study roi of supply chain risk management (riskmethods nov 2014)

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STUDYROI of Supply Chain Risk Management

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STUDYROI of Supply Chain Risk Management

Contents

1 Foreword 5

2 ExecutiveSummary 6

3 ProcessModeloftheStudyandDefinitionofTerms 7

4 GoalsofSupplyChainRiskManagement(SCRM) 8

5 ReturnOnInvestment(ROI)forSCRM 9

5.1 ROIThroughAutomatedAcquisitionofInformation 9

5.2 ROIThroughSupplyChainVisibility 9

5.3ROIThroughLowerCostsforExternalPremiumInformation 10

5.4ROIThroughTimeAdvantage 10

5.5ROIThroughPriceContainmentinaCrisisSituation 11

5.6ROIThroughInsurance 11

5.7ROIThroughAdvancedSourcing 12

5.8ROIThroughAvoidanceofRevenueShortfalls 12

5.9ROIThroughProtectionofReputation 13

6TemplateforROICalculation 14

7CaseStudy:ROIDeterminationforaMedium-sizedCompany 16

8Summary 18

Page

1Foreword

Formanyyears,companieshavebeenreducingtheiradded-valuedepth as part of globalization,

and have been shifting this to ex-ternal, globally active supply net-

works.Thisresultsinnumerousnew,globaland complex supply chainswithworldwidebusiness partners,on which companies are increasingly dependent. Accordingly,theproductiondepthinGermanindustryhas,especiallyinthelasttwodecadesofglobalization,fallentoonly30.2%1.Insome sectors,suchastheautomobileindustry,1stand2nd-tiersup-pliers have consequently developed into the real innovationdrivers of the automobile manufacturers. “Best-Cost-Country-Sourcing” also leads to new supplier relationships. Businesspartners are often located in emergingmarkets, where chan-ges inpolitical,macro-economicaswellas infrastructuralrisksareextremelydifficulttomonitor.Measuresforaggregationofrequirements inprocurementhave in turn led tocompressed,highlyfocusedsupplierportfolios–whichhasresultedinaconti-nuallyincreasingriskpositionintheeventofadisruptionwithinthesesupplynetworks.

A study by Zurich Versicherung “Strategic risk: do not forgetyoursupplychain!”investigatedtheeffectsofsupplychaindis-ruptions based on thousands of SEC reports. On average, the consequenceswere:

• 25 % reduction in stock prices (effect over 2 years)• 9 % drop in revenue• 11 % increase in costs• 14 % higher delivery capability of “SCRM Leaders” compared

to other companies2

Withsignificanteffectssuchasthese,itisnosurprisethat, according to Zurich, many companies with long-term supplychaindisruptionsneverrecover.

Besidesglobalization,anothermegatrendisresponsiblefortheincreasedhighpublicawarenessofethical,corporatesustaina-bility insupplychainsandsupplier relationships:digitalization.Sub-human working conditions in far-off regions, workplaceaccidents due to defective safety provisions or environmental pollution on the part of suppliers are made available to theworld’spublicwithinminutesbymeansofasmartphonephotoandatweetorYouTubevideo.ThishappenedtoiPhonesupplierFoxconn(http://bit.ly/1AKKA3Y)inthecaseofthesuicidesduetocatastrophicworkingconditionsandtoaChinesesuppliertoGM (http://onforb.es/1qDxWwE) in the case of an accidentwithover65workercasualtiesasaresultofadustexplosion.Re-putationscanberuinedquickly,andrevenuecanfallifamanu-facturerdoesnotpaysufficientattentiontotheconditionsunderwhichtheirsuppliersmanufactureinforeigncountries.Becauseformanyendcustomers,itisnotjustthepriceatthecheckoutthat countsbut also atwhatprice theproductwasplacedonthemarket.Self-imposedethicalprinciplesand“digitaltranspa-rency”requirethatcompaniesidentifyethicalrisksofthisnatureinsuppliernetworksandthattheytakeappropriatemeasures.

Identification, analysis, forecasting and reduction of risks insuppliernetworkscompriseanewtaskthatis,inparts,notyetwell-establishedincompanies.Thisstudyaimstoprovidecom-panieswithaguidelineforcalculatingthereturnoninvestmentoftool-basedsupply chain risk management (SCRM).Forthis,qualitativeusageaspectsarealsotakenintoconsideration,andquantitativelydemonstrablereferenceexampleslisted.

Dr.HugoEckselerGraduatePhysicist,Consultant

1 Source:GermanFederalStatisticsOffice. 2 Best-in-classsupplychainswithriskmanagementhavea97%servicelevelvs.84%forallothers–Aberdeenin

“TheChiefSupplyChainOfficer’sViewofSupplyChainDisruptions-HowtheBest-in-ClassRespond”.

