Procurement.Takes.Lead.Managing.Supply.Chain.Risk.pdf

7/27/2019 Procurement.Takes.Lead.Managing.Supply.Chain.Risk.pdf

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Procurement Takes Lead in Managing Supply Chain RiskSurvival Conundrum: Understanding Inherent Risk in the ChangingEnvironment of Supplier Engagement

Risk Management: A Comprehensive View for Purchasing

A Risk Management Scorecard

Five Ways to Evaluate a Supplier

OfficeMax Workplace Eases Procurement Risk Concerns

Procurement Takes Leadin ManagingSupply Chain Risk


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Few topics today generate more interest or are more impor-tant to procurement teams than supply chain risk. Supplychains are increasingly more global and unforeseen eventsthat disrupt delivery and affect the bottom line can tax eventhe best prepared procurement teams.

To ensure that your supply chain can meet the rigorousdemands of your organization, OfficeMax Workplace and MyPurchasing Center have partnered to bring you the latest

information on managing supply chain risk. Together, we havecompiled some of the best articles on the topic at MyPur-chasingCenter.com in a new guide.

With the guide, Procurement Takes Lead in Managing Sup-ply Chain Risk, procurement teams will better understandinherent risk in relationships with suppliers and learn howto measure and track risk. Theres a scorecard that will helpprocurement teams figure out if the activities they have inplace to manage risk are world-class or behind the class anda list of tips to evaluate a suppliers financial risk. Finally, MyPurchasing Center sits down with Larry Hartley, Senior Vice

President, Supply Chain, at OfficeMax Workplace, to discusshow the supplier assures its products and services and helpscustomers manage their risk.

Procurement Takes Lead in Managing Supply Chain Risk

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Procurement TakesLead in ManagingSupply Chain Risk

Survival Conundrum:Understanding InherentRisk in the ChangingEnvironment of SupplierEngagement

Risk Management: AComprehensive Viewfor Purchasing

A Risk ManagementScorecard

Five Ways to Evaluatea Supplier

OfficeMax WorkplaceEases ProcurementRisk Concerns


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By John Campi

Today, we find ourselves with an interesting conundrum; inthis time of uncertainty with potential tax changes and fur-ther developing regulatory activity, corporations are hoardingcash and are reluctant to invest. Moreover, there is a continu-ing need to improve processes and strengthen our supplynetworks in order to become more profitable. Concurrently,risk within the supply network is arguably at an all-time high

and appears to be increasing every year. So how do we pro-ceed in these times of high risk and uncertainty? The answerlies within the fundamentals of business conduct.

To improve certainty of supply and drive improved margins,corporations today need to reduce the inherent risk withinthe supply network and improve operational performance. Inorder to achieve these improvements, it is imperative that thefundamentals of supplier engagement be reviewed and modi-fied to reflect a new reality.

For the past few decades, global sourcing activity has been

a primary dr iver by which many companies have sought tolower their competitive cost structure. The capability of under-standing the supply network has become increasingly com-plex with this global expansion of the supply base. While com-panies once knew their suppliers on a reasonably intimatebasis, todays supply networks have become layers of supplythat challenge even the most stringent effort to understandand view all elements in the network. This loss of visibility hascreated a higher risk environment and jeopardizes continuityof supply for any business.

In order to survive and thrive in this complex environment,companies need to rethink their supply engagement prac-tices. It is no longer acceptable to think that a financial reviewof a tier-one supplier is sufficient protection against poten-tial supply interruption. Todays expanding supplier networkrequires a significant change in approach to identify the risk,tools and metrics needed to monitor, measure and assessthe supply base.

Companies need to have an exceptionally well-defined cat-egory strategy that understands the value/risk propositionthat exists within each group of suppliers. The greater thevalue/risk equation the greater the need for a collaborativeapproach within the supply chain. The classic approach ofconfrontation practiced by many procurement organizations isno longer viable. Supply networks must be engaged as a col-laboration of partners with common understanding of strate-gies in order to better understand the risks that are inherentin the suppliers supply chain. This requires, not only a newstrategy for engagement, but quite possibly new skill sets for

the procurement organization.

Genesis has recently conducted a survey which has proventhe need for these changes and we have initiated researchto better understand the new reality of procurement in ourglobal economy. Well over half of all business disruptionsemanate from the supply chain, yet companies have failed toadequately address this issue in a systemic way.

