Tag Archives: risk management

Flashback Friday – Can You Make Procurement Decisions Under Fire?

Are you struggling to lead or motivate your team through difficult times and under extreme pressure? We’ve got some top advice from someone who knows a thing or two about making decisions in extreme conditions…

Andy Stumpf spoke at the Chicago Big Ideas Summit 2017. Read more about our upcoming event  – The London Big Ideas Summit – on 26th April 2018 and find out how you can get involved. 

“There are only two types of leadership.” begins Andy Stumpf “good (effective) and bad (ineffective).”

In today’s world, senior managers often struggle to effectively  respond and adapt to change. But the world is full of change and it’s crucial that our procurement leaders are flexible enoughto respond to the unexpected, to “read the tea leaves and meet the challenges of the real world.”

Andy  began his U.S. military career at the age of 17, transitioning from the position of an enlisted soldier, to an officer, and then,  in 2002,  he joined the most elite counter terrorism unit in the military; SEAL Team Six.

The unit, which is tasked with conducting the nation’s most critical missions, has become the inspiration for a number of Hollywood movies and books.

If you ever needed a man who knows how to plan for and adapt to change, Andy Stumpf is your guy! He’s strategised and executed hundreds of combat operations throughout the world in support of the Global War on Terror.

At Procurious’ Chicago Big Ideas Summit, Andy will draw on his wealth of leadership experience to talk about the intersections between business and combat, decision-making and empowering procurement teams.

Building the greatest leaders

“Business and combat are defined by their similarities, not differences and the theories of successful military leadership and successful business leadership are identical” Andy believes. It’s possible to apply the same principles and philosophy to your procurement teams because it’s really only the arena that differs.

“60 per cent of the time, organisations want me to talk about leadership. In fact, the definition is always the same. What can change is the way in which you approach leadership.”

So, how do the military build strong and competent leaders?

“Leadership is about empowering your people. From day one in the military we are taught, and it is enforced, that in the absence of leadership you must stand up and take control.

“Instead of creating individuals that think reactively in nature, we instead create individuals that think proactively.  You don’t have to be in a leadership position now to think two or three steps ahead.  In doing so, when a decision presents itself you’ll already have an answer for it.”

Does Andy believe these skills can be taught or are natural leaders exactly that?

“neither successful teams or leaders occur by accident, these are skills that must be learned, practiced, and refined. Navy SEALs are successful because of how we select, train, and lead our teams.

“Nothing in that process happens accidentally, everything is calculated. We demand leadership and accountability from each individual starting from the first day of training. We prioritise the individuals to our left and right, and the goal of our team over personal success. This philosophy is diametrically opposed to what is often found in society, and requires a structured approach and prioritisation from leaders to be successful.”

And Andy has some strong words of advice for any over-confident leaders out there. “The 1st leadership principle within the SEAL Team is ego; if you have a massive ego you’re more concerned that your ideas and strategy is being used as opposed to striving for success of the team. You can’t meet the challenges of the real world this way!”

Plan, plan and plan some more!

“We plan for everthing in the navy. We often say that if you want to shut down the military, you simply need to shut down powerpoint!

“Every stage of a plan gets one slide and there might be between five and seven slides on the ‘what-ifs’, the contingencies. Where will we land this helicopter? Where is the nearest location for medical treatment and what alternate options do we have?” When, as Andy points out, precisely 0 per cent of planning goes as expected, contingencies are everything!

“You make primary, secondary and tertiary plans because you don’t want to have make snap decisions in a crisis. You need to be able to fall back on stable procedures”

And of course, it can’t hurt that contingency planning makes you look like something of a genius! “It’s really hard to make difficult decisions in a crisis because you’re in a time compressed environment and you may have people’s lives depending on you.  We plan for 24 -72 hours and there are 5 phases per plan. Each phase has 5-7 ‘what if‘ contingency plans because, at the end of the day, you don’t want to make decisions in a crisis, you want to be able to draw on a branch diagram.

“It’s the contingency planning especially in the SEAL teams that makes the difference between success and failure in moments of crisis.”

What can our procurement teams learn from this? Spend a lot more time planning, for starters! But Andy also reinforces the value in having baseline standards to fall back upon. “Businesses should always fall back on standard procedures so people can come together, with a clear knowledge of the protocol. This is especially crucial when you’re working under restrictive time constraints.”

Andy’s final words of advice? “Don’t get attached to your plan -get attached to success!”

Andy Stumpf spoke at the Chicago Big Ideas Summit 2017. Read more about our upcoming event  – The London Big Ideas Summit – on 26th April 2018 and find out how you can get involved. 

Debt as a Source of Risk in the Supply Chain

What debt conditions, putting pressure on our global economy , should procurement pros make themselves familiar with? And how can we mitigate supplier risk? 

This blog was written by William B. Danner

Two leading authorities on corporate financial health, Dr. Edward Altman, Professor of Finance, Emeritus, at New York University’s Stern School of Business and creator of the Altman Score, and CreditRiskMonitor Founder and CEO Jerry Flum, recently presented a webinar to hundreds of supply chain and credit professionals about today’s mammoth corporate debt problem.