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2Executive Summary

Determiningthereturnoninvestmentrepresentsanimportantaspectwhendecidingonaprofessional,au-tomatedandsoftware-supportedsupply chain risk management (SCRM) solution.Thestudyhasdetailedinformationonhow• savingsthroughprocessefficiency• avoidanceandreductionofcrisiscostsprovidethesourceforindividualpotentialsthatcanbeevaluatedinmonetaryterms,andofferatoolforindividualdeterminationofROIasano-chargedownload.

Results: For a typical medium-sized manufacturing company with revenue of 200 million USD, the actual savings through process efficiency alone quickly amount to considerablymorethan200,000USDperannum.Inparticular,thesehard-to-calcu-latesavingshelptojustifytheinvestmentdecision,andensurebudgetneutralityasearlyasthefirstyearofacquisition.

A significant benefit of SCRM is generated by the immense potentials through risk prevention measures: Losses of up to7.5 %of revenue (approx. 15millionUSD in our sample com-pany)canbeavoidedbymeansofriskprevention,orcanatleastbeconsiderablyreducedinacrisissituation.

Values such as these assist in deciding the success of an entirefiscalyear,aswellastheexistenceofacompany.Compa-niesderiveadditionalfinancialroomtomaneuverandreleased personnel capacity to be able to increase ROI through risk prevention measures, in addition to acquisition of methods,toolsandknow-how.

Success factors: Successful companies with professional SCRMmethodologies,such as the world’s largest automobile component supplierBOSCH, the leading technology group Siemens, or the most profitable European telecommunications group Swisscom agreethattheyhaveplacedasharpfocusoncommonselected criteria from a process, organizational and tools perspective. Thisincludes:

Success factors

•Integratedmethodology–coverageofalltypesofrisks•ClearresponsibilityofSCRMinanorganizationalunit•Integrationofallinternalstakeholdersinthecross-functionalriskmanagementprocess•UseofacommonIT-supportedplatform•Supplychaintransparencyintherelevanttiersineachcase(n-tierSCRM)•Managementofmeasuresasanintegrativecomponent•Useofallavailablestructuredandunstructureddatasources•Transformationofinformationintorelevant,dependableintelligence•Componentsofriskintelligencewithinthesuppliernetwork•Supportfordifferentapplicationcasesforcross-functionalpartners•Predictiveanalyticsforriskpredictionandprevention

39%

3 %

5 %

16 %

39 %

Distribution Savings through process

Avoidance and reduction of crisis costs

$ 9,000,000

$ 5,640,000

$ 300,000$ 32,000

• Automaticvs.manualriskinformationsearch,inputandupdating

• Volumediscountthroughpoolingoffee-baseddatasources

• ReducedCBIinsurancepremiumsthroughsupplychaintransparency

• Risk-controlledAdvancedSourcing• Outsourcingof1stand2nd-tier

supplychainidentificationanddatamaintenance

• Reductionofcrisiscoststhroughreactiontimeadvantage

• Preventionofpriceincreases• Preventionofrevenueshortfall• Shareholdervalueloss–per reputationaldamage

37 %

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3Process Model of the Study and Definition of Terms

3 Thestudy“CanYouAffordtheRisk?”fromSupplyChainInsightsLLC(2014)reportsanaverageof3supplychaindisruptionspercompanysurveyed.

Theaimofthisstudyistoinvestigatethedeterminationofthereturnoninvestment(ROI)ofasoftware-supportedsolutionforsupplychainriskmanagement.Thetermsupply chain risk ma-nagement (abbreviatedtoSCRM) isusedasasynonym.SCRMistakentomeantheidentification,analysis,forecastingandin-fluencing of risks in supplier networks (1-ntier). In this study,allyieldsandreturnsforsuccessofthecompanythatpromiseamortizationacrosstheperiodofuseareconsideredasROIforevaluationoftheindividualinvestmentinSCRM.Bothamortiza-tions thatcanbeevaluated inmonetary termsandqualitativeusageaspectsaretakenintoconsiderationasyieldsandreturns.Theperiodofuseisspecifiedonthebasisofthecurrentbalance-sheetwrite-offperiod for hardware and software investmentsof threeyears.Budgetneutrality implies thatan investment isamortizedwithin 12months. Somebase data for determiningROIareonlyavailableona“percrisis”basis,suchasthefinancialimplicationsofactual shareholder value losses thatoccur. ThedeterminationofROIhereisbasedonthestochasticprobabilityof occurrenceof significant crisis situations, anddetermines astatisticallossmeasure(perannum).Thebasisforthisisthefin-ding3thatthecompaniessurveyedreportedanaverageofthreesupplychaindisruptionsperyear.Forthisstudy,wereducedthisnumbertothereportingof“seriousdisruptions”,suchthatweassumeaprobabilityofoccurrence for a significantdisruptionof0.67peryear.

