Risk Management in the Supply Chain

©ALL RIGHTS RESERVED - Confidential
Spend Matters UK/Europe Real World Sourcing
Risk Management in the Supply Chain
Guy Allen
February 26th 2014

Introduction
The Real World Sourcing Series is a series of 6 sessions covering hot topics
for procurement professionals.
The series is promoted and supported by BravoSolution, and developed by
Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited).
Guy Allen started his procurement career with Ford Motor Company,
moving through IBM, SmithKline Beecham and GSK , becoming CPO for
Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a
Managing Partner. Guy has since left 4C and started his own consultancy,
Real World Sourcing Limited.

Agenda
1. Defining Risk Management
2. Elements of Managing Risk
3. Driving a Procurement Risk Management
Programme
4. Procurement Risk Identification and Treatment
5. Final Thoughts

The Whole Thing Solved in One Equation:

Risk - the effect of uncertainty on objectives, whether
positive or negative (ISO 31000)
Risk Management - the identification, assessment,
and prioritisation of risks followed by coordinated
and economical application of resources to
minimize, monitor, and control the probability
and/or impact of unfortunate events
Definitions

Supply Side Risk – all risks of interest to the
Procurement function, whether related to the supply
of physical goods or not
Definitions

Identify
Evaluate
Treat
Residual
RiskMonitor
Elements of Risk Management

Identification
What are the likely impacts to the organisation’s
key strategies?
Can be driven by brainstorming, checklists (derived
from experience) or inspections
New risks will arise and old ones diminish

Evaluation
What is the likelihood of the risk?
What is its impact?
Defined in terms of impact to the organization’s
objectives

Risk Evaluation Matrix
Impact
Likelihood
L HM
LHM
3
2
4
1
6
5

Treatment
Avoid
Share
Reduce Impact
Reduce Frequency
Approach is dependent on a few key parameters
Risk Appetite – pursuit of risk
Risk Tolerance – willingness to bear perceived risk
Resources

Mitigation,
Contingency
Plan
Mitigation
Contingency
Plan,
Monitor
URGENT
REMEDIAL
ACTION,
MONITOR
Tolerate,
Observe
Mitigation,
Contingency
Plan
Mitigation
Contingency
Plan,
Monitor
Tolerate, No
Action
Tolerate,
Observe
Mitigation,
Contingency
Plan
Impact
Likelihood
L HM
LHM

Mitigation,
Contingency
Plan
Mitigation
Contingency
Plan,
Monitor
URGENT
REMEDIAL
ACTION,
MONITOR
Tolerate,
Observe
Mitigation,
Contingency
Plan
Mitigation
Contingency
Plan,
Monitor
Tolerate, No
Action
Tolerate,
Observe
Mitigation,
Contingency
Plan
Impact
Likelihood
L HM
LHM
3
2
4
1
6
5

The definition of Low /Medium/High impact will
depend on the organisation
In some cases being out of stock is not a problem,
in others its disastrous
Component failure in a car could have deadly
consequences
A smart phone component failure is more likely to
have financial impacts

Residual Risks
‘The cost of doing business’
Will vary according to organisation's ‘Risk
Tolerance’
Acceptance of potential of litigation, disputes,
fines, disruption, costs

Driving a Risk Management Programme
Supply Risk
Management
Programme
What is
important to
your
organization?
What is their
tolerance for
risk?
What can
they afford?
Making it Work in Procurement

Getting the Mandate
Establish a Procurement Risk Council
- Operations
- Manufacturing
- Marketing/PR
- Finance
Agree target outcome
Share the responsibility
Driving a Risk Management Programme

Procurement Risk Identification
Availability (of Resources)
Cost
Quality
Service
Innovation
Reputation
Risk Identification

Task1
On your tables discuss these
areas of risk and add to
them if you feel something
is missing
Then place the areas in
order of most concern
Availability (of Resources)
Cost
Quality
Service
Innovation
Reputation

Procurement Risk - Identify
Risk Identification (an answer)
- Availability
- Reputation
- Quality
- Cost
- Service
- Innovation

- Windscreen washer bottle
- Tool resourced to new supplier
- No production for 6 weeks
- Vehicles stockpiled for 4 weeks
- Significant increase in unit price
Procurement Risks - Identify
Availability - The bottle that stopped Ford from shipping
We didn’t make the same mistake with the steering wheel!

