Supply Chain Risk Management - Accenture Academy · respective case studies in Supply Chain Risk Management that look at planning and forecasting for ... This is a slide from a book

Supply Chain Risk Management Slide 1:

Thanks everyone for joining us today. This is a topic that I am, for one, extremely passionate about. So I would like to thank you for taking an hour out of your day to join us today. Good morning to those of you in North America and good afternoon to those of you joining us from Europe. I am Mark Hillman. I am a senior analyst with AMR Research. I have been leading our research efforts in Supply Chain Risk Management. We are going to share with you several pieces of information, as well as actionable advice. So, we are really looking forward to today’s discussion. Now I would like to turn it over to Mickey North Rizza who is my colleague at AMR to introduce herself and to get us going. Thanks Mark. Hi everyone. I am Mickey North Rizza, and I represent the Supply Management area of AMR Research. And, today we have quite a full agenda for you.

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Slide 2:

Our objectives for today are: to introduce you to Supply Chain Risk Management; give you some respective case studies in Supply Chain Risk Management that look at planning and forecasting for supply disruptions, they assess and monitor supply network; and establish and maintain a sustainable and effective Supply Chain Risk Management methodology. At the end, we will have some key actions and takeaways for you, but the reality of it is, we really want to leave you with some actionable advice. Mark, I will turn it back to you.



Slide 3:

Thanks, Mickey. So, just by way of introduction, I always like to start off discussions about risk and risk management with a little discussion about uncertainty. And, I think that we would all agree that in business today uncertainty is certainly increasing in a lot of different ways. Supply variability is increasing. Variability of demand is increasing. I like to refer to this quote from an excellent book called Against the Gods: The Remarkable Story of Risk written by Peter Bernstein, who is well known on Wall Street. The book really talks about the history of the ideas and the technologies that have evolved to support risk management today both from a portfolio theory standpoint, as well as pieces that inform things like actuarial finance to risk management, even in a casino environment. But I think the point here --the quote that I highlighted here -- is that if in business we were better at sensing imminent changes, the abrupt shifts in profitability that happens so often would occur a lot less frequently, and the prevalence of surprise in the world of business shows that uncertainty is really prevailing. And a lot of our mathematical models underestimate the role of chance and uncertainty, and it really speaks to the need for a probabilistic way of thinking. And, I think the second quote here really touches on the fact that in general we don’t respond. And, human beings, unfortunately, we aren’t really programmed to handle uncertainty well. We aren’t really designed to think probabilistically. So with this backdrop, the whole area and the whole science of risk management is really evolving, and it is a really fruitful area for discussion.



Slide 4:

So given that background, AMR has been doing some work on understanding risk management and especially in its context around Supply Chain Risk Management, where the focus is broadly on Supply Chain Enterprise Application and supporting infrastructure. But, really, a lot of our research is anchored around the extended supply chain process. So, we define “Risk Management” generally as the process of measuring and assessing risk and developing strategies on how to manage and mitigate risk. And, specific to supply chain, this can take the form of understanding and balancing the probability of expected demand, the likelihood of reliable supply and then determining the most effective allocation of resources of the firm to meet those expected demands, given the uncertainty or certainty of supply and the reliability of supply. And you will see this theme come through a lot in the case studies that we will be discussing over the course of today.



Slide 5:

So stepping back for a second -- risk is a very broad topic, and we recognize that it is a broad topic. So how do you really think about it from a supply chain perspective? This is an example that comes from an excellent book by Yossi Sheffi, a professor at MIT here in Cambridge, Massachusetts, and he wrote a book called The Resilient Enterprise, and this is an example from General Motors. This is how they mapped out, as part of their enterprise risk management strategy, the various risks that affects\ their business. And you can see that they are segmented into the categories of financial vulnerabilities, strategic vulnerabilities, operational vulnerabilities, and external hazards. The other part of the model that I think is interesting to note is that the things that are closer to the center of the bull’s eye here are the things that the firm decided they had more control over, so the things the firm could control. And things closer to the edge of the circle are things that are really outside the firm’s control, external to the firm. And, I am highlighting here a number of areas that really have a lot to do with the things that we are worried about in Supply Chain. In the hazard side, we are worried about how do we predict and prepare for external events like hurricanes and typhoons; geo-political risks in the areas we operate in; on the operations side things like systems failures, losses of key suppliers or supplier failures in our tier two and tier three suppliers, etc. So, I think that this is a useful framework to think about: what are the risks that face your firm? And, how do you deal with them?