TheapproachtodeterminingROIinthisstudydeliberatelydoesnotaddresstheoptionofactuarialdeterminationusing“value atrisk”.Thereasonforthisisthatthisstudyfollowsaneasilyap-plicableandyetprofessionalaswellasdemonstrablederivationoftheROIofanSCRMinvestment.

Afictitious industrial company,ROI Inc. is used as a referenceforaconcrete representationof theROI.ROI Inc.has revenueof200millionUSD,employs20 staff inprocurementand logi-stics,andplanstomonitorthe2nd-tiersupplychainof its top100suppliers.Insurancecoveragetoanannualvalueof1millionUSDexists,andthissumisguaranteedasalumpsumwithintheframeworkofotherinsurance.Asupplychaindisruptionisesti-matedtocauselossesofapprox.25,000USDperhour(penalties,idletimecosts,increasedlogisticscostsforreplacementprovisi-oning,etc.)Thecalculationofpersonnelcostsforprocurementandlogisticsstaffisbasedonanhourlyrateof50USD.Theannu-alnewA-categoryspendisonaverage200,000USD.Inaddition,ROIInc.accessescurrentreinsurancedataforgeocodeddeter-minationofnaturalhazardrisksatacostof100,000USDperan-num.Basedontheselistedparameters,theROIpotentialforROIInc.willbeassessedinthestudy.TheROICalculatordevelopedinthisconnection,whichisfreelyavailable,alsoenablesanyin-terestedcompanytoconductacompleteindividualappraisalofitsownROI.Additionalinformationinthisregard,aswellasthedetailsforafreedownloadcanbefoundinSection6“TemplateforROICalculation”.

Success factors

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4Goals of Supply Chain Risk Management (SCRM)

Basedonthevariouscompanyobjectives(priceleadership,qualityleadership,etc.),motivationsandgoal-settinginSCRMprojectsarealsodifferent.TypicalcoregoalswheninitiatingSCRMare:

These core aims are accompanied by a number of ancillary goals such as simplified certification procedures (ISO 28000, 28001) or optimized insurancebenefitsforoperationaldisruptionpolicies (extentofcover,costs).Support forcompany-internalGRCguidelines(Governance,Risk&Compliance)ortherequirementforoperatingbest-in-classmanagementofthesupplychainarealsodriversforinvestinginSCRM.

Core goals•Ensuringrevenuebyavoidingsupplierdisruptions•Protectingthecompanyimagebyadheringtoethical,socialandenvironmentalstandardsinthesupplychain•Protectingthecompanyfromcriminalpenaltiesbyadheringtoregulatoryguidelinesandrequirements•Defendingprofitmarginsthroughresistant,efficientandflexiblesupplychains

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5Return On Investment (ROI) for SCRM

AkeycomponentofSCRMistheidentificationandevaluationoftherisksituationinthesupplychain.Thesupplychainelementstobeevaluated(riskobjects)areallinthesupplychain:

• Suppliers involved• Logistics hubs used (harbors, warehouses, etc.)• Affected countries

Eachoftheseriskobjectshasanumberofindividualriskssuchasinsolvency,relocationofpremises,ethicalbreaches,sanctions(supplier risks), strikes, pandemics, natural hazards (locationrisks)orinfrastructural,macro-economicaswellaspoliticalrisks(country risks). To determine the risk status, individual indica-tors (“sensors”)must be evaluated and continuallymonitoredforchanges:Forexample,todetermineasupplierplant’sexpo-sure in termsofnaturalhazards, informationandchangedataaboutenvironmentalandnaturaldetailsfortheplant’slocationarerequired,suchasriskofearthquakeorflooding,etc.Oneoftheworld’s largest industrial groups estimates thework effortsaved for information research comparedwith a solution thatautomatestheprovisionandanalysisofinformationtobe4.35hpermonth (this corresponds to 1h perweek) per commoditymanager/leadbuyerandlogisticsmanager.Thiseffortsavedcanbedeterminedfromtheobsoleteinitialresearchontherisksi-tuationduringawarddecisionsusinganumberoftoolsaswellaswebresearch,andcontinualmonitoringofindividualrisksviasearchenginealertsandtopic-specificwebsitessuchastheGlo-bal Disaster Alerting & Coordination System (www.gdacs.org).Thehourlyrateusedinthisorganizationis50.00USD.

Inadditiontothispurelyarithmeticalapproach,anotherquali-tativeissueneedstobeconsidered:Bearinginmindtheloadofdailyoperations, isthereinfactacontinualprocess inROIInc.foractuallyperformingthisessentialmanualresearch?Or,inre-ality,isthisresearchperformedinamuchmorelaxmanner?Isitthecasethatrelevantrisktrendsandeventsareperhapscon-sequently identifiedconsiderably later thantheyshouldbe,asmanualdataresearchisnotoneofthetopprioritiesandtasks?