Our research has found that: There are illusions as to the

Survival Conundrum: Understanding Inherent Risk in the ChangingEnvironment of Supplier Engagement

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http://www.mypurchasingcenter.com/electronics/blogs/survival-conundrum/http://www.mypurchasingcenter.com/electronics/blogs/survival-conundrum/


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risks which companies monitor and those which ultimatelyaffect the supply chain. Planning tools do not support the riskprofiles inherent in the supply chain, and few companies have

adequate auditable metrics.

There is a lack of visibility into the ever expanding supplychain and the risks associated with the supply network. Man-agement does not understand - nor do the suppliers under-stand - the risk inherent in their supply chain.

There is confusion in that management views the supplychain as strategic; companies use internal metrics to meas-ure risk and do not have a good benchmark to evaluate therisk in their supply chain.

Identifying the risks, tools and metrics is the goal of the Ex-ecutive Supply Network Risk Forum and we would encourageyour thoughts and input as we develop these plans.

John P. Campi is the founder and Managing Partner of Gen-esis Management LLC, an organization specializing in supplychain and cost management initiatives. Previously, he servedas Executive Vice President and Chief Procurement Officer ofGlobal Sourcing for Chrysler, LLC, where he was responsiblefor all worldwide purchasing and supplier quality activities.

Campi has extensive experience in the field of cost manage-ment and is recognized as a founder of the strategic cost-management discipline known as Activity-Based Cost Man-agement.






http://www.officemaxworkplace.com/


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By Paulo Moretti

According to Warren Buffet: Risk comes from not knowingwhat you are doing.A good example of knowing what they are doing comes fromthe Insurance industry. They measure and track all kinds ofrisks they may have before defining a premium for an insur-ance policy.

We have good references from American National Standardfor Security (ASIS SPC.1 2009) in how a company may beprepared for organization resilience for security, prepared-ness, and continuity management. This helps companiesto define the overall framework for ERM Enterprise RiskManagement.

Just as a reference, several consultant companies havereported the same issue regarding risk management in pur-chasing:

AT Kearney 2011 report Procurement Leaders list Man-age Risk Systematically as one of top priorities.The Hackett Group also reported in The CPO Agenda2012 as top priority Reduce Supply Risk.

KPMG reported The Power of Procurement 2012 Pri-oritizing supply chain risk: Given the events of the past fiveyears financial crisis, natural disasters and massive sup-plier failures, to name just a few the research demonstratesa worrying lack of leadership in the area of supplier risk.

Kairos Commodities and Valcon and 12 Purchasing insti-tutes in Europe reported; 45% of companies have no

commodity risk strategy in purchasing on how to addresstheir total spend.

Purchasing as part of any enterprise should define theirframework, as part of ERM, in terms of types of risk theyface, risk appetite (risk level), tools to measure the risk andcalculate the impact in the company and governance to makesure the processes are followed, the risks are tracked andmitigation plans are in place and implemented.

Risk Management: A Comprehensive View for Purchasing

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We can list at least four risk types: Supplier Risk, Product /Service Risk, Business Risk, Commodity Risk, and in eachone you will have different risk drivers.

Supplier Risk related to financial stress, geographic location,code of conduct, border crossing, trade compliance, productstewardship, quality and delivery.

Product Risk related to supply / demand, number of qualifiedsuppliers, specification, volume under contract, technical op-tions, lead time and supplier back integration.

Business Risk related to number of approved suppliers (solesourced), number of plants and their location, and impact onrevenue in case of disruption.

Commodity Risk related to supply / demand balance, sup-pliers, market forces, cost drivers, resource planning andsourcing strategy.

The key question from Warren Buffet: Do you know what areyou doing?

The key question for purchasing professionals: Do you meas-ure and track your risks?

Paulo Moretti is Principal with PM2 Purchasing ManagementConsulting, a boutique consulting company focused on excel-lence in the purchasing function for manufacturing indus-tries. He has more than 12 years of international purchasingexperience with a Fortune 50 company. There, he was able totransform a global purchasing function from tactical to stra-tegic, moving savings to higher levels than reported by firstquartile purchasing organizations.








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Contributed by ADR North America

All supply management decisions involve risk. Although riskcannot be eliminated, it can be managed.Unless otherwise specified, answer the questions on a scaleof 1-5:

1- Strongly Disagree 2- Disagree 3-Sometimes 4-Agree5-Strongly Agree

Questions1. We have assigned risk factors and created mitigation plansappropriate to the risk of supply disruptions for each of ourpriority raw materials and components.2. We understand the cost basis of the components andmaterials we are purchasing and have planned to prevent ormitigate wild swings in pr ices.

