
                                                Supply Chain, Lend Lease EMEA




                                                                                                                                        14                 1




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 14                                                                                    11/06/2012 13:07
Pre‑qualification, a pre‑requisite for
                          procurement best practice ‑ confirmed
                          Conclusions
                          Using the research findings as a guide, we have             Best Pract
                          drawn some conclusions around the importance                Procurem ice
                          of pre‑qualifying suppliers in achieving best                        ent Teams
                                                                                                        :
                          practice procurement. Irrespective of industry
                          sector or turnover size, businesses with effective        ❏
                                                                                    ✓  U se one d
                                                                                                    atabase
                          and efficient procurement have teams that are
                          working in specific ways to achieve their successful      ❏
                                                                                    ✓  See pre-qu
                                                                                                    a
                          outcomes.                                                   of supplie lification
                                                                                                   rs
                                                                                      business as a
                          Typically, these procurement teams are strategic                        imperativ
                                                                                                            e
                          and forward thinking in their approaches to
                          managing risk. They see pre‑qualification as
                                                                                   ❏
                                                                                  ✓ Con
                                                                                          duct m
                          a pre‑requisite to managing and mitigating                 sourcing ore
                                                                                                 events
                          those risks that are inherent in supply chain
                          management. The teams with the best outcomes,          ❏✓ S pe n
                                                                                           d le ss
                          tend to undertake a greater number of sourcing            each sourc time on
                          events, but devote less time to pre‑qualification                      ing event
                          activities. This is logical when the amount of ‘up
                          front’ work they have done to pre‑qualify their
                          suppliers is considered.                               their information. The businesses with one supplier
                                                                                 database devote fewer days on average, to
                          Their ability to recognise risk in the supply chain,
                                                                                 pre‑qualification activities than businesses with
                          manage it to limit the impact and potential damage
                                                                                 multiple databases. Knowing that the data is
                          to the business, brand and reputation is a key
                                                                                 accurate and up to date also helps procurement
                          benefit of pre‑qualifying suppliers – and is clearly
                                                                                 teams to proactively manage their sourcing events
                          demonstrated by the professional procurement
                                                                                 with confidence and professionalism. In turn, this
                          teams we support every day at Achilles.
                                                                                 translates into tangible business best practice in
                          Another indication of successful procurement           procurement.
                          teams, is their use of a single database to house




     15




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 15                                                                                   11/06/2012 13:07
Chevron uses Achilles’ services for its supplier pre-qualification. As part of the industry
                          community known as FPAL, there are benefits of membership for Chevron, as
                          Iveta Geidane, Contracts Advisor, explained:

                          “Chevron’s FPAL registration has directly contributed to a reduction of contract risk
                          for the business. FPAL registration and profiling ensures that an element of screening
                          and pre-qualification is conducted, before a Supplier is considered by Chevron. In
                          addition, the Verify process validates the working practices of Suppliers and is an
                          evidence-based assessment. FPAL Verify saves Chevron both the time and cost
                          associated with supplier management and ensures that the Supplier’s internal
                          systems are effective”.




                          “Chevron are committed to FPAL Verify and it is embedded into their Contractor
                          HES Management Process (CHESM). Over the years, Chevron’s Business Unit have
                          fully adopted Verify to ensure that their supply chain aligns with Chevrons values
                          and tenets of operation. Chevron have gradually concluded that Verify is the most
                          effectual means of assuring credibility of supplier management systems, potentially
                          leading to superior HSE performance”.
