Know your suppliers? How can you manage supplier risk?
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Sourcing suppliers isn’t just about costs and provision. You need to know about risk. BvD works extensively with regulated firms on their customer and supplier due diligence. Find out how you can manage your supplier risk. What checks should you consider and how can you include them in your workflow?
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Know your suppliers? How can you manage supplier risk?
- 1. How can you manage supplier risk? Dan White Regional Sales Director BvD UK & Ireland
- 2. Risk – it’s not a new issue? UK companies liquidated or placed into receivership in the last two weeks 1,730 90 of those had more than 50 employees
- 3. What is procurement? “Increase quality whilst reducing cost and avoiding risk.”
- 4. 1. Financial risk 2. Reputational risk 3. Incorporating risk measures into your workflow
- 5. Risk: If I do this is it going to hurt?
- 6. Supply chains are vital to the successful performance of a company Deliverables against margin means procurement teams are increasingly concerned with risk and ways to identify it It’s not as simple as “I buy goods from supplier A” To make it’s product supplier A buys from supplier C, D and E
- 7. Identification of risk is a challenge Difficult to obtain an accurate & reliable picture of the financial health of a supplier Procurement professionals are not always financial analysts Where do I get data from? What does it mean? The right data from the right external provider can help
- 8. The right data from the right external provider can help… Initially many external providers look the same
- 9. External content providers Global Quality content Easy to interpret Varied content
- 10. We engage with many procurement teams…. Good procurement teams seem to be agile when it comes to identifying risk Make technology work for them
- 11. The world had changed…. What are the alternatives to help me see risk?
- 12. 1. Financial Risk: New approaches to “see” risk Not moving away from traditional methods but what else is out there New companies have evolved who take a different view on risk Help procurement teams see the bigger picture of supplier ……
- 13. Financial Strength: A wider view Better to have several risk indicators than just one
- 14. Key supplier – multi-million construction project Basic credit score tells us this company is healthy
- 15. All is not well…..
- 19. Different suppliers required different approaches Key strategic suppliers Indirect suppliers
- 20. Don’t forget the real world Good providers of external content should bring other “warning” signs of risk News Adverse documents Should be easily deliverable into procurement teams Information – knowledge - actions
- 21. 2. Reputational Risk “Increase quality whilst reducing cost and avoiding risk.” Do I really know who my supplier is? Child labour & other such undesirable activity Links to criminal activity (proven or unproven) Bribery or corruption (alleged or proven)
- 22. Reputational Risk: Who are you working with?
- 23. How do we understand reputational risk? Aggregated content of Sanctions lists Enforcements Adverse media coverage
- 24. 3. How can we use external content?
- 25. Create a link …. Internal data Common identifier Externally managed data
- 26. You’ve made the link… …it’s your gateway to knowledge
- 27. Help me see risk early “Increase quality whilst reducing cost and avoiding risk.” Decline in Credit score Adverse documents Negative press
- 28. Where’s the risk in my supply chain? “Increase quality whilst reducing cost and avoiding risk.”
- 29. Where does my supplier fit? “Increase quality whilst reducing cost and avoiding risk.”
- 30. Connect to valuable intelligence “Increase quality whilst reducing cost and avoiding risk.”
- 31. Successful procurement teams use external data to: • Identify risk • Take steps to prevent risk • Enrich knowledge “Increase quality whilst reducing cost and avoiding risk.” Please do visit us on stand 7
Editor's Notes
- with emphasis on how we can use external company data to enhance capabilities and improve performance in this area But first
- Wanted to put in context what risk actually meant What measure can we use to see if risk is as important as everyone says 1730 went bust…. Of these 90 were larger coys… lets just think about that number for a minute That’s 45 a week 9 each day…………… 9! That’s just UK where we know while things are tough they aren’t as tough as Europe in many cases – so as supply chains in most cases are certainly European if not global…..clearly the problem is going to be bigger So how do I make sure I don’t have several of these in my supply chain? Or if I do how do I make sure I know about them
- When pulling together I wanted to take a step back and define the role and see how risk aligned with it. Spoke with a number of our procurement clients to define the role whilst I didn’t want a 5 page brief more of a brief statement and taking into account the key deliverables in summary they defined the role as…… Clearly this wont be news to anyone in the room. So taking into account this thing called risk Where does risk fit into the day to day life of a procurement professional and what sort of risks should be considered
- When we look at risk it’s easier to split into the 2 main areas we commonly find procurement teams want to understand when considering supplier risk Financial Reputational And then having done that options to integrate these into existing workflow processes … .We all know it can be easy to run a risk score on a supplier when onboaring which is never reviewed or monitored again.
