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© 2007 RMC Project Management, Inc.
Risk Identification Mistakes to Avoid
Rita Mulcahy, PMP
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About Rita Mulcahy, PMP• Founder and CEO of RMC Project Management, Inc.,
one of the fastest-growing project management training companies in the world
• Founder and CEO of RMC Publications, Inc.
• An internationally recognized expert on project management
• 15 years and $2.5 billion worth of hands-on project experience
• Products and classes have helped hundreds of thousands of project managers world wide
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© 2007 RMC Project Management, Inc.
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•Tricks for Avoiding Risk Stumbling Blocks •How to Use the Risk Book to Help You Pass the PMP® Exam •Top Five Risk Errors That Can Ruin Your Career•Is Your Lack of Risk Management Knowledge Hurting You?
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Biotech Supply Chain Academy
Risk Identification: Improving the Health of your Supply Chain
June 18, 2009
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Recognizes and manages the full spectrum of risks the organization faces
Minimizes “siloed” behavior that can obscure an integrated view of risk
Allocates proportionally more resources to the most strategic and pertinent risks
Considers effective risk management to be an organization-wide responsibility
and competency
Anticipates and prepares integrated responses to risks
Manages risk with a view toward maximizing the upside of strategic decisions
while minimizing the downside
Acknowledges the need to take intelligent risks to create value
A Risk Intelligent Approach
- 12 -
Deloitte’s Risk Intelligence Map
- 13 -
Scope of Supply Chain Risks
Compliance
Risk Intelligence
GovernanceOperations /
InfrastructureStrategy &
PlanningReporting
Supply Chain
Planning Sourcing Production Delivery Returns
Inaccurate demand / supply forecast
Inadequate capacity planning
Inaccurate costing considerations
Inability to determine and maintain optimal safety stock
SKU proliferation
Inability to procure goods / raw materials cost effectively and constrain volatile material costs
Inadequate supplier selection process
Inadequate quality of goods and raw materials
Over-reliance on sole source vendors
Inability to manage contract compliance and sustain sourcing savings
Inefficient production planning process
Inadequate quality control measures
Inability to control variations in production
Inability to manage third party manufacturers
Lack of operational uniformity across production facilities
Inefficient warehousing / inventory management processes
Lack of manufacturing flexibility to react to disruptions
Unreliable 3PL service providers
Failure to optimize lead time for supplies / distribution
Inappropriate network design
Inefficient order management and verification process
Inefficient inventory and channel management processes
Breakdown in cold chain integrity
Product diversion
Poorly defined / unenforceable return and credit policies
Inefficient return handling processes
Poor forecasting / trend analysis of returns
Inadequate planning for reverse logistics
Inefficient recall management processes
Inadequate chargeback reconciliation processes
- 14 -
Impact of Life Events on a Company’s Risk Profile
* 6. Unexpected Occurrences
2. Product Commitment
1. Search and Development
3. Scale Manufacturing Capability
4. Commercialization
5. Merger, Acquisition & Divestiture
Pipeline
GrowthStage
Lif
e E
ven
ts
Cold chain integrity6
Supply chain integration5
Supply Chain Risk
1 Clinical supply risk
2 Raw material quality
3 Managing contract manufacturers
4 Forecast accuracy
Cold chain integrity6
Supply chain integration5
Supply Chain Risk
1 Clinical supply risk
2 Raw material quality
3 Managing contract manufacturers
4 Forecast accuracy
- 15 -
Supply Chain Risk Assessment Approach
Interview / survey key stakeholders across the organization
Compile data for each supply chain risk category
Identify risk themes across categories
Develop mitigation strategies to address high risk areas
Define scope of implementation strategies
Estimate cost of risk mitigation / management
Develop initiative roadmap
Administer Supply ChainHealth-Check
Identify Areas of High Risk
PopulateRisk Dashboard
Develop Mitigation Strategies
Key Activities
Output
Assess the impact of key risks to the organization
Evaluate the vulnerability for key risks and understand the speed of onset
Prioritize supply chain risks for each theme
Completed health-check questionnaire
Risk mitigation recommendations
Mitigation RecommendationsMitigation Recommendations
Assess performance across risk categories
Define performance issues for key risks
Provide risk summary and areas requiring mitigation measures
7Copyright © 2008 Deloitte Development LLC. All rights reserved.