As the primary point of contact between their company and suppliers – not to mention a first line of defense against third party risk – procurement and supply chain professionals should be concerned with the degree to which public companies are leveraged today.

Dr. Altman and Jerry Flum identified three unprecedented debt-related conditions, putting pressure on the global economy today that procurement should be aware of from a risk mitigation perspective:

1. Compare debt to GDP

One of the best ways to put debt levels into perspective is to compare debt to GDP. In the U.S., total debt is currently at a historically huge 3.5 times GDP. Of this total, corporate debt is large and growing. Overall debt levels are so large we must be concerned about the investors who own this debt, not just the borrowers. A 10% decline in value would destroy wealth equivalent to 35% of GDP, with a major effect on spending. Junk debt (high-yield bonds and leveraged loans) has soared to $2.5 – 3.0 trillion world-wide.

2. Benign credit cycle

Now in the 8th year of what is usually a 4-7 “benign credit cycle”, many executive teams have let their guard down, forgetting the lessons of the past. As Dr. Altman explained in the webinar, a ‘benign credit cycle’ has four characteristics:

  • Low default rates
  • High recovery rates when bonds default
  • Low interest rates, yields, and spreads
  • High liquidity

In other words, credit is cheap and easily available to publicly traded companies, which leads many companies to take on more debt. A great deal of debt has been issued to pay dividends and buy back stock, making corporations riskier.

3. Corporate valuations

Corporate valuations are inflated, with market values far higher than historical norms. Private equity firms are paying as much as 10 to 11 times cash flow for acquisitions. High stock prices make corporations less risky, but stock prices can fall.

Whether companies give in to the mania or make a disciplined choice to break free from the pack, procurement and supply chain professionals can take action to mitigate supplier risk and prepare their companies to handle the downturn when the next recession inevitably comes.

Suggested Steps for Supply Chain Professionals to Mitigate Supplier Risk :

1. Build in a monitoring process

Don’t stop with an initial vendor screening. Companies’ financial health can change and even a periodic review simply isn’t good enough. Avoid surprises and react quickly to change.

2. Get to know the vendors you do business with well

Ask questions such as:

  • “Who is the corporation we are paying? Is it under a different name?”
  • “Are they actually manufacturing the product or is someone else?”
  • “Where are their operations?”

Be cautious, especially if you are not getting clear answers.

3. Don’t over-do it

Not all your vendors will present a problem if they enter financial risk. Ask yourself:

  • “Is the commodity/product easy to replace? Is this a one-time contract?”
  • “Or, could this vendor create a major issue with our ability to ship on time, the quality of our product, or with our customer satisfaction?”

Only if you find that it’s a “yes” to the second question do you need extensive review.

4. Incorporate financial analysis in your key vendor review process

Be sure to include multiple periods of financial statements in your review to see trends. If you are finding it difficult to get financial information, be wary. 

5. Compare your vendors with the financial condition of their peers

You may find more secure sources of supply.

6. When appropriate, take a hard look at the financial stability of your vendor’s suppliers

They are part of your supply chain and could be a significant exposure.

7. Have an open and honest communications process

You’ll want to explore with your vendor the performance factors that directly impact you such as shipping reliability, product quality, etc. but also financial stability. Knowledge is power and knowing all the facts gives you the time to identify and prepare alternative source(s) of supply.

8. Look at more radical options if a vendor looks too weak

  • Make vs. buy decision
  • Engineer a stronger vendor into the supply chain
  • Buy the troubled vendor, or
  • Help arrange for a preferred vendor to purchase the troubled vendor.

The fact of the matter is that today’s debt situation is historically unprecedented. We can’t be certain of the timing of a change in the financial markets, or what will serve as the trigger, but a shift is coming – so now is the time to prepare and put your processes and procedures in place.

The full webinar can be viewed here.


William B. Danner has been president of CreditRiskMonitor since May 2007. Bill has more than 35 years of financial and information services experience. 

Prior to CreditRiskMonitor he worked in brand strategy and business development consulting for financial services clients at his own firm, Danner Marketing. Previously he was at Citigate Albert Frank, a marketing communications company in New York City, where he worked on a variety of leading financial services accounts including Reuters Instinet and the CFA Institute. From 1997 to 2001, Bill was Vice President of Market Development at MetLife’s employee-benefits business. Before joining MetLife, he was at Dun & Bradstreet, most recently as VP Strategic Planning. He spent the first decade of his career at GE Information Services and GE Capital.

Bill earned a BA in economics from Harvard College and an MBA from Harvard Business School.

Automation: Who Says You Can’t Manage What You Can’t See?

If your business is engaged in international commerce, you’re probably struggling to toe the line with supplier risk management. Automation, alerts, and third-party data are your best defense.