Slide 6:

So given that backdrop, we published some research last fall where we outlined some of the key risk factors that affect the supply chain, as well as some key strategies for how to address those risks. So, everything from hedging strategies to deal with rising commodity costs, to contract management, which really touches so many aspects of the relationship of the firm with external parties and really speaks to what is the risk inherent in the agreement that you have made. How do you ensure compliance internally and externally to high-risk terms and conditions in the relationships that you are building with your clients? I think that the other thing that is interesting here is that sales, operations and planning, which is traditionally thought of as almost a motherhood and apple pie supply-chain process, really can be thought of as a risk-mitigation strategy. You are really looking at, touching back on the earlier slide we discussed, really looking at the expected probabilities of demand and aligning the assets of the firm to most effectively meet those expected demand patterns. And, you are really doing a “what if” analysis and scenario planning. And, an effective S&OP process brings together a cross-functional team that can really bring to bear the strengths of the firm to address potential risk factors.



Slide 7:

So, what are some of the trends driving awareness of Supply Chain Risk Management today? There are many business trends and challenges. Wall Street and other financial analyst are driving us to run leaner supply chains. Cost pressures are driving us all to be sourcing globally at the same time customer expectations are increasing. Customers want products customized to their needs. But, on top on that, given global sourcing as well as the specialization of products, the complexity and interdependency of the supply base is also dramatically increasing. And, of course, along with customer expectations increasing, volatility and variability of our demand signals also expanding exponentially, and finally throw in the issue that we are all dealing with rising commodity costs and the tightening of logistics capacity, especially in North America, but also globally. That is punctuated by a lot of other external factors such as the Enron scandal and Sarbanes-Oxley legislation in the United States, terrorist attacks, Avian flu, and also fresh in our minds, the hurricane season that we had last year or so. Those are a lot of the factors that we are seeing. Anything to add there, Mickey, that you would like to add to that? No, Mark. You pretty much summed that up well.



Slide 8:

So, finally, there is another slide that I would like to use in this discussion to drill down into one of these risk factors which is on the whole area of cost. This is a slide from a book called Hot Commodities by Jim Rogers. If you are US based, you may know him as sort of a commodity investor and pundit, and use to work with George Soros in a past life. He looked at historical data comparing the performance of the stock market to the performance of a basket of commodities, and what he discovered was that there were three significant periods where commodity prices increased and far outpaced the increase of stocks. And, the argument of the book is that starting around 2001/2002, we were entering another 15-17 year bull cycle in commodities. I think that this is a really interesting argument, and it’s raised awareness about managing risk especially around commodity costs.



Slide 9:

And, in fact, the evidence shows that people are doing something about this. This is a survey that was cited in an article in the Financial Times from last October, in which a survey of treasurers, and this is primarily treasurers in the United Kingdom, showed that three-quarters of firms now hedge their commodities exposure, compared to only half the companies surveyed the prior year. And, in addition, 80 percent of treasurers are tracking their success. The most important thing here, I think, and the most important takeaway is that the expectations of investors and external stakeholders in the firm are changing significantly. The days when you could say we didn’t expect this cost increase or we didn’t expect this business risk are gone. You can see a senior manager here saying we are supposed to have a precise calculation for the impact of every act of God on the firm. That is quite a tall order, but I think it really highlights the need for focusing on Supply Chain Risk Management.



Slide 10:

So, we will dig into a little bit of data here now from a number of surveys that AMR Research has conducted and what it means to set the context for today’s discussion. We recently conducted a field study looking at the adoption of Supply Chain Risk Management technologies. As you can see from this chart about a 3rd of companies are currently using some form of Supply Chain Risk Management technology but 50 percent of firms, those top three slices of this pie, are either planning to implement or evaluate solutions for Risk Management in the next 12 – 24 months. So, we can see that there is an increase focus of the need for Supply Chain Risk Management technologies.