Supplier Risk Dashboard: Sample Company January 23, 2009
Confidential <Firm Name>
Firm Supplier Selection and Management Supplier Financial and Operational Performance
Supplier Risk Summary
Dimension Performance Summary Rating
Supplier Selection and Qualification
Supplier selection does not include detailed financial review
Supplier InformationSystems
Supplier DB does not include financial performance info
% of Supply Base from LCC
20% of materials are sourced from LCCs
% of Supply that is Single-Sourced
Very limited single-source components
Supplier Monitoring Programs
Supplier monitoring is limited only done for engineered parts
Supply Base Location Risk
Despite being in LCCs supply base is in large cities
Supply Base Geopolitical Risk
Geopolitical risk is high for Indonesian suppliers
Dimension Performance Summary Rating
Late or Missed Shipments
3 of 2000 supplier have had late shipments in 12 months
Supplier-relatedDisruptions in past 12 months
1 delayed shipment resulted in assembly line stoppage
Capacity Utilization Supplier cap utilization is between 50% and 80%
Process Compliance (Manufacturing, Safety, Storage, etc)
LCC suppliers are not following safety and storage processes
Supplier Quality Issues (Defects,Recalls)
2 major recalls in past 12 months
Financial Health (Profit and Z-score)
Some exposure associated with automotive industry
A/R and A/P Performance
Suppliers are paying and receiving payment on time
High Risk Supplier Summary At Risk Commodity Summary Overall Supplier Risk Needs
20% of the supply base is located in distant geographies (LCCs) from which transportation costs are increasing
3 electronics suppliers are closely affiliated with the automotive industry and at risk for bankruptcy if one of the Big 3 declare bankruptcy (outstanding A/R)
1 critical sole-source supplier has a Z score of less than 1.8
Wiring harnesses are at high risk for shortage due to supplier affiliation with automotive industry
Hydraulic cylinder capacity utilization in supply base is at 98%, additional demand will not be accommodated by existing supply base
Improvement needed in supplier monitoring across all suppliers
Process compliance issues in LCCs as well as quality issues
Review supplier delivery failure root cause analysis process and buffer inventory levels
7Copyright © 2008 Deloitte Development LLC. All rights reserved.
Supplier Risk Dashboard: Sample Company January 23, 2009
Confidential <Firm Name>
Firm Supplier Selection and Management Supplier Financial and Operational Performance
Supplier Risk Summary
Dimension Performance Summary Rating
Supplier Selection and Qualification
Supplier selection does not include detailed financial review
Supplier InformationSystems
Supplier DB does not include financial performance info
% of Supply Base from LCC
20% of materials are sourced from LCCs
% of Supply that is Single-Sourced
Very limited single-source components
Supplier Monitoring Programs
Supplier monitoring is limited only done for engineered parts
Supply Base Location Risk
Despite being in LCCs supply base is in large cities
Supply Base Geopolitical Risk
Geopolitical risk is high for Indonesian suppliers
Dimension Performance Summary Rating
Late or Missed Shipments
3 of 2000 supplier have had late shipments in 12 months
Supplier-relatedDisruptions in past 12 months
1 delayed shipment resulted in assembly line stoppage
Capacity Utilization Supplier cap utilization is between 50% and 80%
Process Compliance (Manufacturing, Safety, Storage, etc)
LCC suppliers are not following safety and storage processes
Supplier Quality Issues (Defects,Recalls)
2 major recalls in past 12 months
Financial Health (Profit and Z-score)
Some exposure associated with automotive industry
A/R and A/P Performance
Suppliers are paying and receiving payment on time
High Risk Supplier Summary At Risk Commodity Summary Overall Supplier Risk Needs