                          Iveta Geidane, Contracts Advisor, Chevron Upstream Europe




                                  Achilles Group Limited
                                  30 Park Gate, Milton Park, Abingdon, Oxon, OX14 4SH, UK
                                  T: +44 (0)1235 820813 F: +44 (0)1235 821093 E: marketing@achilles.com W: www.achilles.com
                                  001‑02/2012




T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 16                                                                          11/06/2012 13:07

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Achilles Research: Supply Chain Risk - A Study of Procurement in the UK

  • 1. Research summary Supply Chain Risk A Study of Procurement in the UK services for professional procurement www.achilles.com T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 1 11/06/2012 13:07
  • 2. The research Earlier this year, Achilles commissioned an independent research project into the perceptions of risk and attitudes to supplier pre‑qualification amongst UK procurement professionals. As a provider of information and services that help companies manage global supply chains, we wanted to find out more about the importance procurement professionals place on pre‑qualifying suppliers and the risks they need to manage. To gauge the views around pre‑qualification of suppliers, amongst procurement professionals from a number of business sectors, Achilles Group commissioned IFF to undertake the research. During December 2011 and January 2012, IFF interviewed 200 businesses by telephone, each with more than 250 employees. They asked a range of questions to procurement professionals across the six industry sectors listed below. The interviews in each sector were then weighted to be representative of the number of UK businesses with similar numbers of employees in that sector. This aimed to give the broadest possible picture of attitudes to pre‑qualification by sector. The sectors selected for the project were: ■ Utilities, Mining and Quarrying ■ Manufacturing ■ Construction ■ Wholesale and Retail ■ Transport, Storage and Communications IFF Research ■ Finance By asking companies from different industry sectors and annual turnover to contribute, we Established in 1965, IFF Research is can compare and contrast their views and the one of the largest independent research priorities they attach to risk. In turn, we aim to organisations in the UK. It specialises in draw conclusions about attitudes to risk, supply researching public policy, business and chain management, and best practice business marketing issues in the UK and overseas, approaches. focusing on both private and public sectors. It has particular expertise in financial services, branding and communication, business and enterprise, learning and skills and employment and benefits; its team also concentrates on healthcare, the environment and the third sector. 3 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 2 11/06/2012 13:07
  • 3. Foreword At Achilles we see our role as providing services that help companies to remove some of the more time consuming elements of the procurement process. Our services help companies to identify, evaluate and monitor suppliers throughout their global supply chains and enable them to identify and effectively manage supply chain risk. We recognise that risk, and managing it, is playing an increasingly large part in the world of supply chains. This research provided a rare opportunity to explore the ways that companies look at pre‑qualifying suppliers and the risks associated with supply chain management. For example, what do procurement professionals perceive to be the We wanted to explore the ways that companies biggest risks they face? How do they manage risk look at risk in different sectors, their appetite for and mitigate its impacts? it, and the drivers for managing it. The research we commissioned provides an insight into what CPOs are worrying about, their greatest perceived risks, how big a risk is ‘too big’ and whether the business sector and size, influences this. We also wanted to assess the amount of risk management that is driven by the need for compliance with the law, or by the less tangible variables of brand and reputational management for that organisation. I trust that you will find this report interesting. Adrian Chamberlain, Achilles Group CEO Contents The research............................................................2 Pre-qualifying suppliers is the key to IFF Research............................................................2 effective risk management....................................12 Foreword..................................................................3 Pre-qualify before tendering....................................... 13 Global supply chain management. The cost of pre‑qualification....................................... 14 A balancing act........................................................4 Data quality as a business imperative........................ 14 When it goes wrong....................................................... 5 Pre‑qualification, a pre-requisite for What are CPOs worrying about?.............................6 procurement best practice - confirmed................15 How great a risk is too great a risk? .......................8 Conclusions................................................................. 15 Keeping the plates spinning. Compliance, a driver or facilitator for risk management?............................................10 3 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 3 11/06/2012 13:07
