August 2014

Monitoring & Mitigating Supplier Risk page 1

Monitoring & Mitigating Supplier Risk: Procurement Organizations’ Best Practices for Supplier Due Diligence and Risk Management

A WBR Digital Benchmarking Whitepaper Presented in Conjunction with LexisNexis®

August 2014

August 2014

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For companies in virtually any industry, supply chains are the lifeblood to economic success. In recent years, supply chains have become progressively larger and more complex as the drive for efficiency demands increased outsourcing, sub-contracting and an on-going search for lower-cost providers. Moreover, rising security threats, safety requirements, financial vulnerabilities and other compliance matters that affect supplier networks require proactive management. When combined with inevitable threats of natural disasters and extreme weather, it is clear that supply chain risk is higher than ever before. The potential impact of supply chain disruptions can be serious and measureable, including reduction in share price and significant material effects on company value. Supply chain disruptions can result in serious and measureable damage to organizations, including reductions in share price and significant losses in company value.

Given this context, it’s not surprising that this year’s 2014 Monitoring & Mitigating Supplier Risk benchmark analysis reinforces the expanding scope in risk management responsibilities that Procurement executives face. The “Great Recession”only accelerated this evolution as it challenged businesses globally to maximize efficiency in order to survive in an increasingly competitive market. This is a logical shift given Procurement’s unique position to influence cross-functional stakeholders, both internally and externally.

The analysis also emphasizes that procurement’s ability to realize its strategic supply risk management role remains challenging, even for the best teams. Case in point, the study found that Procurement departments manage supply risk for 77% of organizations polled but only 7% of respondents felt their supply risk management programs are very effective. One of the key factors producing this gap is a lack of easy access to the often obscure, international data sources needed to foresee supply risks. Comprehensive market intelligence about your suppliers, their industries and locations is a critical enabler to effectively anticipate supply risk challenges.

LexisNexis understands the importance of relevant, reliable information and works with our clients to leverage our vast collection of news, public records, legal and financial content to mitigate supply chain risks more effectively, as well as access comprehensive content chosen specifically for due diligence when evaluating potential and existing suppliers.

I propose that organizations that develop robust and proactive supply risk management capabilities will not only reduce costs associated with risk, but benefit from the operational efficiencies through increased visibilities and improved supplier relationships.

I hope you find the results contained in this report informative and helpful in finding ways to make effective supply risk management a strategic business advantage.

If you have any questions on the findings or would like to discuss supply risk management in more detail, please email supply@lexisnexis.com.

Eric Walsworth,Director of Supply Management LexisNexis

Foreword

August 2014

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It is no longer a secret that the procurement division can provide business value beyond simple cost savings. The effects of procurement strategies and programs reverberate across the entire company. Supply chain management dictates the availability of products and services. Supplier compliance initiatives shield the company from litigation and reputational damage. Contracts executed by the procurement department impact pricing strategies and the bottom line. Procurement is an essential strategic function, and corporate structures are increasingly changing to reflect that.

Procurement departments have evolved in order to shoulder the rapidly increasing burden of strategic responsibility. Centralized organizations have taken the place of independent, decentralized purchasing and supply management entities. For even more innovative companies, central leadership structures have emerged to build organizational procurement strategies while delegating tactical execution to smaller units operating within each region or business area. These modern management structures enable businesses to streamline their operations and bring their procurement programs to scale.

As procurement has solidified itself as a core strategic business

function, procurement departments have assumed almost full responsibility for supply chain risk management. For CPOs and their teams, the implications are enormous, since responsibility for supplier risk management puts the procurement team fully in control of one of the most challenging yet essential business functions. With an effective supplier due diligence and monitoring program, organizations can discover commercially and financially viable vendors, improve documentation, create end-to-end supply chain efficiencies, and reduce costs.

However, supply risk management is an ever-evolving challenge. Mitigating risk across national or global networks of contractors and creating transparency across multiple levels of suppliers is no easy task. The present study indicates that although most organizations have implemented rigorous due diligence programs, comprehensive supplier monitoring remains elusive.

What follows is an analysis of the best practices in supplier risk management, with a special focus on due diligence and supplier monitoring. The analysis is based on survey data collected from procurement professionals in a variety of industries. The findings are based on the insights and practices of procurement professionals from some of the world’s leading companies.

