1. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Guy Allen February 4th 2014

2. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Introduction The Real World Sourcing Series is a series of 8 sessions, 4 in Dubai and 4 in Abu Dhabi covering hot topics for procurement professionals. The series is promoted and supported by Tejari and CIPS MENA, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited). Guy Allen started his procurement career with Ford Motor Company, moving through IBM, SmithKline Beecham and GSK , becoming CPO for Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a Managing Partner. Guy has since left 4C and started his own consultancy, Real World Sourcing Limited. 3. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Agenda 1. Defining Risk Management 2. Elements of Managing Risk 3. Driving a Procurement Risk Management Programme 4. Procurement Risk Identification and Treatment 5. Final Thoughts 4. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management The Whole Thing Solved in One Equation: 5. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Risk - the effect of uncertainty on objectives, whether positive or negative (ISO 31000) Risk Management - the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events Definitions 6. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Supply Side Risk all risks of interest to the Procurement function, whether related to the supply of physical goods or not Definitions 7. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management 8. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Identify Evaluate Treat Residual RiskMonitor Elements of Risk Management 9. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Identification What are the likely impacts to the organizations key strategies? Can be driven by brainstorming, checklists (derived from experience) or inspections New risks will arise and old ones diminish Elements of Risk Management 10. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Evaluation What is the likelihood of the risk? What is its impact? Defined in terms of impact to the organizations objectives Elements of Risk Management 11. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Elements of Risk Management Risk Evaluation Matrix Impact Likelihood L HM LHM 3 2 4 1 6 5 12. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Treatment Avoid Share Reduce Impact Reduce Frequency Approach is dependent on a few key parameters Risk Appetite pursuit of risk Risk Tolerance willingness to bear perceived risk Resources Elements of Risk Management 13. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Mitigation, Contingency Plan Mitigation Contingency Plan, Monitor URGENT REMEDIAL ACTION, MONITOR Tolerate, Observe Mitigation, Contingency Plan Mitigation Contingency Plan, Monitor Tolerate, No Action Tolerate, Observe Mitigation, Contingency Plan Elements of Risk Management Risk Evaluation Matrix Impact Likelihood L HM LHM 14. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Mitigation, Contingency Plan Mitigation Contingency Plan, Monitor URGENT REMEDIAL ACTION, MONITOR Tolerate, Observe Mitigation, Contingency Plan Mitigation Contingency Plan, Monitor Tolerate, No Action Tolerate, Observe Mitigation, Contingency Plan Elements of Risk Management Risk Evaluation Matrix Impact Likelihood L HM LHM 3 2 4 1 6 5 15. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management 16. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management The Definition of Low /Medium/High impact will depend on the organization In some cases being out of stock is not a problem, others disastrous Component Failure in a car could have deadly consequences A smart phone component failure is more likely to have financial impacts Elements of Risk Management 17. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management 18. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Residual Risks The cost of doing business Will vary according to organizations Risk Tolerance Acceptance of potential of litigation, disputes, fines, disruption, costs Elements of Risk Management 19. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Driving a Risk Management Programme Supply Risk Management Programme What is important to your organization? What is their tolerance for risk? What can they afford? Making it Work in Procurement 20. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Getting the Mandate Establish a Procurement Risk Council - Operations - Manufacturing - Marketing/PR - Finance Agree target outcome Share the responsibility Driving a Risk Management Programme 21. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Procurement Risk Identification Availability (of Resources) Cost Quality Service Innovation Reputation Risk Identification 22. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Task1 On your tables discuss these areas of risk and add to them if you feel something is missing Then place the areas in order of most concern Availability (of Resources) Cost Quality Service Innovation Reputation 23. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Procurement Risk - Identify Risk Identification (an answer) - Availability - Reputation - Quality - Cost - Service - Innovation 24. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management - Windscreen washer bottle - Tool resourced to new supplier - No production for 6 weeks - Vehicles stockpiled for 4 weeks - Significant increase in unit price Procurement Risks - Identify Availability - The bottle that stopped Ford from shipping We didnt make the same mistake with the steering wheel! 25. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Availability Financial Audit Dual Source Safety Stock Generic Design Contingency Planning Exclusivity or Preferential Supply Supplier Acquisition Procurement Risks - Treat 26. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Reputation The film that tarnished a reputation Procurement Risks - Identify BBC Panorama condemned use of child labour in Primark factories PR disaster for Primark Primark became the Poster Boy of Child Labour However the BBC subsequently apologised to Primark for using film footage that was not genuine 27. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Reputation Policy Source Selection Audit Agencies Response Action Plan Procurement Risks Treat 28. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Quality Example The Cement that Killed Procurement Risks - Identify BP Deepwater Rig Explosion caused by weak cement around the well Failure in the testing regime both in operation and interpretation The cost of a proper quality check was estimated at $128k 11 lives lost, BP lost $10bn, incalculable environmental damage 29. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Quality Design Source Selection Measurement (SPC) Auditing Consequential Damages Procurement Risks - Treat 30. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management The Rolls Royce RB211 was developed specifically for Lockheed in the late 1960s/early 70s Purchase price was set in US dollars All Rolls Royce's development costs were in UK Sterling A 20% move in the $ to ex rate meant the engine cost more to make than the sales price Procurement Risks - Identify Cost The Contract that Bankrupted a National Icon Rolls Royce was nationalized, and Lockheed had to pay 110,000 more per engine 31. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Cost Contractual arrangements Commodity and Currency Hedging Needs to be geared to your organizations market, strategic objectives and risk tolerance Procurement Risks - Treat 32. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Procurement Risks - Treat Futures No premium Easy to contract Transparent Commitment Margin Call Only for quoted commodities Options No commitment Standardized or bespoke Premium Cost Complex to use Swaps Not limited to quoted commodities Easy to use Commitment Lack of transparency ConsPros 33. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Polaroid Cameras produced instant pictures In the 1970s a billion Polaroid pictures were taken every year, and the company employed 21,000 staff Revenues peaked in 1991....within 10 years the company was gone Procurement Risks - Identify Innovation The Camera that Disappeared You can now buy an instant camera film, though marketed by Fujifilm and others 34. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Innovation SRM Market Reviews Joint Ventures/Collaborations Art of the Possible sessions Contractual Structure (particularly cost down requirements) Procurement Risks - Treat 35. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Monitor TASK 2 You are shipping finished goods to the UAE retail market Supply is a critical concern to you What factors might you monitor to give you early warning of a supply problem? Procurement Risks - Monitor 36. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Scanning of local news services against pre determined parametersReputation Analysis of natural phenomenon eg earthquake activityEnvironment Alert status by supplier based on previous experienceConfidence Analysis of Annual ReportsFinancial Analysts reports and predictionsMarket Analysis Assessment of Supplier QA measurementsQuality Dynamic assessment of changes in spend and invoicing profilesSpend Analysis Constant review of shipping and freight progressTransportation Procurement Risks - Monitor 37. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Final Thoughts Your risk management approach needs to be aligned to your organizations objectives, tolerance of risk, and available resources Align your activity according to its likelihood and impact Some risks you have to live with develop contingency plans Do not go it alone you will not provide your organization with an effective programme if you do In Summary 38. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management Real World Sourcing Scholarship 10,000AED towards any procurement based training You will receive an email with your Tejari Education Network login details Complete the online certification programme Answer as many questions right as possible The top 10 scorers will be invited to the Awards dinner The winner will be announced at the dinner! 39. ALL RIGHTS RESERVED - Confidential Spend Matters UK/Europe Real World Sourcing Supply Side Risk Management THANK YOU! Please feel free to contact me on guyallen@realworldsourcing.com