  • 4. Global supply chain management. A balancing act Global supply chain management is not for “It is about getting the the faint hearted. Against a backdrop of highly competitive, high risk, global supply chains – product to the marketplace. dependent on tight margins and fast paced It starts with the sourcing turnaround ‑ there are inherent risks in doing of the raw materials business. and then right through This is borne out by our research, which found some interesting views and attitudes to high risk to the marketplace. If suppliers in the supply chain. This is illustrated by anything goes wrong with the fact that 43% of businesses were aware of a the process it can be high risk supplier failing to meet their compliance requirements. Yet whatever level of risk the catastrophic.” supplier posed for the business, they were seen as Wholesale and Retail sector necessary links in the supply chain, and as such, managed as part of ‘business as usual’. A similar picture emerged across all businesses we talked to. There was no significant difference between sectors or turnover of the businesses either, all “A supplier was fraudulently faced similar risks across their own supply chains. identifying parts. They went to jail as a result. Our company had to reaccredit our suppliers.” Transport, Storage and Communications sector 4 5 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 4 11/06/2012 13:07
  • 5. “The use of substandard When it goes wrong labour by (supplier) Supply chain management can be argued to have caused damage to been a key contributor to the negative impact our brand reputation.” on BP’s reputation in the Gulf of Mexico. The contractor responsible wasn’t BP, but it was the BP Transport, Storage and brand, reputation and senior leadership team that Communications sector paid the price. Many household names today have suffered the ignominy of reputational damage as well as a large hit on their share prices, as a result of ineffectual “Because we are a water supplier management. company, quality is an Clothing manufacturing has come in for serious issue. We could be sued scrutiny in recent years, following the exposure if something goes wrong of practices in the factories used by low cost manufacturers selling clothes in the UK. Primark’s and then there is the issues around child labour and low wages for problem of bad publicity.” workers in factories in the Far East had the potential to damage their brand and reputation. Utilities, Mining and Quarrying Supply chain management is playing an sector increasingly important part in how businesses see their brand equity management. The Olympic Games London 2012 is not exempt from questionable supply chain management practices. A recent report by the Playfair scheme has identified sweatshop conditions at factories in Guangdong Province in China, contracted to provide mascots and badges for the London 2012 Olympics. A combination of low wages, excessive working hours, child labour and dangerous health and safety conditions, alongside audit fraud, are now under investigation. All serve to impact on the brand and reputation of the Olympic movement. 5 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 5 11/06/2012 13:07
  • 6. What are CPOs worrying about? A recurring theme in our research is the vital part We found some variation in views on the next played by risk management. two big areas for risk depending on company size. Irrespective of sector, large companies are Most businesses have a lot of risks to manage concerned to protect their brand and reputation every day – minimising exposure to these is crucial from damage caused by ‘weak or high risk links to business survival and success. For many in the chain’. Smaller companies with 250+ procurement professionals, the risk management employees have concerns closer to home – and ‘game’ has new rules and a playing field that are focusing their energies on financial survival. is complex and global. Traditionally the risks of supply management did not have the same Nearly half (48%) of companies we talked to are dependency on a procurement team to get it right. concerned about the financial failure of suppliers’ But that’s changed now – and our findings see the businesses and put it in the top three risks they role of procurement teams in risk management and have to manage. In addition, 33% list the financial mitigation, as ‘part of the day job’. failure of their own business in their risk top three. In the Construction industry, 30% of those 40% of businesses said that their most important surveyed put failure of their own business as the risk to manage through the procurement process number one risk. With the recent recession and the is the “failure of a supplier to deliver in terms of current economic climate being unforgiving, this quality, timeliness or cost”. This is consistent for concern has become acute. 