Executive Summary

“[This] is one of the great benefits of ProcureCon, that no matter what the organizational model we can meet and share best practices.”– Matthew Saviello, Global Director of Sourcing STARs and Training, Dover Corporation

Foreword ................................................................................................................................................................................................................................................2Executive Summary .......................................................................................................................................................................................................................... 3Key Findings ......................................................................................................................................................................................................................................... 4Research Findings

Procurement Models & Best Practices to Create Total Business Value .......................................................................................................................... 5Supplier Quality: Best Practices in Due Diligence & Monitoring .........................................................................................................................................7Supply Risk Management ............................................................................................................................................................................................................10Monitoring & Mitigating Future Risk..........................................................................................................................................................................................11

Key Recommendations ..................................................................................................................................................................................................................13Appendices .........................................................................................................................................................................................................................................14About LexisNexis ............................................................................................................................................................................................................................. 15About ProcureCon ........................................................................................................................................................................................................................... 15About WBR & WBR Digital............................................................................................................................................................................................................. 16

Table of Contents

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Key Findings

Procurement divisions are moving toward a center-led model.Decentralized procurement is becoming a thing of the past. The center-led procurement model enables organizations to develop global procurement strategies while leveraging regional assets and markets.

Although supplier due diligence is rigorous and effective, procurement organizations must improve their supplier monitoring programs. When it comes to supplier due diligence, most organizations are leveraging numerous informational resources across multiple tiers. However, less than a third of those surveyed are monitoring the majority of their suppliers.

Procurement divisions are bearing the responsibility for supplier management, and there is room for improvement.For the vast majority of companies, procurement departments hold the responsibility for supplier risk management. Unfortunately, only a fraction of respondents see their risk management programs as very effective.

In order to mitigate future risk, companies are driving innovation through the procurement function.Most procurement professionals consider economic factors to be the primary risks in the year ahead, while very few see environmental issues as critical. Supplier risks, such as supplier quality and supply chain disruption, also loom large. Procurement organizations are meeting these risks head on by driving innovation through the procurement function and shifting performance metrics to focus on big-picture goals.

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As procurement departments have pushed beyond the simple acquisition of goods and services, they have taken on more critical business responsibilities. Twenty-first century procurement creates efficiencies, manages risk, and contributes to strategic corporate planning. In order to better manage these duties, many procurement departments have modified their structures, shifting from decentralized procurement models to more efficient centralized or center-led models. In particular, many procurement leaders have hailed the center-led model, which enables organizations to build out corporate supply chain strategies while leaving tactical execution to regional or business unit-based entities, as the future of procurement. This structure leverages the benefits of both centralized and decentralized models while providing a scalable solution in the long term.

A center-led model can be especially effective for companies operating on a global scale. The Kellogg Company, for example, boasts a management structure in which a global CPO is supported by regional CPOs, each of whom have responsibility for tactical execution in their respective regions. This structure allows the company to take a global view of strategies and resources while

preserving the flexibility to leverage regional assets and markets. Performance measures may differ by geographic area and business unit, but the overall procurement strategy should remain consistent. The Kellogg Company is a strong example of the shift toward center-led procurement operations, but it is just a single instance of what is becoming a major trend. In fact, 47% of survey respondents are now employing center-led procurement models.

In addition to implementing more effective management models, procurement divisions are taking steps to ensure supplier compliance, streamline business processes, and manage product demand. In other words, procurement executives are focused on the total business value that their divisions can create. In order to drive this value, the most successful procurement units are creating cross-functional teams, developing multi-year supply plans, implementing web-based automation, coordinating metrics and incentives, and following one central vision. These best practices all contribute to a company’s “procurement maturity,” which encompasses the multifarious roles and responsibilities the division now holds.

47% Center- led

41% Centralized

About the procurement models:

• In the decentralized procurement model, each individual business, functional, or geographic unit is responsible for its own purchases and procurement strategies without the oversight of a central purchasing body.

• A newer standard, the centralized procurement model drives all purchasing and procurement through a single, centralized department, allowing corporations to create economies of scale and create efficiencies through standardization.

• In the center-led model, a procurement center of excellence (COE) is responsible for generating and supporting organizational supply chain strategies and best practices while leaving actual purchases to individual business units.

Research FindingsProcurement Models & Best Practices to Create Total Business Value

Most Procurement Operations Are Either Center-Led or CentrailizedHow would you define your procurement operation?How would you define your procurement operation?

12% Decentralized

Monitoring & Mitigating Supplier Risk: Procurement Organizations’ Best Practices for Supplier Due Diligence and Risk Management

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