- Risk is always a balance. Whilst we know a supplier can deliver significant advantages, if we spend time integrating them into the supply chain are they going to deliver? And whilst we know many do work out….there may be one that doesn’t … .at some stage is it going to come back and bite me? Amongst other things something that’s lurking in the back of everyone’s mind when they sign a contract with a key supplier……
- But first to put it all in context…. We know supply chain risk is a strategic issue I don’t need to tell you that the economic world today: a tough place to be Extremely challenging trading conditions for suppliers = increase in risk = risk penetrating into supply chain As the business world becomes more competitive and complex and the pressure on margins increases, so have the supply chains that organisations depend on and knowing how vital supply chains are to organisations then stress/risk in these chains is not a thing that procurement directors like to think about at night…. Risk, whilst it’s always been important is really coming to the fore and an area where we’re finding more and more procurement teams want to spend more time
- So how do we go about looking at risk? We’ve mentioned supply chains have become more complex, & particularly as supply chains spread geographically and in cases increasingly infiltrate on emerging markets getting reliable data is difficult Especially if you’re not an expert in data - in where to go, what to look for, is it free? Can I rely on it? What do I do with it? far better at this point to reach out to an established provider in this area who professional collate and maintain this data content, and more importantly are on hand to help you understand it
- So ok we know data can help but what should you look for in a good external provider? After all to the untrained eye many look the same – hopefully we’re not all that fat To me one law firm…..
- The point here isn’t to review data providers but more & more we’ve seen focus by procurement teams move from domestic required 15 years ago to very much a global view International content available has developed in line with requirements that has meant more visibility into suppliers along with technology that allows the information to be more accessible and better understood that ever before Don’t need to stress that point short of strategic decisions are made with ext data very often being a factor – inaccurate data can hurt a business More and more pro teams don’t just want financial content – they want additional content that helps them really understand a supplier in it’s wider context
- Successful procurement teams seem to be pro-active when it comes to measures to help them see risk – essentially they don’t want to be caught out They know there has been advances in technology and content offered by external providers which can offer significant advantages… They seem to embrace new ideas to help drive risk down and offer additional benefits
- So when we take into account risk & it’s importance in today’s world we also find ourselves at a time as difficult in our history to predict it!! Don’t want to bring back any nightmares… Having been in the market for a number of years… More and more procurement teams were asking us what else is out there to help with risk – finding that more and more basic credit scores or other methods weren’t telling the whole story and leading to nasty surprises in cases. A reliance on simple scores in isolation weren’t always giving a true picture of risk can we base a score developed in 2001 against the climate in 2013? Scores based on pay-decs may not reflect more fundamental issues with a balance sheet or sector – companies generally tend to pay the phone and electricity bills The bottomline is when companies are in trouble they make every effort to hide this so scores heavily influenced by the balance sheet in isolation didn’t always reflect more fundamental issues And I don’t want to go on about the rating agencies failure to predict the banking crisis between that and issues with existing scoring many proc teams started to look at options - what other ways were out there to do this? Led to a number of approaches – so ok BvD you play in this area what are the options? Help varied from team to team, some wanted raw data others wanted help in interpreting what data meant – what could we do to help/what other alternatives could we find – approached a number of modeling coys who took a different view some approached us And we started to develop ways to provide alternatives to existing methods or at very least comes at the problem from a different angle
- Evolution not revolution – important to add that I don’t think any financial model will be a 180 approach Some coys taken it on themselves to look at this differently We found a new breed of mathematical modelers, predictive modelers out there, and in some cases expert in developing propensity models, whilst financial history was a factor they came round to developing models that looked at the liklihood a coy would be around in 18/24/36 months time. Help procurement teams see the bigger picture of supplier health at this point!! we are not there to say these scores and right or wrong, or are more valuable than other scores – we are not there to provide the answers but more to raise the questions when it comes to supplier health But as a proc proff I would rather raise questions early as I have more insight to risk than being provided with a false impression of supplier health before I incorporate it into my supply chain
- So we know that risk is hard to see – indeed companies in stress will try very hard to hide this – and so by looking at the problem from several angles often helps. Bringing together an variety of opinions allows more questions to be asked of a supplier than a single view. So in conjunction with some of our proc and credit risk clients it has led us to develop this thing we call financial strength
- So I just want to stop at this point to look at a couple of examples as it helps underwrite the areas discussed – apologies for screenshots Traditional method of credit scoring – based on several factors but heavily influenced by a balance sheet. Doesn’t always tell the whole story – for all the reasons we’ve just discussed Viewed in isolation it tells us this company is healthy Run analysis of numerous failed coys many had healthy scores…. REMEMBER that no provider is ever “right” – more of an opinion that asks the questions for you? We don’t like to give people the answers
- But when we start to incorporate a couple different views First we see a provider (ModeFinance…..) who review a whole range of issues and provide a rating to help buyers “scale” this coy as to how healthy it is..