Slide 11:

And, then finally from the same set of survey data, we asked firms about what categories of risk do they think pose the most threat to their firm. And, consistently across almost every survey we do around Supply Chain Risk Management, the issue of supplier failure comes up as the number one risk. So, we will take you through some case studies in managing supply risk today. Other risks that concern firms are strategic risk which we defined as, for example, selling the wrong product in the wrong market, really misunderstanding demand and bringing the wrong product to bear. And, then issues like natural disasters and logistic risks, I don’t know how this matches up with the experience of those in the audience, but these are some of the risks we have seen from the broad survey work that we have done. I will turn it over to Mickey to take us through a little bit more data here.



Slide 12:

Thanks, Mark. From the risk factors, we started looking, as part of this research study, how the risk factors were for 2006, whether our participants in the research felt it was increasing, staying the same or decreasing. And as you can see here by what we have, the cost increase is definitely the highest runner here as far as risk will increase, followed by quite a bit of difference here by supplier failure and then energy shortages. And, you will see the supplier failure actually coincides nicely with what Mark had on the previous slide at a percentage difference with just a few points there. So, the reality of this is when they started ranking them, the cost increases were 55, the supplier was next, energy, workforce management seems to be an issue with grain workforce, and then the natural disasters that we are all aware of at this point in time.



Slide 13:

The next segment of our research is the Gap Analysis we did in Supply Management Capabilities. And, in this particular piece of research, we asked executives, 246 in this particular research survey, what they were looking from supply management, what was the most important for them in 2006. And, then we asked them to rate the performance to that particular goal. And, as you can see here, there are some large gaps. The arrows point to what need to become a core competency in the supply management or in the organization in general, so that they can close this gap and ensure that they mitigate the supply risk. And basically that is ensuring your reliable supply, the cost avoidance, attainment and measurement, understanding and managing that end-user demands so you can really close that gap, get closer to your customer and then mitigate the risk on the supply end. What are the terms: the supplier terms management; complying with those third party regulations; the social responsibility; the hedging, and then finally managing a global supplier base. Those last three, you’ll notice, are very small gaps which is great to know because that means we are starting to close that -- mitigate some risks. So, we really need to be concentrating on the upper portion of this chart. Mark, I will turn it back to you.



Slide 14:

Thanks, Mickey. So, we will step through a couple more pieces of the data and then pause for questions. One of the other pieces of research we did was looking broadly at how companies organize their supply chain management organizations. And in the research, we asked what are the measurements that your supply chain organization is being measured on? We were surprised, frankly, to find that more than a third of the companies do measure their supply chain organization’s performance on Risk Management and risk communications as one of their key measurements. I think, consistent with the themes that we discussed so far today, other issues include supplier performance, predictable supply, as well as agility of the overall supply network, as well as the attritional matrixes in supply chain that is perfect order performance.



Slide 15:

One of the sort of truisms of managing risk is the more visibility you have, the more effective you can be in managing risk. Well, if that is the case, then this piece of data maybe a little bit scary to those of you in the audience as practitioners. We, also, in that same survey asked how long does it take you to sense actual demand in the channel; or how long does it take you to sense actual consumption? More than half of the companies that we surveyed said that it took them more than two weeks to get visibility to the actual demand signal. So, visibility is one of the key factors in your ability to mitigate risk. This speaks to the fact that there is a significant gap in performance and the gap that needs to be filled in order for firms to more effectively manage risk.



Slide 16:

And, then looking at overall complexity and the kind of complexity that firms that we work with are struggling with, we asked how many distinctive supply chains do you have in your organization? As you can see, almost a third of companies have more than ten different, discreet supply chains that they are trying to manage. But fully 80 percent of companies have at least two supply chains and almost over 60 percent are managing three or more supply chains. So, this speaks to complexity and, again, the need to get a handle on what are the risks that face the overall network.



Slide 17:

And then, finally, in closing network design and evaluating the shape of your network to discover if there is actual risk inherent in the design of your network is one of the best practices that we see firms engaging in. We were a little bit surprised here to see that when we asked the same survey set how often do you re-evaluate your supply network? You can see that almost 50 percent of firms do this evaluation less often than once per year, and 70 percent of firms do it on a yearly basis or less frequently, which is potentially alarming. We see best practices examples in some of the higher-turn industries, such as high-tech and electronics doing quarterly reviews of their supply network and looking at opportunities in logistics for example.