Managing supply chain risk is no walk in the park. Exogenous events like the recent terrorist attacks in Barcelona have drawn attention to the EU’s rules to combat terrorism financing through stricter anti-money laundering (AML) regulations. These rules impact many companies that are increasingly added to the law’s scope: possibly yours.

Meanwhile, modern slavery violations can surprise even the most astute contract or supply chain managers who may have unknowingly relied on invalid or falsified information. In the U.K., The Modern Slavery Act 2015 includes a Transparency in Supply Chains clause, which requires companies operating in the U.K. to address modern slavery in their supply chains. If you’re at a big company, you’re probably on the hook to comply.

Once you add in the more common types of risk, such as the financial or credit health of your suppliers, changing markets, and natural disasters, the sense of how challenging it is to manage them all—in the age of digital disruption with fast-paced change and volatility—can quickly become overwhelming.

Fortunately, there is technology and automation to help you maintain control, gain visibility into your supply chain, and mitigate much of these risks. The right technology can help you proactively steer your organization clear of minefields that can damage everything from reputation to sales. And it’s only getting better.

 Start with real-time monitoring and alerts

The first step is to identify the most likely disruptions to the supply chain, like a natural disaster or a work stoppage at a supplier’s supplier. One way to deal with this type of risk is with real-time monitoring. Real-time monitoring of your suppliers means that you can receive an alert whenever there is a potential for disruption. Such alerts can help you find an alternative source of supply, maintain production, and avoid missed deliveries or even a plant shutdown.

Real-time alerts should be an extension of an overall solution consisting of a platform and business network. This is the ideal foundation to set up, monitor, and manage a portfolio of suppliers to ensure that all essential documentation about labor practices, certifications, certificates of insurance, and so on, is in place before you start doing business.

Integrate third-party data sources

Documentation and data about your suppliers can come from many sources, not just what you gather during an onboarding, contracting, or surveying exercise. There are plenty of third-party sources that have standalone solutions and open APIs or integrations into supplier management platforms that let you address various dimensions of supplier risk and to set up corresponding alerts.

If your company is engaged in trade and has a 10,000-euro or more money transfer in any way, it will need to comply with the EU 4th AML Directive. In addition to digitally onboarding your supplier base, you may want to automate KYC / KYB (know-your-customer, /-business), AML (anti-money-laundering), and EDD (enhanced due diligence) requirements. These steps will help you comply with the directive

One provider that is using cutting edge technology like distributed ledgers is Austria-based Kompany. Their counterparty verification data allows users to streamline the supplier verification process at the point of onboarding (and continually) with up-to-the-minute alerts on any material changes to supplier vitals. Their information comes directly from the commercial registers. Kompany even includes PEP (politically exposed person) screening and sanction lists.

Who says you can’t manage what you can’t see?

Other popular sources of company and industry data include Moody’s (credit ratings), EcoVadis (sustainability scorecards and ratings), riskmethods (transparency into risk exposures in 1-n tier supply chains), and Made in a Free World (visibility into modern slavery), to name a few. These data sources can help you continuously monitor for risks and evaluate your risk portfolio during the sourcing process.

Through technology and regulatory technology systems like those described above, you can design an automated, customized, and intelligent risk management strategy. In turn, this can boost trust between you and your suppliers and you can plan more confidently in an environment full of uncertainty.

Cladding Purchase in the Spotlight After Grenfell Tower Fire

After the tragic death of at least 58 people in the Grenfell Tower fire, confusion remains over whether the decision to use combustible panels in its construction was in accordance with British building regulations.

 

The Guardian and the BBC have both reported that Reynobond panels with a combustible polyethylene (PE) core were used in a refurbishment of the 24-storey Grenfell Tower, completed last year. This has yet to be independently confirmed by investigators, although it would explain the frighteningly rapid spread of the fire. The thermoplastic material is known to melt and drip as it burns, which spreads the fire downwards as well as upwards.

Manufacturer’s own warning ignored

A Reynobond brochure from 2016 shows that PE cores are only suitable for buildings up to 10 metres in height, while panels with a fire-retardant (FR) core should be used up to 30 metres. Grenfell Tower is 60 metres tall, for which Reynobond recommends their A2 model, with a non-combustible core.

The Guardian’s report states that the Reynobond PE cladding supplied to the companies refurbishing Grenfell Tower was £2 cheaper per square metre than the alternative Reynobond FR.

Confusion over legality of PE panels

While media outlets have pointed out the PE panels are banned in the U.S. and Europe, there remains some confusion as to whether they are legal in the U.K. or not.

Two Government ministers have said that “in their understanding”, the use of the cladding is against British building regulations.

Treasury chief Philip Hammond told BBC News: “My understanding is that the cladding in question, which is banned in Europe and the US, is also banned here. So there are two separate questions: one, are our regulations correct; do they permit the right kind of materials and ban the wrong kind of materials; and the second is were they correctly complied with, and that will be a subject the inquiry will look at and will also be a subject the separate criminal investigation will look at.”

Trade Minister Greg Hands told Sky news: “My understanding is that the cladding that was reported wasn’t in accordance with UK building regulations. We need to find out precisely what cladding was used and how it was attached.”

