Presentation Transcript

1. Reducing Risk in the Supply Chain How to optimize your supply chain for minimal disruption. Take the lead. With POOL4TOOL. Martin Nehls Auren E. Kaplan 2012-04-20
2. Table of Contents Introduction 3 Defining Risk Reduction in the Supply Chain 4 What are Strategies for Successful Risk Reduction? 5 Who is in Charge of Reducing Supply Chain Risk? 6 What Are Types of Supply Chain Risks 7 What are the Goals of your Risk Assessment? 10 What are the Geopolitical Risks Associated with your Supply Base? 11 What are the Impacts of Strategically Choosing your Suppliers? 12 Conclusion 13
3. Introduction In this White Paper, we are going to evaluate the topic of reducing risk in the supply chain. One of the key drivers is the supply chain disruption from the Fukushima nuclear reactor incident in Japan, and news of how tornados have affected Boeing suppliers, etc. It is important to understand the required steps to take in reducing risk. First, we will discuss what reducing risk in the supply chain means. Then we will evaluate various risk reduction strategies. Next we will discuss how one department can be responsible for taking action to reduce risk.In closing, we will define the parameters of successfully reducing supply chain risk, discuss various categories of risk, and show how with easy steps it is possible to impact your exposure to the supply chain.
4. Defining Risk Reduction in the Supply Chain At its simplest level, supply chain risk reduction happens when you choose one supplier over another, or when you help current suppliers reduce risk. Of chief concern is minimizing supply chain disruptions, which can be costly both in the short and long term to businesses with supply chains that now span the globe, comprising the extended enterprise. Some suppliers cost less than others, but perhaps they are less reliable. It may be worthwhile to spend more on a per unit basis for products that are higher quality and delivered more efficiently. Decisions like these are what constitute a solid risk reduction approach. In fact, effective decision-making is absolutely critical to reduce risk in the extended enterprise of the supply chain. The remaining sections of this White Paper will discuss the parameters around which you can implement successful strategies for reducing risk in the supply chain. Disasters such as the earthquake in Japan in 2011, combined with globalization and geopolitical factors beyond an individual company’s control, have made it supremely important to work proactively to reduce risk in the supply chain. The near wipeout of one or more American carmakers and their supply chain in the 2008 financial crisis serves as a stalwart reminder of the need for companies to implement well-developed supply chain risk reduction strategies in order to mitigate risk wherever possible throughout the extended enterprise.
5. What are Strategies for Successful Risk Reduction? Web based supplier monitoring is a successful strategy for risk reduction. Integrating your supplier into your monitoring needs is called onboarding, and the supplier provides the relevant information to you, based on criteria that you determine. This gives you the monitoring capability at the fingers edge. It is additionally valuable to choose suppliers with the same safety recommendations as your company. This matching of “values” helps to set the baseline for a positive working relationship where standards are understood to match your high quality / low cost / fast reaction needs (etc.). Your supplier relationship analysis should be strategic, according to numerous criteria this White Paper will outline in a moment. A successful strategy is to turn your commodity strategy into supplier development, creating the interconnecting links between commodity purchases and elements of your supply chain that rely on specific commodities. Additionally, successful supply chain risk reduction occurs with a focus on developing a continuous improvement process. By never settling for the status quo of your supplier relationships, you reduce risk by continually optimizing for potential obstacles to your supply chain’s global effectiveness. A supplier scorecard that takes into account quality, delivery time, and other pertinent factors is an additional best practice.
6. Who is in Charge of Reducing Supply Chain Risk? In global companies with operations and facilities spanning the Earth, it can often be confusing as to which individuals, departments and teams are responsible for managing risk in the context of a healthy and often global supply chain, which when combined with the business itself comprises the extended enterprise. In some cases, the purchasing agent or purchasing department will be responsible for reducing risk. In other instances, the supplier will help the purchasing agent. For instance, the cost of tires could be in question. Someone in your team needs to identify who is responsible for tire procurement and then work with that individual to discuss the various elements of risk reduction in the context of procuring tires. Companies may also hire outside consultants to conduct the risk assessment of the extended enterprise. If handled in house, it is good practice to have a dedicated staff member whose sole focus is on reducing risk across the supply chain, and larger multi-national corporations may find it valuable to employ multiple people specifically to conduct risk reduction analyses.
