Managing Sourcing Risks Dirk De Waart Where Innovation Operates Management Consultants.

Managing Sourcing RisksDirk De Waart

Where Innovation Operates

ManagementConsultants

SCRLC October 2008 | © 2008 PRTM Proprietary | 2

Agenda

PRTM Introduction

Supply Chain Risk

A New Model For Managing Sourcing Risks

Case Study



PRTM Introduction


Our Focus: Defining and Implementing Operational StrategyPRTM is the premier operational strategy consulting firm

We help clients envision and design more effective operations

Our specialty is implementing changes to affect measurable results

We focus on the critical link between business strategy and execution

Operational strategy orients your business and economics for competitive advantage

We help you establish a winning operational strategy…and realize it

Operational InnovationGame-Changing Ways to Win

Operational Strategy

How We’ll Win

Business Strategy

Where and Why We’ll Win

OperationalExecution

Executing to Win


PRTM Global Experience

31 years of operational strategy and innovation

More than 600 consultants worldwide

17 offices worldwide

Over 1,200 clients and 6,000 projects

90% level of repeat business

Major commercial sectors:

Aerospace and Defense

Automotive

Chemicals and Process Industries

Consumer Goods

Electronics and Computing

Energy

Government and Public Sector

Industrial Goods

Life Sciences and Healthcare

Semiconductors

Software

Telecommunications

Bangalore Boston Chicago

Dallas Detroit Dubai Frankfurt Glasgow

London Munich New York Orange County

Paris Shanghai Silicon Valley Tokyo

Washington, D.C.



Sourcing Risks Defined


We Are Seeing Increased Emphasis On Supply Chain Risk

Risks have increased ….

• Number of natural disasters has tripled since 1970

• Man-made disasters have increased by 50% over the same period

… while at the same time the vulnerability to these risks has grown

Outsourcing and off shoring have increased sourcing and distribution risks

Lean and JIT have taken away traditional buffers against supply chain risk

Supplier reduction waves have increased exposure to single source suppliers


After Hurricane Mitch hit Central America, Dole had no alternative sources and suffered a $100M loss

After Hurricane Mitch hit Central America, Dole had no alternative sources and suffered a $100M loss

Supply Chain Disruptions Can Have Significant Impact

Statistics show that a crisis will hit large companies every 4-5 years and 73% of companies that suffer a disruption of 10 or more days will shut down or experience considerable, long term effects

Unprepared companies can be significantly impacted by these events….

… and there are many more undocumented cases!

A fire in one of Toyota’s suppliers’ plants shut down production for 5 days. Costs related to disruption: $195M

A fire in one of Toyota’s suppliers’ plants shut down production for 5 days. Costs related to disruption: $195M

A lightning strike at an Ericsson supplier’s plant disrupted production for three weeks and significantly impacted process yield. Ericsson lost $400M as a result and eventually withdrew from the mobile phone business

A lightning strike at an Ericsson supplier’s plant disrupted production for three weeks and significantly impacted process yield. Ericsson lost $400M as a result and eventually withdrew from the mobile phone business

Source: Crisis Management International


Sourcing Risk Is An Important Type Of Supply Chain Risk

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External

Internal or External

Your Company

Source

Return Return ReturnReturn Return Return Return Return

Logistics risk (e.g. port shut down)

Planning risk (e.g. unplanned demand)

Manufacturing risk (e.g. factory shutdown or labor strike)

Sourcing risk (e.g. supplier shutdown)



A New Model For Managing Sourcing Risks


Common Models For Managing Sourcing Risk Are Inadequate

Current models for sourcing risk management are either too simplistic (relying on expert opinions) …..

HML

L

M

H

Risk

Imp

act


…. or unrealistic


Suppliers

ProcessesSuppliers’ Suppliers

Etc. Etc.



We developed a new model that is flexible, scaleable, and easy to implement

Specific

Measurable

Actionable

Realistic

Time Phased

Be specific about what contributes sourcing risks in the company and identify the unique risk and impact attributes

Quantify the risks and their potential impact on the business

Move from studying risks to mitigating them. Pinpoint the risks that will have the most severe impact on the business and define initiatives to mitigate them.

Understand what resources are required to mitigate risk and prioritize the initiatives to address resource constraints.

Develop actionable implementation plans with clear roles and responsibilities



Case Study


Started With Defining Risk Attributes Specific

In defining risk management for sourcing, the “object” is the material sourced and supplier from which the material is sourced

1,500 part numbers sourced

200 suppliers

The “attributes” determine the risk and impact of the risk on each object relative to other objects

Measurable elements that contributes to the magnitude of the risk and impact


Started With Defining Risk Attributes Specific

Example Supplier, Materials, and Impact attributes:

Supplier specific risk attributes

• Financial health• Delivery performance• Dependency• Physical location

Supplier specific risk attributes

• Financial health• Delivery performance• Dependency• Physical location

Materials specific risk attributes

• Sole/single/multi sourced• Demand increase• Shelf life / storage constraints• Supplier’s sole sourced

Materials specific risk attributes


Impact specific attributes

• Where used (product & process)• Lead time• Available alternatives• New supplier ramp up time• Inventory• Supply governance



For example:Financial health

Low risk: QR > 1High risk: QR < 1 (industry specific)

For example:

Sole/single/multi sourced

Low risk: Multi sourcedHigh risk: Sole sourced

For example:

Where used by product

Low risk: Used in one productHigh risk: Used in all products


Defined Approach To Measure Each Attribute Measurable

Risk Attribute

Sole/single/multi source

Demand increase

Financial health

Supplier dependency

Etc.

