managing sourcing risks dirk de waart where innovation operates management consultants
TRANSCRIPT
SCRLC October 2008 | © 2008 PRTM Proprietary | 2
Agenda
PRTM Introduction
Supply Chain Risk
A New Model For Managing Sourcing Risks
Case Study
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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
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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.
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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
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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
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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)
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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
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…. or unrealistic
Common Models For Managing Sourcing Risk Are Inadequate
Suppliers
ProcessesSuppliers’ Suppliers
Etc. Etc.
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Common Models For Managing Sourcing Risk Are Inadequate
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
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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
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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
• Sole/single/multi sourced• Demand increase• Shelf life / storage constraints• Supplier’s sole sourced
Impact specific attributes
• Where used (product & process)• Lead time• Available alternatives• New supplier ramp up time• Inventory• Supply governance
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
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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
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Developed Scoring Method Measurable
Material specific risk attributes
• Sole/single/multi sourced• Demand increase• Shelf life / storage constraints• Supplier’s sole sourced
Material specific risk attributes
• Sole/single/multi sourced• Demand increase• Shelf life / storage constraints• Supplier’s sole sourced
Impact specific attributes
• Where used (product & process)• Lead time• Available alternatives• New supplier ramp up time• Inventory• Supply governance
Impact specific attributes
• Where used (product & process)• Lead time• Available alternatives• New supplier ramp up time• Inventory• Supply governance
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
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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”
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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
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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
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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)
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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
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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
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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
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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