7. What are Types of Supply Chain Risk? One of the first types of risk to asses is economic and competitive risks. A quick example is to consider a group of 5 suppliers, all owned by 1 company. If your company did business with those 5 suppliers, an economic disruption at that one company could affect the business you conducted with each of the 5 suppliers. Therefore, to reduce risk, it would be intelligent to ensure a sufficient diversity of ownership for your suppliers. Along these lines, in the event one supplier goes under, you would be able to move quickly to another supplier without a significant disruption. The broad idea is to ensure that your supply base’s ownership is not consolidated, but rather diversified amongst a number of owners. Changes to a management team could result in new decisions that affect your supply chain. Individuals responsible for risk reduction would do well to continuously evaluate the stability of management of their suppliers, as new additions, resignations, or firings could signal trouble in the company – and therefore, it may be an appropriate time to seek alternative suppliers for the parts in question. This example falls into the category of social risks. Other examples of social risks include union and labor relations including strikes, labor shortages, or perceived low quality. 7
8. What are Types of Supply Chain Risk? (cont‘d) Violations of government agency guidelines, for example E.P.A. violations by a supplier, could be a signal that it is time to seek alternative suppliers. Along the same vein, a supplier with repeat OSHA incidents could signal an inability to match company standards for those reducing risk. It is reasonable to expect a certain level of quality from suppliers, and some companies set the bar quite high – in order to be able to deliver highest level quality to their customers. Evaluating suppliers to see whether they are able to deliver high quality products without violations is an important task. This example falls into the category of legal or political risks. Other examples of legal and political risks include law suits, lobbying from customer groups and new government regulations. It is also important to evaluate suppliers as to quality. Suppliers with quality issues constitute a risk to your company’s quality and therefore successful transaction with the end customer, and so quality should be carefully considered when conducting risk reduction assessments. Also pertinent along these lines are noticeable lags in response time to inquiries. 8
9. What are Types of Supply Chain Risk? (cont‘d) Again, we stress that the cheapest suppliers may come at a quality cost, and so it is important to balance those tradeoffs in order to make the most educated decision as to which companies will integrate well into your supply chain. These examples fall into the category of operational and technological risk. Other examples of operational and technological risks include material shortages, machine failure/downtime, budget overrun and communication/IT disruptions Those reducing risk in the supply chain would also do well to assess the probability of natural hazards affecting their supply chain. For example, a company that sources all of their parts through the Gulf of Mexico may be exposing themselves to hurricane and tropical storm risk disrupting their supply chain. Supply chain disruptions can lead to loss of short term profit as well as loss of long-term shareholder value, and so the purpose of risk management is to minimize these disruptions. Risk reduction professionals that prepare for such natural hazards by diversifying their supply chain in the global context mitigate possible natural hazard effects on their supply chain by tapping into suppliers that trade from areas less prone to natural disasters. This example falls into the category of natural hazard risk. Other examples of natural disasters to consider are tsunamis, wild fires, floods and earthquakes. 9
10. What are the Goals of your Risk Assessment? While some companies optimize their extended enterprise for lowest cost, others may optimize for higher part quality, or shorter delivery time. Still others may seek to maximize the lifecycle of their product, and still others may decide that optimizing their supply chain for a global customer base is most important. Some procurement officers may seek to establish strategically a relationship with a company that may bear fruit with the availability of new product years down the road. There may be multiple goals to consider, of varying degrees of importance. There are operational, social, natural hazard, economic and legal risks to consider, and each type of risk should be given its due diligence. 10
