All posts by The Smart Cube

4 Key Strategies for Tackling Today’s Most Prevalent Supply Chain Risks

Marketplace and operational risks akin to aiming at a moving target.

What is the biggest single risk facing your supply chain? Chances are, it’s impossible to name just one. Global supply chains are inherently complex, making the task of identifying, let alone addressing, marketplace and operational risks akin to aiming at a moving target. If you’re like many of today’s supply chain and procurement professionals, you’re under constant pressure to reduce costs while increasing operational efficiencies—and hard-pressed to effectively balance business needs with risk management efforts.

Survey Reveals Common Challenges

Findings from a supply chain survey conducted by global professional services firm, The Smart Cube, shed light on today’s most formidable supply chain risks. Of the senior-level supply chain and procurement executives surveyed, over two-thirds (69 per cent) consider the financial health of suppliers to be one of their largest risks in the next quarter. Respondents also cited geo-political instability (46 per cent); ethical risks, including environmental, social, and reputational risks (31 per cent); and political risks (38 per cent) as key factors with the potential to adversely affect the integrity of their supply chains.

What’s more, the majority of the executives surveyed also predict that the regulatory environment will have a high impact on their supply chains. And they expect outsourcing to substantially increase, due in part to a lack of internal expertise and resources. These factors, taken together, show that global supply chain management is a collection of many moving parts—and the risk management component is becoming even more critical to survival in the global economy. One cost-cutting decision made to affect just one point in the supply chain can lead to vulnerabilities in your entire system, resulting in unexpected costs or delays that derail the company’s ability to reach business goals. Likewise, the introduction of a new industry regulation could increase your supply chain’s overall volatility if you’re unprepared to manage the aftermath of change and its impact on your processes and supplier relationships.

Forward-Thinking Solutions

Innovative leaders are seeing that the challenges can be transformed into opportunities through the strategic integration of risk management into supply chain management. This makes it more important than ever for you to understand your organisation’s supply chain risk profile and take steps to strengthen and safeguard what makes it resilient and fortify areas in need of attention. Additionally, you need to know how risks (and various points of failure) could impact your organisation on the whole. Based on their recent research and consulting expertise, the Smart Cube recommends the following four key strategies to combat, if not mitigate, risks along your supply chain:

  1. Avoidance

When the risk of operating in a particular market, or with a particular vendor or customer, is extremely high, it might be necessary to take drastic action in order to prevent or sidestep calamities. This might include discontinuing business in certain geographical markets, ceasing relationships with established suppliers or customers, and even dropping operating segments of the organisation.

  1. Control

Here, an organisation tries to take charge of the situation through specific manageable actions, typically to abate short- to medium-term risks such as supply disruptions due to human error. Examples include adjusting inventory and production capacity to better manage product movement and implementing easier-to-audit contractual structures with suppliers.

  1. Cooperation

In this strategy, an organisation tries to mitigate short- to medium-term risks by cooperating with external stakeholders, especially its suppliers. Strategic initiatives may include the preparation of joint business continuity plans and collaborated efforts to improve supply chain visibility. Your goal is to protect your interests and those of your business partners, in the spirit of solidarity.

  1. Flexibility

Building flexibility into your business practices and processes can improve the overall, long-term efficiency of your supply chain. Multi sourcing, for example, may help companies tackle multiple challenges—such as those pertaining to geo-political instability, supplier-related risks and financial risks—in one go. By engaging multiple suppliers to deliver quality, price, and reliability requirements, companies can mitigate risks such as supplier bankruptcy or performance deterioration for strategic categories that are critical to operations.

Committing to Proactive Risk Mitigation

Aside from developing a plan to identify, assess, and monitor the various risks impacting your organisation’s supply chain, putting a plan in place to proactively address them can ensure the health of your bottom-line and provide competitive advantage. Knowing that there are different strategies you can employ to help you manage your supply chain risk factors puts you ahead of the game—and in front of potential failures, rather than behind them. Practicing avoidance, control, cooperation, and flexibility in your risk management plan may not remove the element of uncertainty or eliminate the consequences of unfortunate events, but it can give you peace of mind that you have strategies on deck to protect your supply chain and the business it supports.

Omer Abdullah is The Smart Cube’s Co-founder and Managing Director.

Procurement Policy And Practice: An Evolving Landscape

The evolution of the procurement function

In a January 2015 report, The Smart Cube discussed key trends in corporate procurement practices, including managing increasing procurement-related risks, establishing alliances with key suppliers, and leveraging data analytics. The report also highlighted specific trends in the market that have the potential to increase or decrease in prominence.

This article continues the conversation with a focus on several key aspects of procurement policy and practice: centralised procurement, category management, stakeholder engagement, and better implementation of total cost of ownership (TCO) as a strategic sourcing tool. 