Vague building codes

A Reuters report found that British building regulations documents did not specifically say PE-core panels should not be used, yet that doesn’t mean builders are clearly permitted to use them: “British safety regulations across many industries are usually principles rather than rules-based.”

This means the law often requires companies to act safely without giving a specific definition of what this would involve. Firms are instead expected to be able to prove in court that they “behaved in a way that their industry would consider safe, given current knowledge and technology”.

The Fire Protection Association (FPA), an industry body, has reportedly lobbied for years for the government to make it a statutory requirement for local authorities and companies to use only fire-retardant material. 

Paper trail

Lawmakers have urged the Government and the police to immediately seize all documents relating to the building’s renovation to prevent the destruction of evidence that could show criminal wrongdoing.

“The Prime Minister needs to act immediately to ensure that all evidence is protected so that everyone culpable for what happened at Grenfell Tower is held to account and feels the full force of the law,” said Labour lawmaker David Lammy. This means that all emails, minutes of meetings, correspondence with contractors, safety assessments, specifications and reports, must be kept intact.

The Government is reportedly carrying out an urgent inspection of other tower blocks in Britain to assess their safety. There are roughly 2,500 similar apartment towers throughout Britain.

Supply Chain Risk Management: Not a Procurement Priority

This article was first published on My Purchasing Center.

Procurement teams struggle with supply chain risk management. They are aware of  the consequences of not managing it, but often they don’t have the resources to focus on it as much as they’d like. Even when they do, managing supplier risk poses a challenge: Most often the best metric of procurement performance at risk is when nothing happens.

A new report, Is Your Luck Running Out? Managing Supply Risk in Uncertain Times, by A.T. Kearney and Rapid Ratings International, describes the current state of procurement involvement in supply chain risk management activities, potential risks that could affect the supply chain, and ways procurement can begin to better manage risk.

Report co-authors Carrie Ericson, Vice President at A.T. Kearney Procurement and Analytic Solutions, and Rose Kelly-Falls, Senior Vice President at Rapid Ratings, did a presentation on the study for procurement and supply managers at ISM2016 held recently in Indianapolis.

Describing the report in an interview with My Purchasing Center, Ericson says she and Kelly-Falls started with the hypothesis that there’s risk along the supply chain that procurement teams simply aren’t managing. “They’re taking a kick-the-can approach,” she says. Asked if managing supply chain risk is procurement’s responsibility, Ericson responded:

“Procurement plays a big role in terms of vetting and onboarding suppliers before they even enter the supply chain,” she says. “Then, typically it’s procurement’s responsibility to put in supplier performance management programs to monitor and track behavior of suppliers throughout the course of the relationship or contract.”

The Is Your Luck Running Out? Managing Risk in Uncertain Times report, referring to the A.T. Kearney Assessment of Excellence in Procurement, states that companies are not effectively managing supply risk and that their risk management approaches are ad hoc at best. What’s more, just 40% of companies report having key performance indicators (KPI) or metrics for supply continuity and supply chain risk mitigation.

Most cite lack of bandwidth and budget as the biggest roadblocks.

Overlooking risk management—or, rather, getting by with that “kick-the-can” approach—leaves procurement teams especially vulnerable in today’s tenuous geopolitical and economic environment, according to the report.

The report also cites A.T. Kearney’s Global Business Policy Council (GBPC)  study, Divergence, Disruption, and Innovation: Global Trends 2015–2025, which analyzes trends shaping the world today and in the decade ahead. It identifies macro trends that play a role in the current and future operating environment for businesses and global supply chains. Among the trends procurement teams are advised to watch are: geopolitical realignment, continued global violent extremism and accelerating global climate change.

Understanding these trends and how they could affect the supply chain is the first step in anticipating and planning for the future,” reads Is Your Luck Running Out? Managing Risk in Uncertain Times.

Supplier Risk: A Closer Look 

The report also demonstrates how procurement teams can use the Rapid Ratings proprietary FHR® (Financial Health Rating) to analyze the health of public and private companies globally, with comparison across industries and regions. 

According to Kelly-Falls at Rapid Ratings, this is the first time such a study shows how combining macro trends analysis with a micro bottom-up company and industry analysis provides procurement teams with relevant industry insights to make informed risk management decisions.

Is Your Luck Running Out? Managing Risk in Uncertain Times shows the financial health of U.S. public firms peaked three years after the beginning of the global financial crisis in 2008, with an average FHR of 61.0 in 2011. Since then, they have declined to an average of 59.2 in 2015, a drop of 3%.

The peak for non-U.S. public firms (61.9), on the other hand, came in 2008 as the global financial crisis was beginning, while the low point was 58.4 in 2009 and again in 2015, a decrease of 5.7%.

While a two- or three-point change might not seem like much, it represents a very significant change based on the algorithm used to determine FHRs, the report states.