Slide 18:

Before we get into the case study here, I want to talk to you a little bit about the advisory services that AMR Research actually helps our clients with. We actually take in inquiries from our clients asking about various aspects of supply chain or functionality or issues they may be having, so we can help them solve some of their concerns and problems and give them actionable advice, and out of this, we collect our inquiries and start looking for trends in that. Last fall we started to see a few inquiries around risk management, and since that time, we starting getting one to two major company calls a week around risk management. And, you will see here a selection of what seemed to be the top questions that have been coming up over the last six to eight months. Basically, I currently source 35 percent of my products from China, and now the board is pushing me, they want me to do the rest of the 65 percent. The reality of that is, is it right? Should I be doing that? What is the right balance, and how do I build out the correct and proper business case? How do I assess the vulnerability of my supply chain and when I find that vulnerability what do I do about it? What are the best practices out there around supply risk and how do I reduce that? How do I ensure global trade compliance? And, then lastly, it’s what capabilities to next generation network design, sourcing and global trade tools need to address the market for tools to support the supply chain risk mitigation strategy? So, as we talk about this, you’ll find some of these questions may resonate with you, and may show you in our case studies here that we started to get some answers. So onto the first case study.



Slide 19:

Our first case study is around a retailer who is small and competing with Wal-Mart and the Super Targets out there. Their differentiator is based on their ability for preparedness and then full execution once something happens. So they get themselves ready to go, and then if a hurricane were to hit or a tropical storm, they can execute immediately. In this particular case, we are going to look at what they have prepared themselves for, for the hurricane season in Florida. Their goals for the program were to quickly build up that extra inventory that was needed prior to the hurricane. They also needed to change that mix, depending on what was sold before and what was sold after the hurricane. So, the reality of it is that demand will change. Before a hurricane, you may need wood and supplies to ensure that your windows don’t get broken and help board your place up. After the hurricane, you may need a lot of supplies such as water. It helps them maintain extra inventory on key items; it will help them look at their future forecast; and then help them do some planning based on what they know from each storm, take that knowledge and help use it to enhance what they are doing in the future. So, the techniques they used were their past sales records for actual hurricane seasons. What was bought pre-hurricane, what was bought after hurricane, what were the areas, how was it displayed, how was it viewed. They looked at the demand increase, and then they visualized the history to help them understand what was really going on. And they did this by mapping out what was actually bought, what was not bought before and after. And those requirements were totally mapped out so they can see the entire supply chain.



Slide 20:

They also made some strategic decisions during that period, and in order to do this, they had to say: What is the extra inventory we need to maintain? What inventory do we need to buy has it is headed our way? And, how often do we do that? Do we do it a week ahead of time? Do we do it three days ahead of time? Basically depending on the variability of the storm. And, then what extra inventory would they buy if the storm actually hit so they would have it after the fact. Through this entire process, they found some unexpected benefits that allowed them to strategize their buying opportunities. For instance, we give you three here, Thanksgiving and Christmas -- it allowed the buy- outs to ensure the key product availability during the seasons. So, anything that was extra during Thanksgiving and Christmas season, they would buy that ahead of time to prepare for the next season. They found some unpredictable sales spikes. Fire wood, basically after the hurricanes came through and there were no electricity or power, the individuals were then looking for another means of heating their homes during the cold spells that came at night, and they found fire wood. And, the last one is peanut oil, which is basically an interesting output of this whole thing. Peanut oil is used to freeze turkeys. So in the States, November and December timeframe with the holidays, turkey is a big sale item. So, what they did is they started looking at when they could buy the peanut oil at a lower price, so they were ready from the November and December timeframe, and they could stock their shelves going forward. And that is the first case study. Mark, will you take on the second case study?