3. We know the financial stability of our suppliers, monitortheir business activities, and have prepared for disruptionscaused by business or financial issues.4. We know our strategic suppliers physical facilities andproduction capabilities and have response plans in the eventof breakdowns.

5. We know the shipping modes, routes and schedules fordelivery of materials and components in our supply chain andhave strategies for delays caused by business issues, weath-er, construction, terrorism or other problems.

6. We have prepared for cost or safety issues if the design ofa strategic component is flawed. We have fail-safes built intoour design, for instance.7. We are monitoring regulations that affect our industry and

A Risk Management Scorecard

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our supply chain and are prepared in advance for changes.

8. Our supply management data and communications with

suppliers are well secured against hackers, spies and virusesas well as software corruption or hardware failures.

9. We have calculated the revenue losses caused by any dis-ruption in supplies throughout our supply chain.10. We can demonstrate in financial terms the present valueof avoiding a risk in the future.11. We have calculated the mitigation strategies in terms ofnet present value and have built a financial business plan forour risk management.12. Our contingency plans are optimized over the lifecycle ofthe product. That is they are based on calculations of thepossible costs of disruptions (including lost revenue), the costof responding, and using a probability factor to gauge if theplans are appropriate.

Total scoreScoring ranges

12-24 Time to get started

25-36 Making progress

37-48 Impacts should be measureable and may be a value toyour customers as well49-60 World-class example of risk management






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By Libby Bierman

Your companys supply chain directly impacts your ability tofunction as a service or goods provider and earn profits. Ifyou are waiting on supplies or constantly searching for a newsupplier, you lose valuable time and focus when it comes torunning your company. And, if that supplier provides some-thing that is critical to your operations then it is vital that youcan guarantee uninterrupted service.

To assess the risk associated with that supplier, you shouldevaluate the suppliers financial health. There are severalways you can go about surveying the suppliers long-term via-bility and creditworthiness including a business credit report,references from other clients, or a full financial analysis. If youhave access to the suppliers financial records, a financiallydriven credit report might provide insight into their financialhealth, or you can a simplified analysis in house.

Here are a few recommended steps that look at the suppliersfinancial ratios and give them some context.

Calculate the Suppliers Profitability Ratios: If a companyis not profitable, it likely will not stay in business for long. Thisbecomes your problem when you suddenly have to find anew supplier with similar quality goods and immediate ca-pacity. You can assess a suppliers profitability and marginsby focusing on a few ratios: Return on Assets (calculated asNet Income / Total Assets), Return on Equity (Net Income /Stockholders Equity), Gross Profit Margin ([Sales COGS]

/ Sales), and Net Profit Margin (Net Income / Sales). These

metrics, respectively, illustrate how the evaluated supplieris using assets to generate profit, the rate of return on in-vestments in the business, the cushion they have to coveroverhead, and earnings for that companya key predictor ofsustainability.

Calculate the Suppliers Liquidity Ratios: Liquidity ratiosprovide a measure of the suppliers ability to meet short-termobligations and therefore the suppliers sustainability. Ratiosthat should be used when evaluating a supplier are Cur-rent Ratio (Current Assets / Current Liabilities), Quick Ratio([Current Assets Inventory] / Current Liabilities), and NetWorking Capital Ratio ([Total Current Assets Total CurrentLiabilities] / Total Assets). These three ratios will also give you

Five Ways to Evaluate a Supplier






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insight into the suppliers ability to expand through sufficientworking capital.

Calculate the Suppliers Activity Ratios: Activity ratios lookat a suppliers ability to convert balance sheet accounts intocash or revenue. Ratios that should be used when evaluat-ing a supplier are Accounts Receivable Turnover (Sales /Average Accounts Receivable), Accounts Payable Turnover(COGS / Average Account Payables), and Inventory Turnover(COGS / Average Inventory). These ratios illustrate how wellthe potential supplier manages its collections from and pay-ments to other partners and how well the potential suppliermanages its inventory.

Compare the Supplier to Averages for that Industry: Ifyou are able to collect the financial ratios outlined above, themost effective way to use them is to compare or benchmarkthose ratios to averages from the suppliers industry. This willgive you some context as to whether the supplier is out- orunderperforming compared to its peers.

This comparison can be difficult if the supplier is a privatecompany. Getting the suppliers financial information mightbe a challenge in and of itself, but then finding information forother private companies in that industry could be problematic.If you cant find decent industry data for private companies,

use public company data from the suppliers industry as arough guide.