Adoption of Centralised Procurement

Many organisations are restructuring their procurement departments to favour centralised (where both decision-making and purchasing are conducted centrally) or center-led (wherein overall policy is centralised, but some freedom is given to local departments to make sourcing decisions) sourcing of both direct and indirect categories.

As shown in Figure 1, executives participating in KPMG’s July 2014 Procurement Pulse Advisory Survey foresee a shift in the structure of procurement organisations. Specifically,

  • 53 per cent believe that the adoption of a centralised procurement policy will be common or very common in 2016, up from a 40 per cent in 2014.
  • 57 per cent believe that a center-led policy will be common or very common in 2016, as opposed to 46 per cent in 2014.
  • 15 per cent believe that the adoption of decentralised procurement will be common or very common in 2016, compared with 36 per cent in 2014.

Procurious and the Smart Cube

Why is Centralised Procurement Growing in Popularity?

A centralised procurement structure offers several important benefits to organisations that want to increase competitiveness and efficiency. According to a January 2014 report by APQC, organisations with centralised structures experience:

  • Lower costs – $0.31 for every $1,000 spent on purchases.
  • Shorter supplier lead times – an average of one less day.
  • Improved purchase order processing – a median of 10 hours for centralised structures compared with 11 hours for decentralised procurement functions.

While the numbers look promising, procurement policy must always be informed by the specific needs of each organisation. For a high-tech company, for instance, cost and efficiency of the procurement function may not be as important as the speed and flexibility offered by a decentralised structure. Yet several industries are using centralised sourcing, including these examples in global healthcare:

  • Teva Pharmaceuticals expects to realise a cost savings of $2 billion by 2017 by shifting from a decentralised and regionalised procurement approach to a centralised and global one.
  • The New York City Health and Hospitals Corporation (HHC) plans to leverage the combined purchasing power of its large network of hospitals, care facilities, and community health centers to negotiate lower input prices. (Read the press release.)
  • The UK’s National Health Service (NHS) wants to achieve savings of ~$770 million over FY2014–FY2016 by purchasing everyday hospital supplies in bulk for all hospitals centrally.

Establishing Stakeholder Alliances

Companies are developing more innovative supplier incentives and supplier relationship models to gain competitive advantage. As per a 2012–2013 survey of CPOs conducted by Capgemini, 30 per cent of executives believe that supplier relationship management (SRM) will be their key focus area in the future.

The UK-based supermarket chain Sainsbury’s has developed strong supplier relationships as a result of concerted long-term effort focused on improving service quality through collaboration suppliers, incentivising supplier innovation, and sharing best practices with suppliers. This transformation in stakeholder management practices has resulted in improved sales and profitability for the company. (Read more in the May 2013 study by State of Flux).

Leveraging Category Management

Category management is used by procurement organisations to improve both the effectiveness and efficiency of purchasing activities by restructuring sourcing around specific categories of expenditures. In fact, 57 per cent of executives in the Capgemini survey believe that the introduction or extension of category management within procurement functions is a current or future focus area.

The US federal government is one of the latest organisations to embrace category management. Their procurement function is set to be divided into 10 super categories of commonly purchased goods, including IT, transportation, travel, and professional services—categories that account for $277 billion of the total federal spend. Improved coordination of purchases and sharing of best practices across various agencies are expected to make procurement more effective for the government. (Learn more in the January 2015 White House memorandum).

Total Cost of Ownership: Gulf between Theory and Practice

A cornerstone of procurement management, TCO is the cumulative cost of owning, maintaining, and utilising a product over the course of its lifetime, and helps assess the “true” cost of a product instead of only its base cost. TCO should be a critical element of strategic sourcing; however, there seems to be a gap in the potential benefits of TCO and its actual implementation.

In the Deloitte Global CPO Survey 2014, only 24 per cent respondents planned to reduce TCO over the coming year. Meanwhile, in a survey published in October 2014 by BackerSkeie—a Norwegian executive search firm—only 21 per cent companies are leveraging TCO in an optimal manner, while 66 per cent have limited or no exposure to TCO. This simply highlights the void in the procurement capabilities of many organisations.

The Way Forward

These are only a few of the many important principles to consider when formulating one’s procurement organisation and its related activities. In assessing their fit, it is important for companies to consider their internal practices and organisational maturity. They also need to study the procurement practices of companies inside and outside their industry to gain a deeper understanding of policies that they should adopt.

By Ankit Abraham Sinha, Senior Analyst, & Sidharth Sreekumar, Assistant Manager www.thesmartcube.com

Why Supplier Risk Management Is Still The Big Thing

“Supplier Risk” is no longer a buzzword or an emerging trend. Nowhere is this more evident than for the food and retail industries, where what started with the horsemeat scandal in 2013 now seems to be haunting Europe as the nuts-for-spices scandal.

