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The European Institute of Purchasing Management
French Geneva Campus - Site d’Archamps - F-74160 Archamps - +33 (0)450 31 56 78 - www.eipm.org
XAVIER SARRAT
May 29th, 2014
What`s on your risk
RADAR
What is Risk?
© EIPM 2013
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Things Happen!!!
(Not only to others…)
© EIPM 2013
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Earthquakes
Floods
Hurricanes
Tsunamis
Epidemics
Terrorism
War…
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© EIPM 2012
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And will happen more often in the
future… Worldwide Natural Disasters 1980 – 2012
Source Munich Re
© EIPM 2013
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Basics of Risk
Management
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Communicate &consult
Monitor & Review
Establishing the context
Risks Identification
Define the potential effects
Evaluation Risk Treatment
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Establishing the context
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Your company Its environment
Your suppliers
Their environment
Identification
• Natural Disaster
• Geopolitical Risk
• Epidemics
• Terrorist Attacks
• Volatile Commodities Prices
• Rising Labor Costs
• Currencies fluctuations
• IP Protection
• Delivery delays
• Market Changes
• Supplier Performances
• Forecasting accuracy
• Execution Problems
• …
Unknown
Known Controllable
Uncontrollable
Value-at-Risk
Miss-the-Target risk
Rare &
Severe
Frequent & Manageable
© EIPM 2013
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Differentiate Risks and their Effects
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Supply Disruption
Price increase
Employee safety issue
IP loss
+ Industry specific events
Product Failure
Brand Damage
And more effects to come…
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Capacity issue
Delivery performance
CSR performance Environmental issue
Quality performance
Adversarial relationship with suppliers
Supplier Dependence
Innovation not validated
Risk Effect Probability P Impact I Criticality P x I Abatement Plan
Quality
…
Technical
…
Logistics
…
Capacity
…
Strategic
…
Price and cost
…
Country risk
…
Analyse
Mapping the Risks
Probability :
1 low – 3 moderate – 5 high
Impact :
1 low – 3 moderate – 5 high
Criticality :
15 – 25 High priority : requires an abatement plan
5 – 9 Medium priority : teams must decide if an
abatement plan is required
1 – 3 Low priority : no additional attention (in principle!)
Abatement plan for the most critical risks
5 15 25
3 9 15
1 3 5
Probability
Impact
High
Low
Low High
Criticality
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© EIPM 2013
Examples
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Distribution of epicenters of earthquakes greater than
magnitude 5.0 for the period 1976-2000, South East Asia and
Indian Ocean
Different types of actions can be
identified according to the risk
Mitig
atio
n / re
du
nd
an
cy
Hig
h p
rob
ab
ility ris
ks
Co
ntin
ge
nc
y p
lan
nin
g
Critic
al ris
ks
Cris
is
ma
na
gn
t
Lowt High
Severe
Light
Impact
Probability N
o
sp
ec
ial
atte
ntio
n
Risk typology matrix
© EIPM 2013
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Risk breakdown
Probability
Low Average High
Moderate
Minor
Major
Impact
Risk Analysis
Supplier Bankrupcy
Shortage Butylacrylate
Price increase Ecotax
UE plants restructuring
Contract Pricing volatility
Road Transport Shortage
Integrated suppliers Policy
Natural Catastroph
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© EIPM 2013
Mitigate
Transfer
Accept
Sharing
Avoid
De-Risking Plan
Crisis Mgt
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De-Risking Plan
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Mitigation
Redundancy of capacity / inventory
To accommodate “routine” adverse events
Contingency planning
Analyze what could go wrong and alternatives
Identify action plan and implement
Monitor: implement Market Intelligence
Crisis management
Multi-disciplinary teams trained in rapid response
Based on pre-defined rules and decision process
De-Risking - Development to conduct
Fear and Greed!