31% of Construction all sizes of organisation and across all the sectors businesses surveyed with 250+ employees and we surveyed, with 75% of respondents putting this turnover of less than £25 million, see their own in their ‘top three’ risks to manage. There is an financial failure as the most important risk. obvious and immediate impact on the business if the supply chain fails – in terms of product quality, timing or service delivery. Most important risks to manage (%) Failure of a supplier to deliver 40 the required service in terms of quality, timeliness or cost 75 The financial failure of a supplier 12 (ceases trading) 48 The risk to the reputation 13 of your business 38 The financial failure of your 16 business (ceases trading) 33 The failure of a supplier to meet 12 its Health & Safety obligations 32 The risk that your business is 5 exposed to litigation 24 Selected as most important risk Selected in top 3 most important risks 6 7 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 6 11/06/2012 13:07
  • 7. Achilles Group Chief Executive, Adrian Chamberlain, comments “If a significant supplier of a key component or service fails to come up to the mark, a business can be damaged beyond product delivery. There is the potential for brand and reputational damage – and the ensuing impact on share price performance. From an industrial accident with a worker killed, to a subcontractor polluting a local river or using child or illegal immigrant labour in the UK or Jakarta, there are obvious and immediate impacts on reputation and brand.” This view is backed up with sector commentary, Amongst the larger businesses with turnover including: “We use subcontractors a lot in the between £250 and £999 million, 23% of Construction industry – and our supply chain is organisations put the most important risk international. In the last two years it feels as if we’re faced as managing their brand and reputation. just one small step away from bankruptcy.” Effective and proactive supply chain management is therefore seen as an investment Construction sector in brand and reputation. Most important risks to manage by sector (%) 43 Finance (13) Failure to deliver service 42 Transport, Storage & 40 Communications (75) in terms of quality, 20 Wholesale & Retail (30) timeliness or cost 44 Construction (30) 15 Manufacturing (38) Utilities, Mining & Quarrying (14) 21 11 Financial failure 17 (business ceases trading) 30 13 15 14 16 Risk to reputation 10 of business 20 9 38 0 13 Failure of supplier to meet 17 its H&S obligations 17 9 15 7 11 Financial failure 10 (supplier ceases trading) 13 15 8 14 5 Business exposed 7 to litigation 0 4 0 7 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 7 11/06/2012 13:07
  • 8. How great a risk is too great a risk? Complex, global supply chains, are synonymous with risk. A typical business will have a range of risk levels associated with suppliers – from safe, low risk providers, to something far less Medium risk suppliers visible or manageable at the far reaches of the chain. High risk suppliers may be overseas and 10 without the same commitment to compliance 0 or quality standards of the UK and Europe. Yet, 11 you need them to deliver the components your All businesses 39 22 products require – and at the best price. That is 25 16 the risk your business has agreed to take on, your ‘appetite’ for risk. 8 0 The graph shows how many high risk suppliers Utilities, Mining 16 respondents believe they have in the supply & Quarrying 30 46 chain. There is little variation in the percentage (13) 23 8 of these high risk suppliers by size of business, although there are differences by sector. Some 8 sectors clearly demonstrate a greater reliance 0 on so‑called ‘risky’ suppliers. The Construction 11 Manufacturing 20 sector shows that 28% of companies asked in the (75) 34 27 survey, identified 11% or more of their suppliers as 20 high risk. 13 The global reach of supply chains, distant sourcing 0 of information and pressure to perform in highly Construction 10 20 competitive marketplaces, makes it a necessity to (30) 36 include high risk suppliers in the supply chain. In 30 10 the Construction sector, for example, one in ten of large businesses rely on high risk suppliers, 10 defined in terms of their ability to deliver to price, 0 time and quality. Notably, 20% of suppliers are Wholesale & 13 Retail trade 23 considered to be high risk in the Transport, Storage (30) 40 23 and Communications sector. 13 Today’s quality and accreditation standards are 13 strong tools for managing risk – and provide a 0 framework for a successful approach. As many Transport, Storage 5 companies recognise, however, risk management & Communications 52 22 (38) 24 can be a hefty in‑house cost to the business. 5 7 “The work done by Achilles not only 0 Finance 14 enabled us to increase the quality (14) 21 18 21 of our supplier information, but also 36 helped us to reduce costs, risk and improve effectiveness.” Mean % Hector Tajahuerce, Enagas Purchasing Director Don’t know 100% 51-99% 11-50% 1-10% 0% 8 9 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 8 11/06/2012 13:07