Over the same period, the financial health of non-U.S. private firms peaked in 2010 at 63.6 and deteriorated by 6.8% through 2015. U.S. private firms exhibited a decidedly different pattern of behavior. Their rating peaked in 2014 after achieving a 9.6% improvement from 2008 to 2014 and demonstrates a resilience quite unlike the other three groups. U.S. private firms declined slightly in 2015 to 64.2 but still led the others by a wide margin, indicating U.S. private firms have had an edge in terms of minimizing sourcing risk since 2012.

The report also drills down into the health of individual supply markets (by industry). For example, it shows that deteriorating financial health is evident in non U.S. firms in the aerospace and defense industry and in U.S. firms in the chemicals and computer technologies and services industries.

What is Procurement to Do?

A.T. Kearney finds that 90% of procurement teams expect they will have more responsibility for managing risk in the next two years—and they see a growing need to implement a risk management strategy within the next three years. As a result, they are starting to invest in risk management practices that link procurement, category and supplier management strategies.

Is Your Luck Running Out? Managing Risk in Uncertain Times looks at research on developing supply risk management strategies at the category or supplier level and risk and supply base segmentation.

The report finds there are multiple points in the sourcing life cycle where procurement can use risk mitigation strategies—especially in the early phases. This is when supply or category managers conduct the most comprehensive analysis, evaluating alternative suppliers and supply scenarios.

“At no other time does a procurement team spend so many resources on developing suppliers than when it selects, negotiates with and screens potential new partners,” Ericson tells My Purchasing Center.

After that, the report states that procurement’s most important tool for identifying and mitigating ongoing risk is access to robust, relevant and current data.

Kelly-Falls adds that, “procurement teams should not be shy about starting to engage suppliers they’ve been doing business with for years in risk management. It’s going to have to happen. It’s inevitable procurement will need a monitoring system for the supplier. Maybe not every supplier, but we can’t let incumbents know they’re okay.”

As for tier-two and three suppliers, she says, “We know as we get deeper in the supplier chain, it’s possible to lose touch with some of the smaller suppliers. So, it’s a matter of having good practices and making sure to cascade them to tier-one suppliers then hopefully they will take them and cascade them down to their supply base.”

Big Ideas Summit 2016: Big Idea #15 – Thinking the Unthinkable

Modern leaders, in the C-suite and in Government, aren’t equipped to deal with unthinkable events due to a lack of skills, or sense of denial.

At the Big Ideas Summit 2016, we challenged our thought leaders to share their Big Ideas for the future of procurement.

From ideas that have the potential to change the very nature of the procurement profession, to ones that got the assembled minds thinking about the profession’s impact outside of the organisation, the response we received was amazing.

Managing Unthinkable Events

Nik Gowing, visiting professor at King’s College, London, says that we are seeing a very human sensation of feeling “overwhelmed”. This is happening to executive level leaders in both the public and corporate sectors.

Building on his ‘Thinking the Unthinkable’ study, Nik argues that leaders aren’t equipped to deal with ‘unthinkable’ events, either through a lack of appropriate skills, or through denial, or wilful blindness.

Catch up with all the delegates’ Big Ideas from the 2016 Summit at the Procurious Learning Hub.

Want to find out more about Big Ideas 2016? And maybe what we have planned for 2017? You can visit our dedicated website!

If you like this (and you haven’t done so already) join Procurious for free today. Get connected with over 16,000 like-minded procurement professionals from across the world.

Why Supplier Segmentation Can Aid Risk Mitigation

Supplier segmentation could prove a useful tool for procurement in aiding risk mitigation in the supply chain. Sandeep Singh of Genpact explains.

Supplier Segmentation

In the first part of this series, we looked at the role of procurement plays in risk mitigation. In this article, Sandeep Singh, Vice President – Procurement and Supply Chain Services at Genpact, offers further advice on risk mitigation strategies, as well as how to create effective supplier segmentation.

What are good mitigation strategies for global supply chains in light of high impact factors like natural disasters and political instability?

To anticipate, prevent, and manage adverse events throughout their operations, global enterprises need enhanced visibility of their third-party risks. They need more efficient risk assessments to support targeted mitigation strategies, and the ability to predict potential outcomes throughout their operations.

Some of the mitigation strategies could include:

  • Having access to a list of risk assessed, qualified suppliers, who can serve as an alternate source of supply in case of an adverse event.
  • As part of a supplier selection process, adopting a multi-supplier strategy, where suppliers are located in multiple geographies, or where one supplier may have an ability to ship from multiple locations.

These mitigation strategies can easily be created by analysis of past trends and through leveraging digital technologies.

To increase the likelihood of third-party risk management (TPRM) initiatives achieving expected outcomes, organisations can adopt a Lean Digital approach, combining digital technologies, design thinking methods to focus on the end customer, and Lean principles that offer greater agility.

This approach tightly aligns risk processes to business outcomes, and helps overcome the challenges from legacy operations. This is done by driving the right choices end to end, rather than focusing on the individual parts of the process.

What is a good process to follow when carrying out supplier segmentation for risk management?