Evaluate the creditworthiness of the supplier: If your sup-plier is not creditworthy, it will affect your ability to generaterevenue. It is critical to perform a credit check on your on yoursupplier before signing a contract.

DePaul University Professor of Finance Rebel Cole adds thatin addition to affecting your ability to generate revenue, a sup-

plier going out of business can also affect your cash needs.They may be offering you trade credit and therefore youcould be losing one of your sources of financing, he says.

Engaging a new supplier is no small decision, especially ifthat supplier will deliver goods or services that are vital toyour companys operations. Finacial due diligence, as abbre-viated in the previous five steps, is one way to begin assess-ing the suppliers sustainability as a business partner.

Libby Bierman is an analyst at Sageworks, a financial infor-mation company and provider of the companys BusinessCredit Report.








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By Susan Avery

World-class companieslook to their sourcingteams to manage cost andadd value to their organiza-tions in all spend categories,and probably more so todayin indirect categories suchas those provided by Of-ficeMax WorkplaceSMofficeproducts, interiors & furniture,print & documents, facilityresources and technology. Atthe same time, due to unfore-seen events in the past coupleof years, sourcing teams atworld-class companies have supply chain disruption and riskmitigation on their radar. A recent study by the consulting firmAccenture finds sourcing teams at world-class companieshave built comprehensive risk management programs to map

risks end-to-end, focusing on anticipating, monitoring andmitigating risk, and theyre using tools, services and risk-sharing clauses to mitigate supply risk.

Taking it one step fur ther along the chain, My PurchasingCenterrecently discussed the topic of supply risk manage-ment with Larry Hartley, Senior Vice President, Supply Chain,at OfficeMax Workplace.

My Purchasing Centerreaders look to OfficeMax Workplaceas a valued partner. What risks has OfficeMax Workplaceidentified along its supply chain that could affect cus-tomers? Do the risks differ among the suppliers of goodsand services in each of the categories (office supplies,interiors & furniture, print & documents, facility resourc-es, technology) OfficeMax Workplace provides its cus-tomers?

From an import perspective, OfficeMax Workplace identifiesraw material supply, political unrest and environmental issuesthat may impact our supply chain. The risks vary by categorybased on raw material, however at a macro level they arevery consistent. If risks are identified, we have solid contin-gency plans in place to minimize these risks. We also coor-dinate communications to our customers about any impactsand the actions we are taking.

What steps is OfficeMax Workplace taking to help miti-gate these risks? What tools does OfficeMax Workplaceuse to monitor risk of the suppliers with whom the com-

pany does business?

OfficeMax Workplace performs detailed due diligence on oursuppliers. This includes social accountability audits, factoryquality inspections, security audits and inspections and back-ground checks by credible third parties.

Daily monitoring of commodities, rates, labor actions and portactions allow us to predict and manage the import supply chainand respond accordingly to help minimize risk for our customers.

OfficeMax Workplace Eases Procurement Risk Concerns







Larry Hartley, Senior Vice President, SupplyChain, at OfficeMax Workplace


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What tools does OfficeMax Workplace use to alert itscustomers of unforeseen events along its supply chainthat might disrupt delivery of products and services?

In the event of a disruption, what steps does OfficeMaxWorkplace take to ensure its ability to meet its commit-ments to its customers?

Our customers fall into two categories, customers who walkinto a store and organizations that want products and ser-vices delivered to them. Providing visibility to order statusis vital to our success. As we move toward a more omni-channel world, this visibility becomes increasingly importantfor OfficeMax Workplace to deliver as we help our customersmanage and control their procurement processes.

OfficeMax Workplace is currently upgrading its systemsto provide our customers with dashboard visibility to theirpurchases. From order capture to order delivery, our focus ison providing accurate, real-time procurement updates for ourcustomers.

My Purchasing Centerroutinely surveys its readers. Arecent readership survey shows that quality is an im-portant criteria that procurement uses to select suppli-ers and manage supplier performance. What steps doesOfficeMax Workplace take to ensure products it sells to

customers meet their quality expectations?

OfficeMax Workplace strives to exceed our customers ex-pectations on product performance throughout the productlifecycle. For new product introductions, our sourcing andquality teams partner with category and brand managementto identify critical quality characteristics that are important toour customers, then translate these characteristics into prod-uct specifications for direct suppliers.