  • 9. Using information from Achilles helps High risk suppliers to mitigate risk. “Achilles’ BuildingConfidence allows 5 2 us to drive performance improvements 6 14 with our supply chain in a way we have 18 48 never been able to do before. We are 20 able to demonstrate compliance to 0 our clients by producing PQQ and 0 8 audit information that details how we 15 11 69 manage and analyse our supply chain.” 8 Nigel McKay, Head of Procurement and 3 Supply Chain, Lend Lease EMEA 1 6 19 13 44 27 Achilles Group Chief Executive, Adrian Chamberlain, comments 10 0 “Companies are becoming far more 10 17 17 vulnerable to supplier failures as they 40 23 become more globalised and as they seek to offset business complexity 7 0 by outsourcing increasingly large 6 10 12 proportions of their activity to third 60 17 parties. Problems occur when a company is not on top of its supplier 11 3 information. If you recognise you’ve 8 29 20 got high risk elements in the supply 45 chain, you are in a good position 5 to mitigate the effects. Get new 0 7 suppliers vetted properly to reduce 0 16 the chances of non delivery on a 21 36 contract at an early stage.” 36 Nearly half of businesses regards up to 10% of suppliers as high risk. 8% believe more than half of their suppliers are high risk. 9 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 9 11/06/2012 13:07
  • 10. Keeping the plates spinning. Compliance, a driver or facilitator for risk management? With just 5% of businesses seeing the threat of Many companies choose to offload the mundane litigation as the driver to manage risks effectively, and time consuming administrative elements of the what is driving effective compliance in the supply procurement process to a partner they can trust. chain? The rationale for risk management appears Achilles works with many companies in this way to be more closely linked to audit evidence and – we have experience, understand the processes the need to gain sector or industry‑wide quality and can ensure the audit boxes are ticked as part accreditation status. The research shows that this of the service. is consistent across all sectors. Quality standards and audit, rather than business best practice or Audits are seen as benefitting the continuous proactive supply chain management, appear to be improvement cycle – supporting both the the real drivers for risk management. procurement team and the supplier to track and improve performance. Most suppliers are willing to Compliance is a ‘must have’ in the supply chain. pay for the auditors to come in, conduct their checks More than 30% of all businesses have to provide against the agreed quality models – and give out the evidence of compliance for all their sourcing certificates. activities. This evidence is required from across the spectrum of quality, finance, health and safety, Those businesses who cared most about their data security and corporate social responsibility. reputation and brand, also asked for the evidence to Recognising the importance of splitting what support compliance, as part of all sourcing events. you have to do simply for compliance, away from This demonstrates a clear link between larger what you could achieve in the area of proactive businesses and brand building supplier management management and continuous improvement in the – versus the narrow focus of audit and compliance as supply chain, is key. a ‘necessary evil’ and administrative burden. Areas where businesses have to retain evidence of compliance, and there is a requirement for suppliers to undergo audits 88 Quality 74 84 83 Financial 60 72 83 78 Health & Safety 65 80 78 Environment 63 73 70 Data Security 51 Insurance 72 0 Business Continuity 70 77 54 The UK Bribery Act 2010/US 66 Foreign Corrupt Practices Act 0 CSR 58 75 44 European Law 49 0 None 6 0 % of those collecting evidence Require suppliers to who require audits. There was no Collect evidence undergo audits meaningful variation by sector size. 10 1 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 10 11/06/2012 13:07
  • 11. Providing evidence of compliance is also linked Those businesses who selected ‘the risk to the to the size of the business. Our research findings reputation of your business’ as the most important show that 47% of the largest businesses in terms potential procurement risk, had to provide of turnover (£1 billion +), had to provide evidence compliance for all their sourcing events. This of compliance for all of their sourcing events. 33% compares to only 21% of those who considered of businesses reported that their suppliers had ‘financial failure’ to be their biggest risk. to pay for audits, although this was less common amongst the largest organisations and there was little variation by sector. In 35% of cases, the cost was shared between the buyer and the vendor – this was less common amongst companies with smaller turnovers. Compliance and sourcing events % of sourcing events where companies have to provide evidence of compliance, by sector Finance 7 57 7 14 14 Transport, Storage & Communications 8 26 13 39 13 Wholesale & Retail 17 23 17 37 7 Construction 7 27 20 23 23 Manufacturing 11 27 16 32 15 Utilities, Mining, Quarrying 23 30 15 23 8 33% of businesses reported that their 57% of those who selected ‘the risk to the suppliers had to pay for audits. This reputation of your business’ as the most was less common amongst the largest important potential risk, had to provide organisations and showed little variation compliance for all their sourcing events. by sector. This compares to only 21% of those who In 35% of cases the cost of audit was considered ‘financial failure’ as their shared between the buyer and the vendor. biggest risk. This was less common among smaller companies. % of sourcing events where companies have to provide evidence of compliance, by size £1 Billion + 37 12 47 4 £251 million ‑ £999 million 13 17 23 36 11 £26 million ‑ £250 million 10 33 13 28 14 Less than £25 million 18 33 7 34 7 One third (32%) of businesses stated they had to provide evidence of compliance for all 0% 1-50% 51-99% 100% 100% sourcing events. 11 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 11 11/06/2012 13:07