Short Term Mid Term Long Term 6 months 2 years > 2 years
High
Medium
Low
Deployment
Impact
Purchasing
Finance
R&D
Supply Chain
Take or Pay on Volume
Hedging Monomers
2 suppliers policy per application
Balanced suppliers portfolio
Accelerate switch from
Latex to Starch
Accelerate HSC GCC + HBP
Accelerate HBP SBR
Study Biolatex Use of HSC
latex
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© EIPM 2013
But How to go further?
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Think of the UnSinkable?
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What we find depends mainly on what we look for!
What If? Analysis Cycle
or the worst case scenario
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STRESS
TESTS
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What if analysis can be extremely
powerful in business.
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Think about these questions:
• What if air traffic was shut down due to another volcano? What would this do to our supply chain?
• What if we offered our client a new discount model? Would they buy more products in the future?
• What if we were able to reduce our expenses by 5%? How much flexibility would we gain?
• What if every employee reduced their business travel by just one trip per year?
• What if we changed our fixed phone plans to variable ones? Would we be able to save cost?
Developing those what if questions is the first step. The second step requires us to understand the answers and the potential impact on our business with live practice.
Example
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Harsh Winter
Increase RM Cost
Customer needs more products
Lower product Margin ?
Revenue Increase
v Risks
Opportunities
Obstacles to what if analysis
• Data is complex
• Spreadsheets are often too heavy
• Not enough details. Focus at the big picture but problems hide in the details.
• Slow to handle the complexity.
• Live Simulation phase is neglicted
• Not everybody have interest and understand the purpose
As a result, too many people shy away from performing what if analysis
© EIPM 2013
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Become a new Species
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FRAGILE Damaged by Disorder
ROBUST Resilient to Disorder
ANTIFRAGILE Benefit from Disorder
Definition of ANTIFRAGILE
Simply, antifragility is defined as a convex response
to a stressor or source of harm (for some range of
variation), leading to a positive sensitivity to increase
in volatility (or variability, stress, dispersion of
outcomes, or uncertainty, what is grouped under the
designation "disorder cluster"). Likewise fragility is
defined as a concave sensitivity to stressors, leading
a negative sensitivity to increase in volatility. The
relation between fragility, convexity, and sensitivity to
disorder is mathematical, obtained by theorem, not
derived from empirical data mining or some historical
narrative. It is a priori." © EIPM 2013
Page 33 From Wikipedia
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“Antifragility is beyond
resilience or robustness. The
resilient resists shocks and
stays the same; the Antifragile
gets better.”
Nassim Nicholas Taleb
© EIPM 2013
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Use audit to enquire about risks
Every quarter, review your risk matrix
Take risk into consideration when developing contracts. What If?
Establish Key performance measures that informs you about risks
Prepare yourself to handle crisis – Change the Culture of Risk in the company
Segment your suppliers and purchasing families from a risk point of view
Maturity in Risk management
Formal risk management
• Systematic identification, evaluation & prevention of risk to reduce impact on performance
Coordinated risk management • Collaborate with
suppliers on risk management
• Joint mitigation strategies
• Crisis management team
Designed for risk
• Define priorities
• Flexible supply chains
• Redundancies
• Real time information sharing
• Design value chain to prevent disruption
• Cultural change in the company
© EIPM 2013
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Conclusion
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•Consequences are not known
•Low frequency events
•Resource shortages
•Requires cross-functional effort
•Short tenure of managers
•You don’t get credit for fixing problems that never happen
•You have not experienced one
The procurement contribution Why not more attention is paid to the risk of disruptions?
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© EIPM 2013
Risk analysis is an essential tool to:
– avoid fire fighting
– avoid extra non expected costs
– provide visibility to the purchasing function
TAKE CALCULATED RISKS
“Plan for the Worst, Hope for the Best”
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© EIPM 2013
© EIPM 2013
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« The policy of being
too cautious is the
greater risk of all »
(Nehru, 1st Indian Primeminister)
Thank you for your attention!
Follow us
www.eipm.org
Xavier Sarrat
EIPM China General Manager
13627247430
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© EIPM 2013