- Vadis -
- CRIF – base analysis on sectors to determine good/bad performance
- And its much the same story if we look at most victims of the credit crunch in a number of sectors the signs are clearly there for procurement teams who are serious about understanding risk Healthy credit score but the wider view is very different…… HOWEVER it’s important to note that although some ratings can “see” risk better than others they are not the sole indicator of supplier performance, and are still only a guide to help procurement teams at least take a view of the financial risk.
- Tell the Telent story re Crossrail Right external content can help
- The ability of an external content provider to deliver additional data other than just financial can be a real advantage. Whilst ratings are valuable often there are events that may indicate issues with a supplier Job cuts – site closures – adverse documents However This data needs to be streamlined and delivered to the right people at the right time, Buyers need to act on the knowledge that a news story provides, Successful procurement shouldn’t miss this information…..because there is technology out there that helps us deliver it
- What risks do suppliers present to our reputation? An increased focus for many procurement teams Risk can come in other forms than just financial….. No one likes the thought of their reputation built over years ruined overnight by damaging links in their supply chain I’m sure I only have to mention the word “Horse” As supply chains have become more complex so have the possibilities of being linked with someone you didn’t know about……
- Now we’ve been working with procurement teams with regards to coy ownership for years and we know the core uses of something like an ownership tree For example group spend – what other opps do I have to procure within the same corporate group – more and more we find it’s helping them understand who they are really working with Now additionally people are wanting to understand other elements of this coy - to run checks on directors of the coy to ensure they’re not linked to any undesirable activity but more and more companies want to understand if there are individual owners behind a company “I’m sure many of you will be familiar with the term “beneficial owner” Is he a politically exposed person? Is he linked with any activities you would want to be aware of? I will move on quickly!
- We know there’s been huge increase in legislation over the years in areas such as money laundering and links to criminal activity which in turn have brought this to the fore. You’ll remember even over the past 12 months there have been a few high profile cases of banks being in breach of AML leg Apart from the damage it did to their profits, more and more it is about the risk of reputational damage. Clearly reputation risk is not just isolated to banks and so this is an increasing focus for many coys - and this in turn has lead to providers appearing who can help companies see the risks in this space Bringing together over 600 global sanctions lists – easy view of the data Has this company been linked to any adverse media….. Reputation risk should be considered as part of the procedures for thorough risk assesment when reviewing a supplier
- So are experiences with pro teams is that whilst they want the benefits of ext content they don’t want the data used in isolation – more and more it is about incorporating this content and delivering it in the SRM which is where their buyers live ……. We also know that the SRM has extremely valuable content which clearly inked with external content can deliver more insight than either in isolation
- The linking of data has advantages Legacy “old” or “inaccurate” data on the SRM can be updated, and fresh intelligence can be “PUSHED” into the SRM which is where procurement teams live May have to mention matching….certain amount of process attached to creating that link but its something a good provider should be competent in and be able to offer some valuable advice on
- Now you have a link to a cloud based information source that is effectively managing data on your behalf. Experience has told us the linking of int/ext data can be powerful – and a range of additional intell is on offer Having looked at the dark side of supplier risk on a lighter note lets take a look at some of the ways successful procurement teams will leverage additional data Examples are as follows
- Correctly aligned with internal processes external content should identify risk Early warning signs “ safety net around supplier risk” Softer data items are often useful Alerting
- Using technology to provide simple dashboards Can be used effectively Can take the pain out of the process Also provide environmental measures to screen “how green is my supply chain”
- Coming back to our old friend the ownership tree….. Apart from understanding who you are buying from data can deliver additional value What % of a suppliers revenue does our business represent Howe much profit does my supplier make compared to it’s peers
- Having detailed ownership information on your suppliers allows you to make the link between companies Ultimately to determine if you’re buying from different suppliers in the same corporate group to leverage discounts with the parent A simple and straightforward benefit of the risk approach
- So to sum up There are alternative measures out there to deliver risk assesment – they identify risk in many cases where existing methods don’t. This isn’t always comfined with financial risk and so successful teams are increasing concerned with identifying reputational risk. Combined with the fact that too often businesses are fighting to work with poor or no data. Risk measures can sometimes come up short and successful procurement know that integrating externally managed data into their work flow and SRM helps them to minimise risk and also deliver additional benefits. Once done this benefit is ongoing. These companies vastly reduce the time expended on data management and with enhanced knowledge of their suppliers; and are able to deliver more on key measurables. They are turning their data into a key element of a successful procurement strategy. They are finding that the effective use of data has never been more accessible, simple to implement or as rewarding. If there are questions I would be happy to take them or come and find out more on stand 7 where the team can help….