Improving Your SUPPLIER RISK MANAGEMENT Program

Randy ChristoffersenExecutive Director, ISM-Twin Cities Sr. Associate, The TPD Groupexecdirector@ism-twin cities.org randyc@tpdus.com

Presentation uses best practice information from: CapsResearch recent studies.

AGENDA Background Challenges Traits of Most Advanced Companies Risk Management Process A Simple Tool Developing an Action Plan Reducing Future Risk Some 3rd Party Options What’s Next in Risk Management? Wrap-Up and Q&A

BACKGROUND Many supply disruptions over the last few years

have advanced risk management to the forefront for supply management professionals.

Recent surveys of CPO’s have shown risk management is in their top list of concerns for their companies.

Some of the drivers of increased risk More global sourcing—longer more complex supply

chains Financial challenges (global and local) Natural disasters (earthquakes, tsunamis, etc.) Compliance and regulatory issues (e.g. Customs, labor

laws, OSHA violations, conflict minerals violations, etc.) Freight disruptions such as dock strikes Strikes at suppliers Supplier performance issues (quality, delivery, etc.)

A FEW OF THE CHALLENGES Lack of resources Lack of time and priority Lack of tools to manage Difficult to show ROI for investment Limited visibility beyond the tier one suppliers

51% of disruptions occur in the sub-supplier chain (2014 BCI study) Difficulty to keep up with parameters as data changes “Drowning in data”—Unable to follow up on alerts

TRAITS OF MOST ADVANCED COMPANIES Executive level reviews of risks and mitigation plans

Clearly defined risk categories tied to company strategy Clear process to identify and communicate risks &

probabilities/impact across functions and business units Company-wide focus on risk management audits and

company-wide improvement with appropriate resources Risk identification and mitigation begins at the earliest

stages of new business and product development and becomes part of company-wide culture

TRAITS OF MOST ADVANCED COMPANIES Emphasis on risk prevention with real-time data

collection Extended value chain visibility with collaborative risk

management efforts with key suppliers/ customers Increasingly sophisticated risk management tools:

scenario planning, contingency planning, predictive analytics, simulation

Trained and enabled quick-strike and on-going value chain response teams and communications/ actions in response to crisis events

Broad application to both direct and indirect materials

SUPPLIER RISK MANAGEMENT PROCESS Most best practice supplier risk

management processes use a similar framework:

Identify suppliers and risk

factors to assess

Re-visit and

recalibrate model

Assess risks and outcomes

Monitor risks

Develop plans to mitigate

risks

RISK PRIORITIZATION Assessing the potential risks

For planning purposes, most companies use a framework such as this:

In our day of limited resources and time, it is critical to focus on the “upper right quadrant” risks.

A SIMPLE TOOL—GETTING STARTED Define suppliers to assess

Use categorization principles Start with direct suppliers

Define criteria to consider Define weights for criteria Sort list by top risk Define mitigation plan and assign responsibility Re-visit periodically (as appropriate)

Verify the “right” suppliers are being assessed Re-check the criteria and weighting

SAMPLE CRITERIA TO CONSIDER Number of parts Potential alternative suppliers Difficulty to qualify a new supplier Supplier performance (quality & delivery) Supplier financial strength Supplier location Cost impact to move Our importance to them Depth of leadership at supplier Impact to our revenue

REVIEW OF SOME EXAMPLES Link to Excel Matrix Risk Assessment Sample Matrix 5-16.xlsx

DEVELOPING AN ACTION PLAN Some options to consider

1. Do nothing—accept the risk 2. Reduce the risk

Qualify a second source Increase inventory Develop formal contingency plans if a disruption occurs Perform a last time buy for products going obsolete in the future Develop a long term supply agreement Review and challenge supplier’s existing business continuity plans ???

3. Shift the risk (e.g. take out insurance) 4. Develop a “fast action” response plan if an event occurs

REDUCING FUTURE RISK Some options to consider

1. Strengthen your RFI process to gather more data on risk 2. Make providing key risk data a mandatory step in your supplier

selection process 3. Incorporate risk into your sourcing decisions

E.G. use a risk-factor multiplier 4. Consider paying a third party to help in your risk management

process 5. Maintain supplier risk data in an easily accessible data base 6. Increase resources focused on risk—appoint a risk manager

3rd PARTY OPTIONS Risk management has exploded in the last

few years. Some companies to consider if you decide to look into using a 3rd party: Dun & Bradstreet Resilinc Risk Methods Lexis Nexus Amber Road MetricStream RapidResponse by Kinaxis

WHAT’S NEXT IN RISK MANAGEMENT? Risk management will become an embedded part of

supply management The need for effective risk management will force

companies to look past tier one suppliers Total cost of ownership (TCO) models will increasingly

incorporate risk assessment across the value chain Value chain risk metrics will shift from reactive to

predictive indicators

WHAT’S NEXT IN RISK MANAGEMENT? Risk management approaches will rely more on

prevention and less on mitigation Transparency and real-time data updates will

increasingly replace reactive and batch-data updates Continuous improvement of risk management

capabilities will become a major corporate priority Because exposure to value chain risk continues to

increase, new and innovative approaches will emerge

WHERE SHOULD YOU GO FROM HERE? If you have no system or process?

Try out the Excel tool

If you have a process, but it needs major improvement? Consider a 3rd party software solution

If you have a strong process, review the “Traits of most advanced companies” and the “What’s next in risk management?” slides. Critique your process and see if some changes would

be helpful vs. the key points in these slides.

WRAP-UP and Q & A