Multiple product or services, complex data structure and taxonomies, large supplier base across the globe and changing regulations makes supplier segmentation by risk a complex process.

Leading companies are increasingly relying on data-driven digital solutions, powered by the right set of business rules to conduct risk segment. The Lean Digital approach can make risk segmentation more efficient and effective. Typically to arrive at risk segmentation of suppliers, organisations can follows two broad steps:

Step 1

Segmentation based on:

  • Category or type of product or services suppliers are delivering or will deliver – an office stationery supplier may pose no risk, as compared a supplier providing IT services, or a supplier providing raw material for the manufacturing of an end product.
  • Location of supplier – a supplier located in a developing country can be prioritised first, as compared to suppliers located in developed countries.
  • Nature of supplier relationship – how strategic or critical is a supplier to an organisation’s business. It may be more sensible to focus on suppliers with a long-term engagement, versus a one-time purchase.

Step 1 can also be taken to understand and manage inherent risk. It can help organisations prioritise their needs around risk, and can save lot of time, effort and investment into managing risk.

Step 2

Organisations can assess suppliers’ relevant risk dimensions leading to their segmentation as low, medium or high risk. Risk dimensions, such as anti-bribery and corruption, and data privacy, need to be mapped with the category, or type of product or services, that supplier is responsible for delivering.

Further, a scoring methodology should be created, taking into consideration category and location of supplier, and then connecting it to an applicable risk dimension.

This scoring methodology should also consider weightings across various risk dimensions, so that the final output is a comprehensive risk score which can then be used for supplier segmentation into low, medium and high risk brackets.

Are there examples of good practice in supplier segmentation by risk, where organisations have mitigated their risks?

There is a good example of this through some of the work that Genpact has done with clients in the past. One pharmaceutical company wanted to improve its ability to assess its thousands of vendors and partners, particularly as regulators were taking a greater interest in third-party risk management.

The firm lacked standard processes for supplier risk management, could not provide timely or accurate risk reports, and could not keep up with the volume of assessments required. Genpact transformed the pharmaceutical firm’s TPRM operating model by defining and executing a scalable, five-step process for assessing third parties against its standards of excellence.

The organisation also introduced metrics, data-driven process management and technology to industrialise the process. This enabled more accurate and timely reports, reduced assessment cycle times by up to 40 per cent, and increased coverage to assess close to 100 per cent of the company’s third parties over a certain level of spend.

Genpact offers a number of procurement services that can be tailored to specific client needs, including end-to-end Source to Pay (S2P) services for both direct and indirect materials. Find out more by visiting their website.

The Key Role of Procurement in Risk Mitigation

As average spend with suppliers increases, procurement must be more active with the management of risk mitigation in the supply chain.

Risk Mitigation

Increasingly companies have a higher percentage of their cost base with suppliers, frequently as much as 50-70 per cent. Typically half of this is indirect spend on functions such as Marketing and Human Resources.

It is clear that as the cost spend increases with these suppliers, procurement is playing a key role as a broker and helping to drive the revenue line. However, if the majority of cost base is outside of the company’s walls, this presents a major business risk.

This is particularly alarming in industries such as financial services and pharma, where the regulatory and reputational landscape is complex. How can procurement help with risk mitigation, and also help senior executives have greater confidence that their supply chain is in order?

Mitigation & Segmentation

According to Jon Kirby and Paul Birch, from Business Process Transformation consultancy Genpact, organisations must institute better and more sophisticated risk segmentation, dividing the procurement supplier base into distinct risk tiers.

This does not necessarily mean that the largest suppliers in terms of spend will pose the largest risk. Companies should also be continually re-assessing supplier risk and asking questions, such as:

  • Are any of your suppliers at risk of bankruptcy?
  • Are there any global or geopolitical issues in your supply chain that could disrupt it?
  • Do you have systems and processes in place to regularly evaluate and monitor your most important suppliers?
  • Have you embedded risk evaluation into the on-boarding of new suppliers?

Creating stronger links between the lines of business and the procurement function can also ensure that the risk profile is in line with business priorities.

Procurement’s Role

There are a number of factors procurement professionals can keep an eye on when tasked with supplier risk mitigation. Sandeep Singh, Vice President – Procurement and Supply Chain Services at Genpact, shares his experience across these factors.

  • What are the signs that procurement needs to watch out for when assessing suppliers’ bankruptcy risk?

Assessing the financial health of a supplier should be a critical part of selection, as well as the ongoing relationship management process. Financial failures in today’s economy are not uncommon and can cause disruption to companies business.

Procurement professionals should pay close attention to the following aspects of business when assessing a supplier’s financial condition or bankruptcy risk:

  • Financial information – including profitability or margins; revenue growth; liquidity; negative cash flow.
  • Law suits such as where supplier is being sued for collection matters.
  • Managerial and employee related events such as resignation of key members of management, or abnormal turnover of employees.
  • Poor quality of product or services, or long term order delinquencies.
  • Inability to produce timely and accurate financial information.
  • Delay and penalties due to outstanding tax and statutory issues.
  • Request for special payment arrangements, such as changing terms of shipment to Cash on Delivery, or request for advance payment
  • Declining relationship with their bank or frequent change in their banks.