20% of the supply base is located in distant geographies (LCCs) from which transportation costs are increasing
3 electronics suppliers are closely affiliated with the automotive industry and at risk for bankruptcy if one of the Big 3 declare bankruptcy (outstanding A/R)
1 critical sole-source supplier has a Z score of less than 1.8
Wiring harnesses are at high risk for shortage due to supplier affiliation with automotive industry
Hydraulic cylinder capacity utilization in supply base is at 98%, additional demand will not be accommodated by existing supply base
Improvement needed in supplier monitoring across all suppliers
Process compliance issues in LCCs as well as quality issues
Review supplier delivery failure root cause analysis process and buffer inventory levels
Supply chain risk dashboard(s)
Risk assessment matrix
Imp
act
(In
her
ent
Ris
k)
Vulnerability (Residual Risk)
MediumLow
Hig
hM
ed
ium
Lo
w
1
3
4
2
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Supply Chain Health-Check
Sourcing Health-Check Survey:
Supply base profile- To develop baseline spend and
supplier profile data- Identification of risk factors, nature,
and degree of risk factors- Historical supplier failures
Supplier management practices- Gain an understanding of existing
supplier selection, tracking, and control mechanisms
- Identify weaknesses and areas of “risk leakage”
Risk management practices- Risk ownership and organizational
structure- Existing risk controls and monitoring
practices
ILLUSTRATIVE
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Risk Assessment MatrixILLUSTRATIVE
Size reflects Speed of Onset:Low
Medium
High
Stakeholder Group ImpactVulner-ability
Speed of Onset
1 Executive Team 72 68 60
2 Business Unit / Product Lead 65 51 57
3 Supply Chain Manager 79 71 83
4 Legal / Compliance 70 59 55
Stakeholder Group ImpactVulner-ability
Speed of Onset
1 Executive Team 72 68 60
2 Business Unit / Product Lead 65 51 57
3 Supply Chain Manager 79 71 83
4 Legal / Compliance 70 59 55
Imp
act
Vulnerability
Medium HighLow
Hig
hM
ediu
mL
ow
4
2
3
1
Managing Contract Manufacturers
- 18 -
Supply Chain Risk DashboardILLUSTRATIVE
7Copyright © 2008 Deloitte Development LLC. All rights reserved.
Supplier Risk Dashboard: Sample Company January 23, 2009
Confidential <Firm Name>
Firm Supplier Selection and Management Supplier Financial and Operational Performance
Supplier Risk Summary
Dimension Performance Summary Rating
Supplier Selection and Qualification
Supplier selection does not include detailed financial review
Supplier InformationSystems
Supplier DB does not include financial performance info
% of Supply Base from LCC
20% of materials are sourced from LCCs
% of Supply that is Single-Sourced
Very limited single-source components
Supplier Monitoring Programs
Supplier monitoring is limited only done for engineered parts
Supply Base Location Risk
Despite being in LCCs supply base is in large cities
Supply Base Geopolitical Risk
Geopolitical risk is high for Indonesian suppliers
Dimension Performance Summary Rating
Late or Missed Shipments
3 of 2000 supplier have had late shipments in 12 months
Supplier-relatedDisruptions in past 12 months
1 delayed shipment resulted in assembly line stoppage
Capacity Utilization Supplier cap utilization is between 50% and 80%
Process Compliance (Manufacturing, Safety, Storage, etc)
LCC suppliers are not following safety and storage processes
Supplier Quality Issues (Defects,Recalls)
2 major recalls in past 12 months
Financial Health (Profit and Z-score)
Some exposure associated with automotive industry
A/R and A/P Performance
Suppliers are paying and receiving payment on time
High Risk Supplier Summary At Risk Commodity Summary Overall Supplier Risk Needs
20% of the supply base is located in distant geographies (LCCs) from which transportation costs are increasing