  • 12. Pre‑qualifying suppliers is the key to effective risk management Across the board, 71% of businesses rated the The research also examines the levels of risk pre‑qualifying of suppliers as ‘very important’ – management that are driven directly by the need although for some businesses it’s more important for compliance with law or as evidence for an audit. than others. For larger businesses, with turnovers Some risk management is geared to ensuring that above £1 billion, 88% rate it as ‘very important’. the company brand and reputation are protected and not left exposed as a result of the supply chain. Importance of supplier pre-qualification Sector All businesses 24 71 Finance 29 57 Transport, Storage & 24 74 Communication 23 70 Wholesale & Retail Construction 27 73 Manufacturing 23 73 Utilities, Mining, Quarrying 38 62 Turnover All businesses 24 71 Less than £25 million 39 61 £26 million ‑ £250 million 25 69 £251 million ‑ £999 million 27 71 More than £1 billion 12 88 0% 50% 100% Of no importance Fairly unimportant Fairly important Very important 12 1 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 12 11/06/2012 13:07
  • 13. Pre‑qualify before tendering Half of all the businesses we talked to, pre‑qualify management as a proactive business improvement more than half of their sourcing events before tool, rather than a need to simply pass muster in issuing a tender. On average, this shows that audit, or the knee‑jerk reaction of ‘get it done at any businesses pre‑qualify 58% of individual sourcing cost’. A comment by a Manufacturing respondent events. This is notable in the Transport Storage highlights a death on the premises as a reason and Communications, and Manufacturing sectors, not to use a supplier any more. The partnership where 100% pre‑qualification of suppliers is approach builds a solid mutual understanding that expected in 38% and 32% of cases, respectively. helps to protect the brand and reputation of the company. Irrespective of sector, it can be argued that pre‑qualification is becoming ‘business as usual’ The fact that 95% of businesses rate the for the procurement teams we spoke to – as pre‑qualification of suppliers as important the real benefits of pre‑qualification as a risk suggests that they place greater importance on management tool are recognised. Strategic and managing risk for the business. Pre‑qualification forward thinking procurement teams appear to can give you a context and history of a supplier manage suppliers in terms of building long term and their previous performance. For example, 43% partnerships. These deep and enduring business of those surveyed, know that something has gone relationships help the organisation to focus on a wrong with a high risk supplier in the past – so risk few key suppliers that are trusted for their reliability, management is key. The more you know, the better quality and risk reduction for the company overall. you can run your business. These relationships link back to company vision and long term plans ‑ seeing supply chain Sourcing events and pre-qualification 0 0% Pre-qualified Utilities, Mining 67 1-50% Pre-qualified & Quarrying 34 47 50-99% Pre-qualified 0 100% Pre-qualified 7 Mean % 33 Manufacturing 18 63 32 0 35 Construction 43 64 14 15 Wholesale & 34 48 50% of businesses Retail trade 30 15 pre-qualify over half their sourcing 5 Transport, events prior to 28 Storage & 25 67 issuing the tender. Communications 38 On average, 7 businesses 35 Finance 14 49 pre-qualify 58% of 21 all sourcing events. 13 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 13 11/06/2012 13:07
  • 14. The cost of pre‑qualification For many procurement teams, recognition of the UK and Europe, by taking away the burdens of how important it is to pre‑qualify suppliers has administration, audit and compliance. Outsourcing to be secondary to the costs associated with this part of the procurement process can be cost this part of the procurement process. As an effective for many businesses. It can also help to effective way to manage risk and protect your avoid the pitfalls associated with maintaining up business, pre‑qualification is widely agreed to to date information and data sets – as well as the be business best practice. However, it is time age‑old problem of managing a supply chain. By consuming and expensive for an in‑house team drawing on multiple databases. This is, in itself, a to manage. At Achilles, we support businesses in very risky business. Data quality as a business imperative Chris Hornung, Group Operations Director at Procurement teams are busy people. Across all Achilles explains: “We have experience of working sectors, the median number of sourcing events with 750 of the world’s largest organisations. The managed by each member of the team is 25. general perception of new customers is that their The figure is higher in the Wholesale and Retail data