Availability
Financial Audit
Dual Source
Safety Stock
Generic Design
Contingency Planning
Exclusivity or Preferential Supply
Supplier Acquisition
Procurement Risks - Treat

Reputation – The film that tarnished a reputation
BBC Panorama condemned
use of child labour in Primark
factories
PR disaster for Primark
Primark became the ‘Poster
Boy of Child Labour’
However the BBC subsequently apologised to Primark for
using film footage that was not genuine

Reputation
Policy
Source Selection
Audit Agencies
Response Action Plan
Procurement Risks – Treat

Quality Example – The Cement that Killed
BP Deepwater Rig Explosion
caused by weak cement
around the well
Failure in the testing regime
both in operation and
interpretation
The cost of a proper quality
check was estimated at $128k
11 lives lost, BP lost $10bn, incalculable
environmental damage

Quality
Design
Source Selection
Measurement (SPC)
Auditing
Consequential Damages

The Rolls Royce RB211 was developed
specifically for Lockheed in the late
1960’s/early 70’s
Purchase price was set in US dollars
All Rolls Royce's’ development costs
were in UK Sterling
A 20% move in the $ to £ ex rate
meant the engine cost more to make
than the sales price
Cost – The Contract that Bankrupted a National Icon
Rolls Royce was nationalized, and Lockheed had to pay
£110,000 more per engine

Cost
Contractual arrangements
Commodity and Currency Hedging
Needs to be geared to your organisation's market,
strategic objectives and risk tolerance

Polaroid Cameras produced
‘instant’ pictures
In the 1970’s a billion Polaroid
pictures were taken every year,
and the company employed
21,000 staff
Revenues peaked in 1991....within
10 years the company was gone
Innovation – The Camera that Disappeared
You can now buy an instant camera film, though marketed by
Fujifilm and others

Innovation
SRM
Market Reviews
Joint Ventures/Collaborations
‘Art of the Possible’ sessions
Contractual Structure (particularly cost down
requirements)

Monitor – TASK 2
You are shipping finished
goods from China to the
UK retail market
Supply is a critical
concern to you
What factors might you
monitor to give you early
warning of a supply
problem?
Procurement Risks - Monitor

Scanning of local news services against pre
determined parametersReputation
Analysis of natural phenomenon eg earthquake
activityEnvironment
Alert status by supplier based on previous
experienceConfidence
Analysis of Annual ReportsFinancial
Analysts reports and predictionsMarket Analysis
Assessment of Supplier QA measurementsQuality
Dynamic assessment of changes in spend and
invoicing profilesSpend Analysis
Constant review of shipping and freight progressTransportation
Procurement Risks - Monitor

Final Thoughts
Your risk management approach needs to be aligned to
your organisation's objectives, tolerance of risk, and
available resources
Align your activity according to its likelihood and impact
Some risks you have to live with – develop contingency
plans
Do not go it alone – you will not provide your organization
with an effective programme if you do
In Summary

Real World Sourcing Scholarship
• £2500 towards any procurement based training
• Log on to the BravoSolution Education Network
with the details you’ll receive tomorrow
• Complete the certification programme
• Check your ranking!
• The winner will be announced at the Sourcing
Experts Dinner in December

THANK YOU!
Please feel free to contact me on
guyallen@realworldsourcing.com

Futures
No premium
Easy to contract
Transparent
Commitment
Margin Call
Only for quoted
commodities
Options
No commitment
Standardized or
bespoke
Premium Cost
Complex to use
Swaps
Not limited to
quoted
commodities
Easy to use
Commitment
Lack of
transparency
ConsPros

Risk Management in the Supply Chain

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