3 electronics suppliers are closely affiliated with the automotive industry and at risk for bankruptcy if one of the Big 3 declare bankruptcy (outstanding A/R)
1 critical sole-source supplier has a Z score of less than 1.8
Wiring harnesses are at high risk for shortage due to supplier affiliation with automotive industry
Hydraulic cylinder capacity utilization in supply base is at 98%, additional demand will not be accommodated by existing supply base
Improvement needed in supplier monitoring across all suppliers
Process compliance issues in LCCs as well as quality issues
Review supplier delivery failure root cause analysis process and buffer inventory levels
- 19 -
Questions
Marsh- All Rights Reserved www.marsh.com
Best PracticesSupply Chain Risk Identification
Webex Document
Gary S. Lynch, CISSPMarsh
Global Leader & Managing Director
Supply Chain Risk Management Practice
212 345 6053
21Marsh
Today’s Discussion focuses on one element of Supply Chain Risk Management - Risk Identification
Risk Pricing, Measurement,
&Modeling
Risk Prevention,Mitigation,
&Financing
Risk Identification,
Analysis, & Evaluation
Alignment Priotization Impact Modeling
Manufacturing & Service Products
Ser
vice
s
Ele
ctro
nics
Mac
hine
ry
Risk Segmentation/
SKURationalization
22Marsh
Supply Chain Risk Identification has traditionally been performed on a static and/or historical view…
Consumer
Wholesaler
Distribution
Center
Filling & Packaging
Supplier failures (financial,
production, design, etc.)
Natural hazards
Work stoppages
Labor disputes
Infrastructure outages (fire in
plant, power grid down, etc.)
Unanticipated demand surge
or drop-off Political upheaval
Price, currency, and interest rate fluctuations
Unanticipated supply
constraints, allocation,
price increases
Spoilage
Improper handlingor cargo
placement
Theft
Diversion/ gray market
Poor packaging
Manufacturing
Raw Materials
Pandemic
Counterfeiting/diversion
Delivery delays
Source: Marsh
23Marsh
…and typically applied to the latest event (Risk De Jour) Volatility
– Energy– Foreign exchange– Commodity pricing
Trade credit issues
Pandemic threat
Regulatory change– Nationalization– Customs
Information and cyber-based
CHANGE…COMPLEXITY…SPEED…VARIABILITY
24Marsh
Economic & Financial
• Economic collapse
• Currency devaluation
• Labor disputes, strikes or unrest
• Labor shortage
• Major decline in stock price, earnings or significant volatility
• Major market fluctuations
• Decline in major earnings
• Cash flow/liquidity crunch
• Hostile takeover
• Bankruptcy
• Other financial: derivatives, investment, credit, interest rates, transfer velocity, collateral
Political & Social
• Government policy and/or attitude change
• Confinement or imprisonment of employees/family
• Lawlessness & hostile demonstration
• Regulatory change
• Civil unrest
• Government expropriation or renegotiation of royalty streams
• Government change in tax regime
• Unfavorable dividend & share sale proceed transfer
• Military coup
• Unilateral expropriation
• Nationalization
Brand/Org Reputation
• Product & service
• Liability, recall & failure
• Obsolescence
• Counterfeiting
• Organization
• Government or regulatory investigation
• Special interest group (NGO) protest or inquiry
• Community action as a result of organization’s product, people and/or technology
• Human rights abuses
• Rumors, gossip & hoaxes
• Libel & slander
• Poor customer satisfaction
• Marketing blunder
Weather
• Hurricane, typhoon, tropical cyclone
• Rising water, wind, projectiles
• Earthquake
• Tornado & waterspouts
• Rising water (flood, tidal wave, tsunami - non hurricane caused)
• Wildfire
• Mudslides
• Extreme heat
• Extreme cold
• Climate change
Environmental &
Man-Made
• Chemical, biological, radioactive, and/or nuclear
• Fire and/or explosions
• Water/soil contamination
• Public utility failures
• Asbestos & mold
• Emissions levels & waste clean-up