11. What are Geopolitical Risks of your Supply Base? Geopolitical risks should also be factored into the risk reduction assessment. It is important to understand the various political relationships between countries in order to ensure that no lines are crossed. China is commonly seen as a low cost sourcing option. But with a 10% labor cost increase each year, your labor cost will double in six years. What happens in China when political change occurs? Questions like these are especially relevant in sectors like automotive or consumer goods, where supplier relationships only bear fruit after a long, multi-year ramp up process. An awareness of geopolitical factors is critical to successfully reducing risk in the supply chain. Another issue for American procurement professionals is sourcing in Mexico. While many companies are moving production facilities to Mexico due to lower labor costs and shorter transportation time and cost to the United States, a significant danger remains: some regions in Mexico are not accessible without major risks for travelers. It is important for companies to take geopolitical risks like these into account when building their supply base. 11
12. What are Impacts of Strategically Choosing Suppliers? There are numerous impacts of taking a risk reduction approach to choosing your suppliers. First, it can save you money. Second, you can build relationships that bear fruit beyond the business that you do in the present day – current relationships can lead to future business in ways you cannot presently understand. You may be able to deliver parts on time when in other situations it would not be possible. Concurrently you may avoid losing production for a month by working with multiple suppliers rather than just one. By managing your extended enterprise effectively you can avoid supply disruptions. Importantly, the opposite of all of these impacts are also possible if you don’t prudently manage your risk. A good example of a positive impact of making strategic choices is General Electric. GE recently opened a large R&D facility in Munich, Germany. Munich happens to be one of the most expensive places to do business in Europe. But the accumulation of other high-tech players in the region will very likely give access to new technologies and technology combinations. GE will likely do business with suppliers that contribute to this high tech business cluster, earning intellectual and social capital contributions much in the way that American technology companies cluster around Silicon Valley.
13. Conclusion One thing is safe to rely on – change. As the world changes so does your supply base. Risk reduction is an integral part of managing your suppliers. You have seen that it is not necessary for a 1 million dollar consulting project to get the basics covered. Supplier integrated platforms are often available for as little as $1000 per month, and can give you a high level of coverage – especially when you want to establish an ongoing communication process and knowledge hub to be prepared for the change. If conducted effectively, you can avoid mishaps, save money, and increase the quality of the parts you purchase. If neglected, there is now more than ever a severe risk of supply chain disruptions – that can be devastating to a business both in the short and long term. We hope this guide has given you a thorough and useful introduction to supply chain risk reduction. Now it’s your turn to take the reins and unleash your newfound knowledge of risk reduction on your supply chain! POOL4TOOL is a natively integrated SRM and CRM suite, providing procurement, supplier relationship management, eSourcing, and supply chain management for automotive, manufacturing, consumer products, and services companies. We work with companies like Bayer, Visa and more to optimize their supply chains across the globe. To learn more about how POOL4TOOL can help you manage risk and optimize your supply chain, visit our website at www.pool4tool.com. About POOL4TOOL 13
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15. Awards POOL4TOOL among the world wide leading sourcing solutions Gartner elects POOL4TOOL as one ot the 10 world wide leading applications for strategic and tactical sourcing (Strategic Sourcing Suites). POOL4TOOL among the world wide leading SRM solutions Gartner rates POOL4TOOL as one of the world wide leading applications for supply base management (SBM). POOL4TOOL among the world wide top 100 most innovativ solution provides POOL4TOOL was chosen as one of 100 most innovativ solutions for supply chain management world wide by “SupplyDemandChain“. BestPractice-Award of e procure & supply Together with Windmöller & Hölscher, POOL4TOOL was awarded for the SAP integrated implementation of a commodity strategy. BMÖ awards the Austrian Supply Excellence Award Together with ifm electronic, POOL4TOOL received the first award for the project “eCollaboration – from procurement to supply-chain-excellence“. Thomas Dieringer is… awarded as “Pros to Know 2010“ for his outstanding work according to “Supply Chain Strategies against the crisis”. 15
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