is of good quality, however once we start sector – with 50 events a year – and lower across the processes of contacting their supply chain we Manufacturing and Transport sectors – with 20 in often find 50% of supplier contact information is each. out of date or incorrect.” The companies we asked, pre‑qualify on average There are costs associated with poor data ‑ one 58% of these sourcing events. The proportion is of the most expensive being that poor business lowest in the Wholesale and Retail sector – with on decisions are made on a shaky foundation of average 48% pre‑qualified. Businesses devoted unsound supplier information. If the data is not on average 4.9 days to pre‑qualification activities fit for purpose, there might be a requirement per sourcing event – although this is higher in to invest in IT projects to build new systems or the Manufacturing (5.7) and Transport, Storage databases. This too, is expensive and requires and Communications (5.5) sectors and lower in an extensive and on‑going requirement for Construction (2.7) and Wholesale and Retail (2.4). staff training and IT support. Again, the pain can be alleviated by outsourcing to experts. Interestingly, businesses with one supplier Achilles collects, qualifies, evaluates and database devoted 3.1 days on average, monitors suppliers on behalf of buyers worldwide whereas those companies running multiple which streamlines the procurement process databases devoted 6.9 days – more than twice considerably. as much time to pre-qualify a supplier. “I knew there would be a cost benefit to the industry in providing this service. We alone saved a massive £500,000 within the first year of joining the scheme – excellent is the only word for it.” Nigel McKay, Head of Procurement and Supply Chain, Lend Lease EMEA 14 1 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 14 11/06/2012 13:07
  • 15. Pre‑qualification, a pre‑requisite for procurement best practice ‑ confirmed Conclusions Using the research findings as a guide, we have Best Pract drawn some conclusions around the importance Procurem ice of pre‑qualifying suppliers in achieving best ent Teams : practice procurement. Irrespective of industry sector or turnover size, businesses with effective ❏ ✓ U se one d atabase and efficient procurement have teams that are working in specific ways to achieve their successful ❏ ✓ See pre-qu a outcomes. of supplie lification rs business as a Typically, these procurement teams are strategic imperativ e and forward thinking in their approaches to managing risk. They see pre‑qualification as ❏ ✓ Con duct m a pre‑requisite to managing and mitigating sourcing ore events those risks that are inherent in supply chain management. The teams with the best outcomes, ❏✓ S pe n d le ss tend to undertake a greater number of sourcing each sourc time on events, but devote less time to pre‑qualification ing event activities. This is logical when the amount of ‘up front’ work they have done to pre‑qualify their suppliers is considered. their information. The businesses with one supplier database devote fewer days on average, to Their ability to recognise risk in the supply chain, pre‑qualification activities than businesses with manage it to limit the impact and potential damage multiple databases. Knowing that the data is to the business, brand and reputation is a key accurate and up to date also helps procurement benefit of pre‑qualifying suppliers – and is clearly teams to proactively manage their sourcing events demonstrated by the professional procurement with confidence and professionalism. In turn, this teams we support every day at Achilles. translates into tangible business best practice in Another indication of successful procurement procurement. teams, is their use of a single database to house 15 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 15 11/06/2012 13:07
  • 16. Chevron uses Achilles’ services for its supplier pre-qualification. As part of the industry community known as FPAL, there are benefits of membership for Chevron, as Iveta Geidane, Contracts Advisor, explained: “Chevron’s FPAL registration has directly contributed to a reduction of contract risk for the business. FPAL registration and profiling ensures that an element of screening and pre-qualification is conducted, before a Supplier is considered by Chevron. In addition, the Verify process validates the working practices of Suppliers and is an evidence-based assessment. FPAL Verify saves Chevron both the time and cost associated with supplier management and ensures that the Supplier’s internal systems are effective”. “Chevron are committed to FPAL Verify and it is embedded into their Contractor HES Management Process (CHESM). Over the years, Chevron’s Business Unit have fully adopted Verify to ensure that their supply chain aligns with Chevrons values and tenets of operation. Chevron have gradually concluded that Verify is the most effectual means of assuring credibility of supplier management systems, potentially leading to superior HSE performance”. Iveta Geidane, Contracts Advisor, Chevron Upstream Europe Achilles Group Limited 30 Park Gate, Milton Park, Abingdon, Oxon, OX14 4SH, UK T: +44 (0)1235 820813 F: +44 (0)1235 821093 E: marketing@achilles.com W: www.achilles.com 001‑02/2012 T2474 Achilles Reasearch Doc Issue1 Draft 20.indd 16 11/06/2012 13:07