• Noise/dust pollution
• CO2 and/or other hazardous gas and liquid emissions
• Liquefaction
• Building, mine, facility collapse or condemned
• Water leaks and/or floods
• Insect infestations
Psychopathic, Criminal & Terrorist
• Product tampering
• Terrorist acts
• Arson & explosion
• Industrial/economic espionage
• Sabotage
• Kidnap
• Extortion
• Fraud
• Theft
• Terrorist using product or materials as weapon
• Workplace violence
• Suspicious mail/package
• Counterfeiting
Informational
• Loss of proprietary and/or confidential data (e.g. privacy, trade secrets)
• Information integrity and quality issues
• Loss of key customer, supplier, marketing, production, and/or financial data
Technology
• Technology hardware failure
• Technology software failure (rogue code, viruses, poor quality)
• Capacity issues
• Performance issues
• Other malicious acts
• Technology obsolescence and/or lack of relevance
Operational
• Project management failure
• Out of stock
• Sourcing failure
• Pricing misalignment
• Change control failure
• Transportation/logistics accident
• Walkouts, slowdowns & strikes
• Disruptions, delays (piracy, seizure)
• Leakage
• Restricted access
• Infrastructure deterioration or obsolescence
Compliance & Governance
• Non-compliance (labor, environment, security, safety, quality, etc.)
• Legal
• Regulatory
• Statutory
• Contractual
• Class action or mass tort lawsuits
• Corporate governance issues and whistleblowers
• Executive misdeeds, bribes, offenses, security and/or code of conduct violations
• Oversight, over-extended authority, accidents, errors, & commissions
Health
• Epidemic or pandemic (e.g. TB, SARS, Avian Flu)
• Long-term health issues
Source: Gary S. Lynch, “Single Point of Failure”, Wiley 2009
Strategy
• Unanticipated competition
• Product misplacement
• Disintermediation
• Poor marketing strategy
• Poor sales strategy
• Failure to innovate
Labor
• Human resource failures
• Defections & resignations
• Inability to attract/retain talent
• Labor & skills shortage
• Sexual harassment, workplace discrimination, wrongful dismissal
Many organization’s risk identification process is about looking for a particular threat in a complex supply chain network
25Marsh
However, this approach can be quite challenging, limiting and inefficientRisks are identified:
Based on what’s known and/or past performance
Usually within narrow boundaries instead of across the entire scope of the supply chain
And impacts are usually presented quantifiably rather than a combination of quantified and qualified
But the identification is only as good as the “third party” that conducted review
But a provision for the impact of constant, rapid change is not considered
26Marsh
Best practices today are moving away from the static or historical view…
Static methods (today)– Audit– Assessment– Simulation– Actuarial and similar quantitative techniques– Benchmarking– Monte Carlo
27Marsh
… and evolving into a more proactive and integrated model
Predictive(collective intuition)
Static
Intelligencebased (learning)
Trigger &Demand Driven
Dynamic & Integrated
Passive
Reactive
Proactive
Anticipatory,
Instinctive &
Transparent
28Marsh
These risk identification are then applied to the extended supply chain, at a detailed (resource) level
T1
T1
T1
T2
T2
T2
T2
T3T3
T3
T3
T3
T3
T3
Mill
Mill
Mill
Mill
Mill
S
SS
S
S
S
S
MiningCo.
MiningCo.
S
AutoOEM
OE
M B
uy/S
ell
Source: Marsh, Inc.
PeopleTechnology &
ProcessingRelationships
Physical
Assets
T2
29Marsh
But all identification techniques must support and feed the entire risk management “system” Preparation, risk management, before the risk is triggered
Reaction, risk management, when the risk is realized
Maintenance, risk management, when the risk is being monitored, measured or validated
Optimization, risk management, when measuring the efficiency and effectiveness of the program