Slide 21:

Thanks, Mickey, I appreciate that. The next case study example is an aerospace and defense company. It’s a global organization. As of December 2005, they had 8,000 active government defense programs. They are in the process of submitting up to 17 proposals per day and being awarded up to ten contracts per day on an ongoing basis. And, these are projects ranging in complexity from small assemblies to missile systems and aircraft systems, which are quite complex. On top of that, the firm has 11,000 suppliers in their supply base. Because of the needs of aerospace and defense applications, there is a lot of engineered content, a lot of specialized material used content that often leads to single sourcing or sole sourcing and heavy reliance on a small number of suppliers for certain critical parts, because of the specific requirements and highly engineered requirements of the products. To build the business case for doing something about Supply Chain Risk Management, they estimated that they were suffering two significant supplier failures per year that had an estimated cost to the firm of $5 million US dollars per disruption. And, finally, they had executives report in the form of the CEO mandate of no surprises. So, one of the questions to ask when you’re dealing with third party contracts because, in effect, this firm was often the brand owner for a proposal that might include multiple vendors is: Does every vendor in my supply chain, in my package, have an adequate risk management strategy of their own? And, if not, I as the brand owner take ultimate responsibility for this project or program that I am bringing to bear. So, it is really thinking carefully and auditing leading indicators around delivery performance, quality, cost, etc. So we will touch on that in a little bit more detail, but that is hopefully scratching the surface of the question.



Slide 22:

So what did this firm do to get a handle on their risk management strategy? They first started off to ensure that all the suppliers in their supply base were accounted for and that they had some kind of risk management score. So what they did is they took all of their supplier masters that were housed in multiple different systems, brought them together into a single database, but carefully mapped out all their active suppliers, as well as their parents, and tried to get a sense of the parent-child relationships between their various suppliers which is a very important thing to consider. When Delphi declared bankruptcy last year, there were a lot of tier one automotives suppliers who didn’t realize that their tier-two suppliers were heavily reliant on Delphi for a large proportion of their revenues. So when Delphi all of a sudden wasn’t ordering from them anymore, many tier-one suppliers were scrambling to find new sources of supply for suppliers who are about to go bankrupt. So that is an important thing to consider here. So, this firm took Duns & Bradstreet scores, as well as scores from open ratings, which does predict analytics around various aspects of supplier performance to try to predict failures before they occur. So, step one, ensuring all suppliers are accounted for and has some kind of score.



Slide 23:

Next, they went on to ensure that each supplier has a risk manager assigned to it. Now, in this case, they made a very conscious decision to distribute risk management responsibility across the buyer community within the firm. So, instead of centralizing the risk management function in sort of an ivory tower function or as a separate entity within corporate, they partnered between finance and operations to distribute risk management responsibility to the buyers. They recognized the trade-off in the decision, and it is a trade-off that you will need to consider in your own firm as you decide how to go about this process. If you centralize it, you may have more adherence to process and control, but you may have less ability to do active supplier management. And, this firm took the tack of distributing responsibility to the buyer community, so they can do more active supplier management.



Slide 24:

And, then as they went ahead, the next step was to ensure that the risk managers were doing their job or complying and that any new supplier that came into the system went through the gating process. So, through the scoring process and the management process, every supplier was classified into a category of either Safe, so don’t worry about placing orders with this supplier, everything looks good as far as their scores. The next category was Monitor, which is there are some things that concern us about this supplier, so keep a close watch on them. You need to be doing active research on a quarterly or every six-month basis on that supplier to see if their score has changed or deteriorated. And, finally, the category of Act, which means this is a high-risk supplier. You are not to place a PO with this supplier, unless you have a risk-manager plan in place and that can include secondary sources of supply, for example. This is a detailed example about how this firm attacked their risk-management program and got a handle on supply risk, and as a result, they were able to eliminate those costly supply failures that were happening twice a year.



Slide 25:

So to summarize: there are many models out there for how to think about assessing your supply chain and managing supply risk. This one happens to be from a firm that focuses just on risk management called AON. But, in this system, they described sort of a simplified approach to what we just saw. Describe your overall system. Identify the threats within that system so anything from their logistic risks. There are supply risks. There are particular geopolitical risks that might affect particular sources of supply. Estimate what the consequences of those various threats are, and estimate the likelihood of those threats. And that will help you determine what the overall risk level of that particular threat is within your system. And then you come to the decision of: Well, do we accept that risk within our tolerance? Do we modify our system either by adding or removing suppliers or changing our supply network? Or, do we just focus on just building out a continuity plan and financing the risk somehow? Now, what we found in the case study interviews that Mickey and I have been working on is that there are two ways that people have prioritized which suppliers they go after first in terms of risk management. The first is to prioritize high risk, high-impact suppliers. So, those are suppliers who supply what you might call a “line stopper”, a product that if supply of that product stops, the line shuts down. That is clearly a high-risk supplier. Or, someone who supplies a part that is not easily attainable from a secondary source of supply. The other approach that we have seen is for companies to look at the products that have the highest revenue or highest margin contribution to the firm, and then work backwards from there to identify any supplier who is tied to that product line, and identify them as a high risk-supplier that needs to be managed and monitored. So, that concludes our second case study, and I will turn it over to Mickey for our third case study.



Slide 26:

Thanks, Mark. The third case study, and our last case study today, looks at Supply-risk management. And this is a financial investment company. They have the uniqueness of 38 regulatory requirements that they must meet. So, what they have done here is they have built their framework or their building blocks for risk management. And you will see that they also have KPIs, which are their Key Performance Indicators that help guide them through this, and they have also inserted what they call their KRIs, or their Key Risk Indicators. So, starting from the bottom, we are going quickly preview financial, operational, strategic, legal, compliance, and reputation risks.



Slide 27:

So, the next slide shows us the financial risk area. And you will see there that for their financial risk framework within that scorecard model, they are actually looking at Dun & Bradstreet supplier evaluation risk, or their SER scores as they call it. With this they look at the financial statement analysis for any high SER scores, and in their case, they use a greater than six number, and this would include their operating cash flow, their quick ratio numbers, and debt-to-equity ratio.



Slide 28:

The next building block within their risk management scorecard framework is their operational risk. They are looking at supplier specifics here. What is the product or service, and is it a commodity that they need to keep an eye on? Is there a backup or alternate source for this product or service? Mark just spoke to you a minute ago about how that is the number one area that companies are actually addressing when they start looking at risk management. Are there backup sources available, and if not, can we get emergency stock? Is there a third party involved, and do they have a disaster recovery plan in place? If not, how do we encourage them and start developing that, so that it becomes in place, and they can further the type of work they are actually doing with the firm? How easily can that third party be replaced? And, then lastly on the supplier specifics, has the product or service price increased more than five percent in the last year? It is definitely a guideline to keep an eye on, because if that has increased, one needs to understand why. Is it because of constraint to supply? Is it because of commodity pricing? Capacity issues? And that will help from a risk standpoint.



Slide 29:

The next segment. All of that operational risk is the operational performance, and this is based on their scorecard approach that they use with their suppliers. In the next slide, you will see the operational framework that is part of the second step in the risk analysis. And that includes technology, looking at new products, enhancements and innovation, quality of the product coming in from the supplier, the support that they receive. Is the supplier there helping out? Is there a repair that is needed? How are they in reducing their lead times? And then on delivery standpoint: Are they making those on-time delivery requirements? Are their shipments coming in accurate? And, are we ensuring that there are no quality issues with the delivery? The business side from future business plans and working together as a team to promote for the end customer, and then, lastly, the economics and the total cost of ownership and what is the financial impact and the value that is coming into the supply chain by working together to ultimately go to that end customer.



Slide 30:

The next slide shows the third area or building block of strategic risk. In this particular area, they are looking at country risk. Are there political, financial, and economic risks within that country of origin for this remaining third party? What are the issues that need to be tracked and solved? And, then the competitiveness of the third party’s industry. In this company, they actually use what they call their Porter’s Five-Force of Analysis. They look at the bargaining power of suppliers, the bargaining power of customers, the threat of new entrance, substitutes, and finally the competitive rivalry between the existing players.



Slide 31:

On the fourth step, they call it Legal Risk. In this particular case, they want to clearly articulate the clauses that they have in those contracts. They want to look at performance measurements and service-level agreements. They want to have the right to audit. They want to look at NDA and intellectual property rights. They want to ensure that there is contingency plans and backup. And, if you go back to the research that we presented, that would ensure the reliable supply in meeting that customer demand. They want to understand insurance, controls around the use of new product introduction, indemnification, quality, a background check on any contractors, and finally default termination and renegotiation of any type of contract to move forward.