However, applying various signs and parameters to assess a suppliers financial condition can be a huge challenge for procurement, for the following reasons:

  • Financial assessment needs to be a continuous process, and doing it only during selection process may not be sufficient.
  • How priorities are given (i.e. which supplier to cover and which supplier to exclude).
  • Large supplier base can run into the thousands.
  • Multiple early warning signs and financial parameters.

To overcome the above challenges, leading global companies are leveraging Lean Digital solutions, which combine digital technologies with design thinking. This results in procurement being able to segment their supplier base with minimal effort, and being able to prioritise multiple early warning signs and financial parameters.

The adoption of the Lean Digital approach also provides companies with the ability to conduct ongoing financial risk assessments on their suppliers as opposed to doing it only during the selection process.

So what else can procurement do to assist with risk mitigation in the supply chain? For this you’ll need to come back for the second article in this series.

Genpact offers a number of procurement services that can be tailored to specific client needs, including end-to-end Source to Pay (S2P) services for both direct and indirect materials. Find out more by visiting their website.

Don’t Risk It – Why Your Organisation Needs Supplier Pre-Qualification

Workplace accidents have other costs apart from the tragic loss of human life. They can damage your brand, cost your company millions and, if you’ve failed to mitigate a known risk, could put you behind bars.

Pre-qualification Risk
Cell tower climbing – One of the world’s deadliest jobs

It’s difficult to write about the business consequences of a workplace fatality. It can be hard to see beyond the immediate human tragedy – from shattered families to a saddening waste of life when someone is killed on the job.

But the business consequences do need to be talked about, not only due to the financial impacts, but also because it’s up to big businesses to drive the safety improvements that could one day make workplace fatalities a thing of the past.

Risk Management Expertise

Insurance companies understand this, as do the risk management experts who take a holistic view of the impacts of accidents and fatalities. Angelique Navarro, of supply chain risk management firm Avetta, gives the example of a major telecommunications organisation that suffered eleven fatalities amongst its cell tower climber contractors before it acted to pre-qualify suppliers.

“The human cost was horrific, but the business costs were high as well. There is always significant public anger when preventable deaths occur, and people generally vent their frustration at the provider at the top of the chain – even though the safety lapse may have occurred two or three tiers down the supply chain.

“Cell tower climbers potentially have the deadliest job in the United States, so it’s a prime example of an area where you need to be 100 per cent confident that your suppliers, and their suppliers, are doing the right thing. Since the telecommunications organisation has partnered with us to bring in rigorous pre-qualification, there have been zero fatalities to date.”

Highly Visible Organisations

Navarro’s point about the most visible corporation taking the blame for its suppliers’ errors is borne out by the example of the Deepwater Horizon oil spill in the Gulf of Mexico. Public anger – from placard-waving protesters to President Obama himself – was directed almost entirely at the highly-visible oil giant, BP.

We didn’t hear anywhere near as much about the operators actually responsible for the spill, namely oil-field service company Halliburton and offshore drilling contractor Transocean. Almost seven years on, BP is still suffering from the enormous brand damage that this environmental disaster incurred.

“Consumers lose trust and confidence in what your organisation can do for them”, says Navarro. “But brand and reputation damage aren’t the only negative effects. There are huge insurance payouts involved, and of course lost production time and revenue. Knowing that you work with suppliers who are completely qualified mitigates that risk.”

Avetta’s 300+ major clients, such as Coca-Cola, Shell, Verizon and John Deere, tend to come from some of the riskiest industries – oil and gas, chemicals, construction, utilities and energy, telecommunications, transport and manufacturing. This core group of more than 300 clients has approximately 50,000 suppliers over 100 countries – every one of which carriers a degree of risk.

“We vet suppliers and partner them with clients and industries across the globe”, says Navarro. “And the results speak for themselves. We’ve saved a global leader in oil and gas $6 million in one year by managing its health and safety program.

“We’ve reduced the incident rate at a chemical company by 74 per cent, saved lives at a major telecommunications company, conducted 14,000 performance reviews for a well-known construction company, and Avetta is an integral part of a major airline’s recognition as the safest airline in the world.”

Six Steps to Pre-Qualification

While every industry and business model is different, there are six key steps that can be taken to pre-qualify suppliers and reduce your risk profile. Ensure your suppliers have:

  • risk as a top agenda item for their board or senior team
  • the right employees: conduct background checks, ensure rules and regulations are being followed
  • the correct level of insurance protection with up-to-date insurance certificates
  • safety manuals in-hand and accredited training programs in place
  • prequalification for anyone coming on site
  • a consistent level of auditing multiple levels down the supply chain
  • rigorous tracking and data collection.

