On Tuesday, March 29th, we had the pleasure of hearing Robert “Bob” Kane speak at the CPO Rising 2016 Summit here in Boston. He delivered a fascinating breakout presentation on Supply Chain Risk: Managing Supplier Risk in a Tough Global Climate. Bob knows a thing or two about managing supplier risk – he’s the Vice President of Procurement, Sourcing, and Contracts at Ogin Energy, and has been managing supplier risk in all of its forms for the past 20 years. So it was a real treat to hear Bob share the story of how Ogin, a builder of wind turbines for the niche renewable energy industry, manages global supply risk today.
How Ogin Manages Supply Risk
Ogin’s wind turbines are made-to-order, and they are assembled in various stages at various hubs in China and the US before being shipped to the project site and assembled there. The whole process typically takes 10 weeks, and as a result, there are a number of risks that the production and delivery process are exposed to that can result in sleepless nights for Bob and his team. These can range from strategic risks (consumption vs. capacity, demographic changes), market risks (commodity pricing or foreign currency exchange), or event risks (legal/regulatory, natural disasters, war/terrorism). Any and all of these risks could result in a negative impact to a company’s financials, market share, branding, assets in the field, and sales inventory operations planning.
For example, Bob cited the recent attack at the Brussels Airport on March 22 that resulted in 34 deaths, more than 200 people wounded, the airport closed, borders within Belgium, France, and the UK closed, and rail traffic disruptions. Although Ogin’s impact was marginal, other companies were likely not so lucky. Attack casualties, stranded employees or parts, down time, and loss of business surely occurred for other companies. This is just one example of one type of risk, but it illustrates how sudden and far-reaching the risk can impact the company, their personnel, and their supply chain.
For Bob and his team, they follow a four-part methodology for managing supply risks:
1) Monitor Risks: This includes analyzing supplier health, notably their financial, operational, and commercial metrics, as well as their business intelligence for any signs of trouble.
2) Prioritize Risks: They then assess the strategic importance of that supplier to the company, quantify the risk exposure for various scenarios, and prioritize their risk management efforts.
If the supplier is distressed, Bob and his team:
3) Conduct Contract Reviews: They review the supplier’s contract and assess any post-filing legal obligations, such as volume commitments, contract life, etc.). They will restructure legal obligations and prepare contingency plans, if needed.
4) Develop Risk Management Plans: If Bob and his team determine that they will stay with the supplier, they will insource or realign their needs with that supplier, fix relations, and if needed, bail out that supplier. They could also decide to dual-source the commodity or source to shore up a weak supplier. If they determine that they will not stay with the supplier, they will then re-source the commodity or service.
Like many other procurement teams, Bob and his team also conduct supplier rationalization and incorporate it into their supplier risk management process. For them, it is “proactive risk identification,” and they combine qualitative, quantitative, delivery, and price metrics into their calculus to derive weighted scores, prioritization, and ultimately a path forward for their supplier base.
Beyond the basic blocking and tackling and supplier rationalizing, Bob offered up some other common-sense strategies for supply risk managers. These include:
- Understanding the critical path and map your supply chain. This includes locations for production, demand planning, and other logistical considerations, like where is your customer?
- “Rigorously” qualify your supply base – know their safety records, quality, capacity, and costs before entering into an agreement with them.
- Consider following a five-step program, building and leveraging a cross-functional team, developing a supplier score card with which to rate supplier performance, and understanding second- and third-tier supplier dependencies.
- Other strategies, such as paying attention to and planning for worldwide events, multi-sourcing wherever possible, developing contingency plans (asking and answering the question, “what happens if…?”), build supplier risk databases, leverage publicly-available databases and information, and commit to continuously improve your supplier risk management program.
Bob closed out his presentation with some words of advice to a packed audience of procurement professionals, declaring that “without a plan, you will pay … it is only a matter of time.” And even with a plan, “stuff” happens, so procurement teams need to develop contingency plans and understand them. They also need to enhance, train their companies, their teams, and their supplier base – they need to be proactive about it and get everyone onboard. Concurrently, they need to be a “customer of choice” and understand not only their suppliers, but their suppliers’ suppliers. All the while, they need to maintain a vigilant and current global view, to include worldwide financial, political, regulatory, and security environments, for each can and do impact operations. Lastly, procurement teams need to test their contingency plans periodically, adapt, and continuously improve in order to stay ahead of the risks that lurk within their supply chains.