Tag Archives: supply chain risk

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.

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.

Risk Mitigation – Hope Like Hell It Doesn’t Happen to You

Organisations can plan and strategise for risk mitigation in their supply chain, but ultimately a lot of it comes down to luck.

Risk mitigation

In the words of one member of The Faculty’s Melbourne Roundtable, “There’s a lot of risk out there – you can mitigate all you like but in the end, you just hope like hell it doesn’t happen to you.”

Risk-experts Aaron Cleavely-Millwood (Market Development Manager – Regulatory, Market and Operational Risk) and Nathan Lynch (Head Regulatory Analyst) of Thomson Reuters, visited the Melbourne and Perth Roundtables to take members through their organisation’s global research findings on risk and disruption.

While the Thomson Reuters research focused on disruption to financial services, Roundtable CPOs drew some key learnings from shared challenges around governance, risk, compliance and regulatory drivers.

The Faculty ran its own snapshot survey among its Roundtable members, providing some interesting comparisons between Thomson Reuters’ global, cross-industry study and our local, procurement-focused findings.

Supply Chain Risks

Thomson Reuters’ top four disruption risks revolved predominantly around price:

  1. Raw material price fluctuation
  2. Currency fluctuation
  3. Market changes
  4. Energy fuel price volatility

The Faculty’s findings revealed that CPOs have a slightly different set of concerns:

  1. Supplier monopolies
  2. Market changes
  3. Climatic or natural disasters
  4. Emerging technologies

Risks and Impacts

Price risk is an obvious and ever-present danger and a key part of strategic planning. Cleavely-Millwood gave the example of the 2015 drought in Russia, which saw the price of wheat rise by 41 per cent, and create a huge impact throughout Europe. Spikes such as this (and of course the drop in oil price) cannot necessarily be forecast, but it is possible to plan for and hedge against these events.

Interestingly, social activism was placed at the bottom of both lists. This is surprising given some of the recent disruptions driven by environmental activism in the Australian coal and coal seam gas industries.

The Thomson Reuters presentation focused on fraud risk. This has been identified as a high area of concern for Australian organisations despite increasing regulation. CPOs have to be continually aware of the risks around supplier, contractor and employee fraud, and have plans in place to minimise the damage when fraud takes place.

Increased regulation is a double-edged sword. It will effectively lower the chance of fraud risk and other potentially damaging issues, but will mean CPOs need to spend more time and resources ensuring compliance.

Roundtable delegates were taken through various major pieces of regulation including the UK Bribery Act, the Australian Senate Review of Bribery Laws, the Dodd-Frank Act, and the upcoming Unfair Contracts Act.

The key takeaway – communicate regularly with your internal legal counsel to ensure you keep track of regulatory change.

Effective Risk Mitigation

Our snapshot survey asked members to nominate the most effective risk mitigation measures, with the following results (1 being the most effective):

  1. Building strong supplier relationships
  2. Creating a risk-aware culture
  3. Improving market intelligence
  4. Improving IT and data analytics
  5. Increased sharing of information

The Faculty’s advice for managing risk:

Due diligence can take place through three levels of risk assessment:

  • Ensure you thoroughly investigate new vendors.
  • Regularly perform risk assessments of existing vendors to check if anything has changed.
  • Ensure you have visibility of your suppliers’ suppliers, and their suppliers, and so on, until you’re confident that there are no major risks several layers down the supply chain.

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.

Contract Lifecycle Management: Stop Being Foxed by Your Suppliers

Daniel Ball, Director at Wax Digital, explains how organisations can minimise supply chain risk through effective contract lifecycle management.

Today’s businesses are increasingly reliant on global, multi-tiered supply chains. While they can contain the essential ingredients for competitive advantage, cost efficiency and innovation, supply chain complexity also contributes to greater supply chain risk.

Consequently, contract lifecycle management (CLM) has become progressively crucial to organisations as they attempt to keep track of suppliers and their sub-contractors. Analyst group Gartner claims that no organisation is immune to the complexities of today’s contracts, or the pace at which businesses operate in the global economy.

Regardless of the sector you operate in, for anyone with a growing and increasingly complex supply chain, CLM has become a critical business process.

Mitigating Supplier Risk

You don’t need to search very hard to find examples of organisations whose complex supply chains have caused them significant issues, affecting both their reputation and bottom-line. Tesco’s infamous horse meat scandal is a classic example of how uncontracted and unvetted suppliers can become part of your supply chain and cause unforeseen damage.

The store was left at the mercy of the public and the media for months after the scandal broke causing huge reputational damage and financial loss to the organisation. Unfortunately for Tesco, the complexities of its supply chain meant that visibility was restricted, and it was unaware that one of its suppliers was sub-contracting work to an unknown and unvetted supplier.

Supplier risk can raise its head in many forms. The importance of ensuring all your suppliers have the necessary certifications required to work with your organisation shouldn’t be understated.

It’s irrelevant whether they are supplying food, people, commodities, electronics, or complex mechanical parts. Take the construction sector as an example. A building company’s supply chain manager will diligently vet all contractors required onsite to ensure they have the necessary health and safety certificates and public liability insurance details in place, as part of the supplier on boarding process.

But when pressed could they honestly claim to know when each of these certifications is due to expire, and that when that contractor is next onsite, his certifications are all still in date? If the answer to these questions is no, then an organisation could find itself in a very vulnerable position if an accident occurs, and the contractor’s health and safety certifications have expired.

Contract Lifecycle Management & Legal Compliance

What’s more, new sentencing guidelines have been introduced to create a more consistent and proportionate approach to sentencing for those individuals or businesses convicted of health and safety, food hygiene offences or corporate manslaughter. These new guidelines mean that all organisations should be looking to assess risk, both internally and across their entire supply chain, to ensure standards are maintained at all times.

Legal compliance with legislation such as Sarbanes-Oxley or ISO standards can also be monitored as part of CLM. The healthcare, financial services and manufacturing sectors are all subject to compliance demands. Stiff penalties can be applied if an organisation is found to be non-compliant.

Contract Management Databases

Contract management databases play an essential role in ensuring organisations know exactly when their suppliers’ contracts are up for renewal. No-one wants a contract which is no longer valid for your current business needs to roll over for yet another year. As important as that is, arguably the main benefit contract management offers is complete visibility of supplier performance and compliance.

Moving all contracts to a secure, electronic contract management database enables an organisation to practice effective contract lifecycle management and keep a firm eye on its entire supply base – both direct and indirect.

A contract management database that hosts all of an organisation’s contracts, and details on the criteria (certifications, regulatory requirements and SLAs) that its suppliers are contractually obliged to meet, enables organisations to quickly identify specific types of supplier able to compliantly fulfil a project.

It also allows organisation to identify their business-critical suppliers, and ensure their necessary certifications are in place and that any KPIs agreed at the start of the contract are being met. Some systems can even offer visibility into tier two suppliers. This is extremely beneficial if your supply chain is becoming increasingly complex, and can help identify who your critical suppliers are sub-contracting to.

Visibility at Your Fingertips

The benefits delivered by CLM are undeniable as it becomes increasingly important that organisations ensure that their compliance procedures are in place. Contracts filed away, stuffed in drawers or indexed on a spreadsheet can’t issue an alert if they’re about to expire. Nor does it make life very easy if you’re looking to identify which of your suppliers has the right credentials in place to fulfil a certain role.

Storing all suppliers’ contracts in a secure, manageable database, that is quick and easy to access, ensures that you have supply chain visibility at all times. Should the time arrive when you need evidence to defend your organisation, or pinpoint the cracks in your supply chain, you’ll certainly be glad to have this level of visibility at your fingertips.