Navarro comments that risk-savvy procurement professionals work very closely with their organisation’s environmental health and safety teams, who have been in the risk-management space for a long time and can give some valuable advice. It’s important that we share safety learnings across industries as well. “You need to ensure your organisation is competitive”, she says, “but when it comes to safety we’re seeing major organisations come together to share best practice”.

Personal responsibility

There are executives behind bars for not acting to mitigate risks, with members of the C-level now being held personally responsible for fatalities and other accidents. “There’s little defence if you knew about a risk and didn’t act on it, or if you’ve been warned before yet let it happen again”, says Navarro. “When someone goes to work for a company, they have a reasonable expectation that they will come home safely to their family at the end of the day.”

To learn more about Avetta, visit their website. Avetta Founder John Moreland is President of Operation Underground Railroad, a non-profit organisation dedicated to rescuing children around the world who are victims of sex slavery. Click here to learn more.

How Walmart, Hanesbrands and Mattel Reduced Supply Chain Risk

It’s the million dollar question. How can corporates minimise supply chain risk, without significant disruption to their core business?

Supply Chain Risk

Global retail giants, headquartered in the US, have had to address their supply chain risk in a bid to forge ahead in the new world of corporate social responsibility. It hasn’t been an easy exercise, that’s for sure.

Retail giant Walmart, apparel brand Hanesbrands, and toy manufacturer Mattel, are among the countless others to bring about major changes within downstream manufacturing to ensure corporate risk is above board. Each turned to brand protection firm ICIX to implement a new way forward.

Management Wake-Up Call

Company founder Matt Smith explains that supply chain risk was starting to enter the corporate vocabulary in 1999.

“Companies were starting to get jittery about their corporate responsibility. Emails and back then, faxes, were being sent from management looking to address this issue, as they started to wake up to the fact that there were major risks within the supply chain that they had to actually take responsibility for. Before this time, it hadn’t really dawned on management that supply chain risk had anything to do with them,” Smith says.

Suddenly, the race was on to find a way to outsource the task of conducting factory audits and ask the hard questions. Fast forward more than a decade, and the events of 9/11 shone an even brighter spotlight on these issues and what it means for corporate entities.

Smith was at the coalface, watching the opportunity emerge. He set about creating a solution, and today ICIX remains the leading operator in this space. ICIX was born in 2004, initially to respond to the challenges faced by the food industry in securing the food supply chain, and addressing increased safety requirements of the Bioterrorism Act of 2002.

During this time, Smith worked with some of the world’s largest retailers to help them address issues of supply chain transparency and inefficient information sharing. ICIX worked to connect all trading partners into a single network to centralise collaboration, making it one of the earliest cloud-based SaaS companies.

Risk a “Complex Beast”

The company grew early food customers into other retail segments, including general merchandise and apparel and footwear. It also extended its solutions to include not just safety, but also quality, compliance and corporate social responsibility.

Today, ICIX helps companies understand where its products are coming from, streamline collaboration with trading partners, drive compliance and safety, and as a result, secure and maintain customer trust.

Smith says that those working on the risk side of a business are often frowned upon by those working on the business side, which makes it a complex beast to juggle. Frequently, the CIO within a business isn’t necessarily on the same page as someone in the CEO chair.

“I could see a really big opportunity opening up in the US, with several major retailers over here scrambling to find a solution.

“And today, businesses are spending more on managing risk than ever before. Those in procurement are battling for budget and attention, until something bad happens like people get sick or someone dies because of their product. That’s when the purse strings always open up. That’s what it often takes for people to want to solve the supply chain risk related issues.

“We realised that tackling this as a network was going to bring about far greater efficiencies, however retail is a complex industry in which to do this, which complicated the process,” Smith continues.

Role of Technology

For example, barcodes don’t match purchase orders or product numbers, and without that universal product identifier, it can be a complex process. Technology has played a huge part in bringing scale to the organisation, with cloud technology supporting a new way to assess and identify potential risk.

“Supply chain risk management is a huge area, and we were looking for ways to take that network architecture and make it accessible to everyone.”

ICIX does this by taking various feeds of information and assessing it. This could include shipping feeds, purchase feeds, ethical and responsible sourcing data and much more, and then cross-referencing all of these to determine supply chain risk.

The sheer size of retail giant Walmart put it under the consumer spotlight and forced it to look at improving supply chain transparency. Company management was eager to speak to Smith to bring about better efficiencies.

The catalyst for the changes at Walmart were the issues with Mattel matchbox cars in 2007, when consumers got wind of the fact that the children’s toys contained lead paint. New government regulations introduced as a result, required companies to act and take responsibility.

“Firstly, we see whether the vendor is meeting all their safety and testing requirements, then we can fast forward a few steps. And if they’re missing a test report, we can request that information on their behalf and rectify the situation and re-test,” Smith says.

Such solutions provide assurances that companies are ‘doing the right thing’ – that they are providing, safe, quality products that are ethically sourced and compliant. With ever increasing customer demands for transparency, information and responsibility, such programs are critical not only for companies to protect their brands and enhance their customer trust, but to survive.