Measure

Number of suppliers by material

Input from commodity managers

Forecast / usage

Quick Ratio

Spend / Supplier Revenue


Developed Scoring Method Measurable

Material specific risk attributes


Material specific risk attributes






Min scoreMax Score

0 2000 1000 500 200

Min scoreMax Score

0 2000 1000 500 200

Min scoreMax Score

0 1000 1000 1000 1000 1000 50

Min scoreMax Score

0 1000 1000 1000 1000 1000 50

550Maximum risk score:

Maximum impact score: 550

Impact Score Distribution

0

100

200

300

400

500

600

0-50 50-100 100-150 150-200 200-250 250-300 300-350 350-400

Score

Nu

mb

er o

f sp

ecs

Risk Score distribution

0

100

200

300

400

500

600

700

0-50 50-100 100-150 150-200 200-250 250-300 300-350 350-400

Score

Nu

mb

er

of

sp

ec

s


Measured Risk and Impact For Each Material Measurable

Sole sourced material

HIGHPRIORITYMATERIALS (15% of PART NUMBERS)

IMPACT

High

Low High

RIS

K

Risk/Impact “Isobar”


Case In Point… Measurable

Sole sourced material

HIGHPRIORITY

MATERIALS

IMPACT

High

Low High

RIS

K

Risk/Impact “Isobar”

• Sole sourced material• Supplier with quality and delivery

problems• Used in 80% of products


Determined Risk Profile By Commodity Actionable

Primary Packaging

0

1

2

3

4

5# Sources

Supplier sole source

Shelf life

Storage cond

Environm

Demand increase

NCWhere used product

Where used process

Lead time

Ramp up ofalternatives

Inventory

Governance

Risk Profile:• Single sourced• Long lead time• Long ramp up time


Identified Risk Mitigation Strategies Actionable

Po

or

Fin

anc

ial

He

alt

h

Un

de

r/O

ver-

Dep

en

den

cy

o

n A

mg

en

Po

or

on

tim

e d

eli

ve

ry

Po

or

FD

A /

Am

ge

n A

ud

it

Fin

din

gs

So

le-

or

Sin

gle

- S

ou

rce

d

Su

pp

lier

so

le s

ou

rce

No

n c

on

form

an

ce

s

Ex

ce

ss

ive

Ca

pac

ity

U

tili

zati

on

Ra

pid

ly I

nc

rea

sin

g

De

man

d

Sh

ort

Sh

elf

Lif

e

Lo

om

ing

Ex

tern

al

En

viro

nm

en

tal

Ris

ks

Us

ed

in

Mu

ltip

le

Pro

du

cts

Us

ed

La

te i

n t

he

Pro

ces

s

Lo

ng

lea

d t

ime

Lo

ng

ra

mp

up

tim

e o

f a

lter

na

tiv

e

Lo

w I

nve

nto

ry L

evel

s

Ma

nag

ed

lo

ca

lly

Add Inventory X XQualify & Purchase from Add'l Supplier X X X X XQualify Add'l Site at Supplier XIdentify Redundant Suppliers X X X XSecure capacity X X XCentralize Procurement XMake: Manufacture Internally X X X X XIdentify Alternative Process X X X X X X XRevise Material Requirements XIdentify Alternative Spec X X X X X XProcure through Distributor XCollaborate in Forecasting XProvide Training / Assistance X X XIncrease Inspection / Testing X XIncrease Site Audit Frequency X XForm Customer Consortium XEstablish Joint Service Agreement X XProvide Performance-Based Incentives X X XEngage Supplier's Supplier (levers) XImprove Financial State X

Risk Mitigation Levers

Supplier Risk Material Risk Attributes Risk Impact Attributes

Risk drivers (e.g. poor supplier performance)

Risk mitigation levers (e.g. qualify additional supplier)


Selected Appropriate Mitigation Levers For Each High Risk Material

In some cases, a combination of levers was required (e.g. build inventory for period of qualifying additional supplier)

Actionable

Risk Factors

• Sole sourced• Shelf life and storage constraints• Long ramp up time of alternatives

Risk Factors

• Sole sourced• Shelf life and storage constraints• Long ramp up time of alternatives

Mitigation Strategy

• Increase site and supplier stock• Qualify additional supplier• Supplier Management

Mitigation Strategy

• Increase site and supplier stock• Qualify additional supplier• Supplier Management


Next We Identified Resource Requirements Realistic

Identified resources required for mitigation initiatives

Estimated workload per task and resource

Identified constraints

Reviewed with functional stakeholders

FTE Resources by function

0

5

10

15

20

25

30

35

FT

E

Other

SCM

PM

GOP

SQM

QPR

QAL

B20 Staff

SS&P

PD

Incremental expenses for Raw Material Risk Mitigation

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

Monthly total

Annual Cumulative

Incremental Expense


And Finally Defined And Kicked-Off Specific Initiatives With Approved Resources

Time Phased

Priorities were determined based on three factors:

Return on risk investment – investment required to move risk/impact “isobar”

Resource constraints

Judgment from senior management team


Lessons Learned

Executive sponsorship is critical

Risks can be quantified but requires lots of data

Focus on few high priority areas for risk mitigation

Risk mitigation is cross-functional and requires broad support

Continue to monitor risk on regular basis and track progress

Balance complexity with risk


Thank [email protected]

Managing Sourcing Risks Dirk De Waart Where Innovation Operates Management Consultants.

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Transcript of Managing Sourcing Risks Dirk De Waart Where Innovation Operates Management Consultants.