Slide 32:

On their fifth step in their building block, they have what they call their ITRO over a CSS Risk Assessment. The reality of this is: This is the total number of open issues one has with the supplier compared to the total number of closed issues. And, they rank this on a high, medium, and low basis. There is also, in some cases, some manual input, if they cannot get the assessment information, because it is such a large firm and they are still coming together after an acquisition, that they will put some manual intervention in there.



Slide 33:

And, finally, their last level or step in the building block is a Reputation Risk. They are looking at a third-party background-check document. It looks at the number of complaints, litigation, bankruptcy, and then your reputation of the principals and executives that are controlling that supply base. This particular investment firm has done a lot with this entire building block from a scorecard standpoint for the supply base. They have done so much over a two-year timeframe. They have seen, depending on the type of commodity, a five-to-ten percent improvement in the supplier’s overall scores for the score carding, just in that two-year timeframe. They have also noticed that three suppliers on average a year have been completely removed from the supplier portfolio and have been put on such a high risk that none of the products will ever be bought from those particular suppliers moving forward. So, that ends the third case study that we have for you.



Slide 34:

We have a little bit more information that we will share with you, and then we will pause for questions again. This next slide really discusses a lot of different strategies, and Mickey and I will sort of tag team on this particular discussion. To this point, we really talked a lot about managing supplier risk and doing that through sort of a Risk Assessment program of the supply side, but this really speaks to what are some of the broad strategies that you can think about. So, for example, network design. We talked a little bit about assessing and understanding whether or not there is risk inherent in the design of your current supply chain. An example of that that has come up publicly, I believe. Dell recognized that the port of New Orleans in the United States was a high-risk port for them. They recognized that the volume of material going through there was extremely high, and it was critical to running their operations. And since they run on two days of inventory at any given time, a significant disruption would shut down their factory, therefore, cutting off their revenue stream. So, they identified this through their frequent network design and network analysis program and were able to shift most of the imbalance supply to ports in South Carolina. The good and bad news is that they did this in the 2003-2004 timeframe, so that when Hurricane Katrina came through last year they were unaffected. So, that is an example of an effective network design. Mickey, do you want to talk about sourcing strategy and supplier development? Sure. On the sourcing strategy side, from an alternate source of supply, we spoke a little bit earlier regarding the nose of a network. If you have a global supply base and you are receiving goods in from China, as well as perhaps India, as well as Europe, and you have various locations, or even into Mexico that you are shipping the product into, you really need to ensure that you have got these various sources of supply, so in case one area of the world happens to go down, you can bring in the product to another area. It may be a little costly, but at least you have got a backup plan, and you can still hit what the customers need. From a supplier development standpoint, the score carding we just saw, one particular company, and the great avenues and strides they have made putting that whole process together, and now monitoring the risk of the suppliers. One of the case studies that we didn’t present here today, but we thought was definitely worth mentioning actually took an alert system that they have managed and set up. So in every case of their supplier risk, any time a supplier would go below a certain score within a portion of their entire score carding -- balance scorecard approach -- or hits a portion of it or a total score and went below a certain area or was just hinging on the edge of going below, an alert system was sent out.





And, it was basically sent out to the product managers that were monitoring that product, the buyer, and the quality group, so they can take a look at it and say: Wait a minute here, we have got a problem, and we need to ensure that we mitigate that so that we can go forward and not disrupt our supply chain.” Mark, S&LP. Yeah, thank you. I think you made an excellent point that is worth underscoring, which is the fact that there are sometimes you may decide that you may choose a supplier that may be more costly. And, I think that is another critical point. It is not all about cost. There are many instances where reliability of supply and reliability in performance and quality are much more important than overall cost. So, as far as S&LP goes, we talked a bit in the beginning about the use of S&LP, because it brings together multi-disciplinary teams within the organization to do “what if” analysis and scenario planning and aligns the assets of the firm to most effectively meet probable expected demand. The more tactical, but still extremely important horizon, contract management, we talked about earlier, but it is really becoming important to a lot of our clients to really get, number one, understand what is in our contracts. What have we committed to? We need visibility to the commitments that we have made so that we are not at risk of non-performance, just because we didn’t know that we had committed to something that we are not performing on. Compliance across contracts, understanding that if you deem high-risk clauses in your contracts that should not be modified without high-level approval, making sure that those are always flagged. And anytime anyone tries to modify one of those clauses, it is going through an appropriate approval process, measuring performance contract and also designing-in flexibility into your contracts to respond to changes in demand and changes in the environment. And, on the sourcing and procurement side from the tactical horizon: Risk Aware Supplier Selection. You may have two or three sources of supply that you are going to use going forward from a sourcing standpoint, but understand if there are some contracts in place specifically around unions and a labor contract coming to fruition where strikes are going out, you need to understand that and make sure that the source you are actually selecting is not going to have a strike during the timeframe that you wish to use them. And, on the procurement side, adhering to preferred risk-approved suppliers, that is basically when your buyers go ahead and they start placing those orders. Make sure they see that the risk on that supplier is quite low, and they should be able to use that for over the period of time that they need. Make it so that they understand what the timeframes are that they can use that supplier and when they can meet the expectations. So, it is a tactical and a strategic that Mark and I are trying to bring forward to you here. Mark.