Yet risk is an issue that cuts across many industries, around the world. The increasing globalisation of company supply chains compounds risk—and at the value chain level. Such risks have a material impact on companies, resulting in supply chain disruptions, material losses, and reputational damage.

Figure 1 shows the most prominent supplier-related risks that companies are exposed to currently.

supplier-risk

According to a November 2013 survey by PwC, 55 per cent of respondents believed that they had experienced at least one significant supply chain disruption over 2011–2013, and these disruptions increased costs for 42 per cent of the respondents and affected customer service for 39 per cent respondents.

Clearly, the need for proactive supplier risk management is no longer simply a nice-to-have—and that’s why 70.6 per cent of the CPOs surveyed for Procurement Leaders’ 2015 Trend Report noted that the time dedicated to risk management activities will increase in 2015.

What are Organisations Doing to Manage Risk?

A February 2015 Procurement Leaders article compares supplier risk to an iceberg. The top 10 per cent of the iceberg, which is visible, is financial risk. The remaining 90 per cent—the portion that is hidden below the surface—includes executive changes, geographical and political risks, and the risk of natural disaster, risks that progressive organisations are increasingly turning their attention toward.

A 2012–2013 Capgemini survey of CPOs lists some of the strategies employed by companies to manage supplier risk:

  • Switching to multisourcing for key inputs
  • Continuously monitoring supplier performance, and taking actions to mitigate emerging risks
  • Putting a clear process in place to continuously assess, mitigate, and manage supply risks
  • Developing a process to proactively analyze potential risks, and building supply chain contingency plans
  • Using external consulting service providers to help identify and mitigate risks
  • Training procurement teams in advanced supply risk management techniques
  • Implementing relevant technology solutions to support and manage supply risks

Take a look at several examples of how global organisations are working to mitigate risk across different areas of the supply chain:

Ford

Companies with widespread and complex supply chains can find themselves at sea while identifying high probability risks, especially those that have the highest impact on their bottom line. As such, organisations turn to new and sophisticated tools to help identify and mitigate risk—as was the case with Ford.

In December 2013, Ford announced a new supplier risk management strategy, developed in collaboration with MIT’s Dr. David Simchi-Levi. Assessing Ford’s supplier risk was a challenging task, given that the company sources thousands of components from ~4,000 tier 1 suppliers. The risk assessment model was based on Dr. Simchi-Levi’s Risk Exposure Index approach, and concluded that a short disruption pegged at 61 per cent of the tier 1 firms would not have an impact on Ford’s profits. Yet a disruption in supplies from 2 per cent of the firms studied would have a substantial impact. Leveraging this analysis, Ford has focused its efforts on those firms that account for the highest supply chain risk. 

EID-Parry

For companies that rely significantly on a single geography, commodity, or supplier, it is essential to diversify their purchasing in order to reduce the impact of any disruptions in supply from that single source.

India-based sugar manufacturer EID Parry is expanding its business outside the state of Tamil Nadu. The company’s Executive Chairman A. Vellayan assured shareholders at a July 2014 annual general meeting that they will see long-term benefits of the company’s policy of spreading out its sugar mills across a number of Indian states. 

P&G

Suppliers that engage in practices such as unsustainable sourcing of commodities, use of child labor, and unsafe manufacturing practices pose a grave threat to the reputation (and ultimately economics) of companies that source from them.

A case in point is Procter & Gamble. Following a February 2014 Greenpeace report on the deforestation practices of some of the company’s palm oil suppliers, the company released an extensive no-deforestation policy aimed at encouraging sustainable sourcing practices among suppliers.  

Kellogg’s

Similarly, Kellogg’s announced its commitment to purchase only deforestation-free palm oil, with a target date of December 31, 2015. The company also introduced a new responsible sourcing policy that seeks to reduce the impact of its supply chain on climate. This includes the provision of resources and education to help suppliers increase their resilience with respect to climate change, optimise the use of fertilizer inputs, reduce GHG emissions in their agricultural practices, optimise water use, and improve soil health. 

The Underlying Trend

In an environment of increasing supplier-related risks, it is crucial for companies to strengthen supplier engagement in order to mitigate threats such as supply discontinuity, over-reliance on key suppliers, and reputational damage from supplier activities. To gain competitive advantage, it is important for them to identify, assess, and efficiently monitor and manage such risks—piecemeal or as part of a broader integrated strategy. The underlying trend, though, is clear—as procurement departments mature and organisations grow, an integrated risk management strategy will be the most effective path forward.

By Ankit Abraham Sinha, Senior Analyst, & Sidharth Sreekumar, Assistant Manager – The Smart Cube, a global professional services firm specialising in custom research and analytics.