Ongoing monitoring of customer feedback and product returnrates, combined with ongoing evaluation of factory perfor-mance allows us to manage quality control. Our productquality testing program further allows OfficeMax Workplace toensure product performance remains steady throughout theproduct lifecycle.

We also vet indirect suppliers for quality, first by assessing

their financial viability. This is important since companies thatare not on a good financial footing are more likely to createshort cuts that affect the quality of material and services.

We also inquire to prospective suppliers current customersto ensure that they are servicing them properly. We then workwith internal customers to formulate Key Performance Indica-tors that are reviewed periodically to ensure that our suppliersare providing the products/services that they have agreed to.Lean process and Six Sigma processes generally ensure that








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a company will provide the quality products and services thatwe require to run our business.

Supplier reliability and price volatility are two risk areasthat particularly concern procurement professionals.Lets take one at a time. Youre responsible for warehous-ing, delivery, inventory management and replenishment.Procurement looks to OfficeMax Workplace to help withinventory management and offer quick delivery. Can youshare with My Purchasing Center readers some of thelatest developments in these areas (warehousing, inven-tory management) that help to ensure that OfficeMaxWorkplace meets commitments to customers?

To manage price volatility, we utilize a variety of websites andsubscriptions to monitor commodity prices. This intelligence isthen used to negotiate costs to help ensure we are providingour customers with the best value.

The latest thinking in inventory and warehousing is howomni-channel companies such as OfficeMax Workplace canutilize all of our assets (stores, warehouse, delivery vehicles,websites) to allow our customers to make purchases whenthey want, and how they want. The deployment of inventoryand the utilization of warehouse space is being combinedto provide customers with a broader array of products while

managing costs to keep pricing competitive.

What tools does OfficeMax Workplace use to help fore-cast commodity prices and how do you communicatechanges to customers that helps them plan for pricevolatility?

We use several tools to ensure that we are on top of com-modity prices in the market place, including:

The Chicago Board of Trade to watch energy pricing; The CPI and PPI are reviewed on an ongoing basis at

the commodity level along with other levels such as fin-

ished products; and Private publications such as RISI and the Yellow Sheet

are used to follow paper and paper products along withprinting.

Strategic Sourcing also provides a representative to eachdepartment that shares changes in commodity pricing to theimpacted departments as those changes occur

My Purchasing Centerreaders want their supplier part-ners to approach them with innovative ideas to helpreduce costs and add value to their organizations. Pro-curement teams look to OfficeMax Workplace to leveragerelationships with its suppliers to introduce new prod-ucts and services and even business processes. Can youaddress? What steps does OfficeMax Workplace take inmanaging relationships with its suppliers to help deliverinnovation solutions to customers? How does OfficeMaxWorkplace in partnership with its suppliers bring innova-tion to customers?

OfficeMax Workplace has a goal with suppliers, and thatis to be their best customer. We challenge and reward our

vendors for showing innovation and utilize our be your bestcustomer model to jump to the front on the line when theseinnovations occur. It takes great collaboration efforts to makethis happen, and our customers benefit through innovativenew products, solutions and services that help streamlinetheir workplace with greater efficiency, cost savings and con-trol in the procurement process.








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Larry HartleySenior Vice President, Supply Chain

Larry Hartley began his OfficeMax career in 1998 as an op-erations manager in New Jersey. Since that time, he has heldvarious leadership positions in the supply chain organizationand currently holds the position of senior vice president ofsupply chain. In this role, Larry is responsible for all aspectsof the North American supply chain organization includingwarehousing and delivery, inventory management and replen-ishment, import operations and strategic sourcing.

During his time at OfficeMax Mr. Hartley successfully in-troduced and implemented the LEAN philosophy into thecompanys supply chain operating culture. He also led theintegration of OfficeMaxs Canadian operations into a Nor thAmerican supply chain organization. As part of OfficeMaxscommitment to diversity and inclusion, he also leads the sup-ply chain initiative to hire, train, and retain adults with devel-opmental disabilities.

Prior to joining OfficeMax, Mr. Hartley held several supplychain positions at McMaster-Carr Supply Co. He is a boardmember of the Quad County Urban League and Aspire, anorganization committed to opening new horizons for peoplewith disabilities. He is also on Werners customer advisory

council and on the advisory board for the University of Ten-nessees Global Supply Chain Institute.

Mr. Hartley holds a bachelors of science degree in mechani-cal engineering from Cornell University and an MBA from theJohnson School at Cornell University.







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