Slide 35:

And this is just really the last slide to just sort of give an illustrative example about the whole concept of managing the high-tech supply chain. So, this is just kind of an illustrative example that looks at across the bottom sort of time horizon, and this is not drawn to scale, but you see the process of design, fabrication, assembly, ocean freight to the location whether its is South America to Tokyo or Shanghai to Seattle, then to D.C. then to the retailer then sale to the customer. And the question is what does two weeks mean to you as a firm? Is maintaining a low cost of supply really the top goal for your company? Have you identified that if you introduced more speed into your process you might be able to gain some competitive advantage?



Slide 36:

We saw some examples where a few firms during the Port strikes in the Port of Los Angles and the Port of Long Beach in 2004, just before the Christmas season. Firms that have done the cost-benefit analysis, identified that there were a lot of opportunities for them to gain market share by flying in goods from the Far East into the US, especially on relatively high margin but not super-high weight products. For example, digital cameras, flat screen televisions, etc. So, this is an example of thinking about the trade-off decisions, managing the risk, and doing scenario planning to understand when you can not only mitigate against risk, but also identify opportunities for competitive advantage.



Slide 37:

So with that we will summarize, and then we have a few more questions that have come in that we will address. Okay, so as actionable advice that we would like you to take away: -you need to really recognize that risk is real. It is here. It is here to stay, and we need to plan for it. As part of the planning process, identify a cross-functional team with, definitely, an executive mandate. Mark spoke to you, and I have as well, regarding the cross-functional team. We have seen some real successes bringing in the folks from finance, supply chain, legal, sourcing, and engineering communities, and then having the executive mandate, as well as a sponsor that this group is going to work cross functionally and collaboratively to ensure that it mitigates risk. Establish a risk framework and process. We gave you some examples of that today, with some of the case studies we did. Identify the technology enablers within that and then enforce compliance through the appropriate incentives, whether it be a supplier incentive or a customer incentive, whatever you need to do to ensure that you mitigate that risk. The next step is definitely measure that. Measure the effect of what you are doing. Everything that you are putting together as you start to roll that out, and then you start seeing some changing and issues crop up. Tailor it, move it forward, make the changes you need to ensure that it is going to work. We recommend planning it, modeling it, simulating it, and then improving it. So, it is a continuous improvement process that continues to go forward. Think about: Does it really need to be on a yearly basis? Can you get it down to a quarterly basis? Could it be a monthly basis? This is something that becomes a part of your everyday process, as in the case study we gave you around the alerts coming forward to the individuals. And, basically, look at every aspect of the supply chain.



Slide 38:

Alright, well, I guess in closing I would just like to thank again everyone for taking the time to speak with us and take an hour out of your day to listen to what we had to say about Supply Chain Risk Management. We think that this is really a fertile area of focus and we really hope that we were able to give you some both provocative thoughts and some actionable advice to take away from this. So, I, for one, would like to thank you for your time and for joining us today. And, I do as well. Thank you so much. We look forward to speaking with you all in the future again.



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Supply Chain Risk Management - Accenture Academy · respective case studies in Supply Chain Risk Management that look at planning and forecasting for ... This is a slide from a book