ROI analysis result based on the automation of data procure-ment and evaluation for ROI Inc.: For each procurement and logistics employee involved, an annual figure of 1,958.00 USD is saved, which amounts to 39,150.00 USD in total4. ROI type: saving. Alternatively, around 100 working days can be allo-cated for value-creating activities.

Transparency across the entire supply chain and, as a result,the identification and evaluation of the risk situation for sub-suppliersaswell, is a significantpartof SCRM.The reason forthis is obvious, and was clearly underpinned in 2013 by theBusinessContinuity Institute5: 42%of all supply chaindisrup-tionsstemfromtiersbelowtheimmediatesuppliers.Thisissueisevenmoredramaticwhenseenagainstthebackgroundthat 75%ofthecompanieshavenotransparencyinthesub-structu-resoftheirsupplychains.Anobviousreasonisthehighdegreeofmanualeffort required to identify thecurrent situationandthecurrentchangesinthe2nd-tiersupplychains,andtoincor-poratetheseintoriskmonitoring6.Theeffortinacompany–evenwherethisprocessiswellsupportedbyelectronicvoluntarysup-plierinformation–isestimatedatapproximately30minutesperyearandsupplierfor

• Dispatch or activation of the questionnaire (e. g. via voluntary supplier information)

• Follow-up on unanswered questionnaires• Follow-up on incomplete or incorrect answers• Transfer of the answers (sub-tier supplier master data, lo-

gistics hubs, data on recovery timeframes, etc.) into the risk monitoring process

• Request for individual risk data sources (credit ratings, geo risk profiles, CSR information, sanctions tests, country risks, etc.)

In2nd-tieridentification,ifoneusesaconservativeestimateofanaverageof5sub-suppliers,theeffortfor1001st-tiersuppliersaloneiscalculatedat300workinghours7.Asthesetasksarety-picallyperformedbyleadbuyers,commoditymanagersand/orlogisticsexperts,anhourlyrateof50.00USDshouldfollowonfrom„rateof“:rateof50.00USDcanbeexpected.Thisthenme-ansthat theworkeffort inpurelymonetarytermsforROI Inc.toidentify2ndtiers,follow-upactivities,updatingandriskdataqueriesis15,000.00USDperannum.However,ifthecompanyinsteadmakesuseofanexpert-supported,software-basedSup-plyChainIdentificationService,thesecostscanbereducedbyanaverageof58%.Inconcreteterms,thismeansanannualsavingof8,700.00USDinourexample.Alternatively,thisregainedwor-kingtime(300hoursperannum)canbeusedbyprocurementandlogisticsmanagementforvalue-creatingactivities.

ROI analysis result based on the use of an expert-supported and tool-based Supply Chain Identification Service for ROI Inc.: annual saving of 8,700.00 USD. ROI type: saving.

5.1 ROI Through Automated Acquisition of Information

5.2 ROI Through Supply Chain Visibility

4 Withanautomationlevelof75%. 5 “SupplyChainResilience”(2013)–BusinessContinuityInstitute.

6“Notime”isthenumber1argumentforlackofsupplychaintransparency–Source:ZurichSupplyChainReview“TheWeakestLink”(2012). 71001st-tiersuppliers+5002nd-tiersuppliersx0.5hidentification&maintenanceeffortperdatarecord=300hp.a.

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Access to data sources from third-party suppliers is often notcost-effectiveforindividualcompanies,firstasthisaccessisasso-ciatedwithhighcosts,andsecondasindividualITsystemsmustbeadaptedandinterfacescreatedandmaintained.Bycontrast,standardSCRMsolutionspermitscalabilityeffectsthatallowtheaccess and use of this premiumdata under significantlymorefavorable conditions. Access to reinsurers’ databases, whichprovideextremelydetailedriskassessmentsaboutdifferentna-turalhazardsforanygeocoordinatescancostasix-figureUSDamount,forexample–this isforasingleyear’saccess.Conse-quently,itisonlylargecorporationsorinsurancecompaniesthatcanaffordthisinformation.SCRMproviderssuchasriskmethodsGmbH offer customers live access to exactly this data, whichallowssmallerandmedium-sizedcompaniestoalsoreceiveex-actestimatesofnaturalhazardrisksfortheirsupplierlocations,forimportantlogisticshubsintheirsupplychainsaswellasfortheirownlocations,andthisatafractionofthecostsmentionedabove.Significantcostbenefitsarealsoavailableintheareaofcreditworthinessdataorsanctionstesting,whichareimpossibletoachievetothesameextent,evenbyanSCRMsolutiondeve-lopedin-house.

ROI analysis result for ROI Inc.: When taking into consideration publicly available price information dated October 2014 from riskmethods GmbH for example, annual costs of this ROI option are reduced by 90 %, thereby generating savings of 90,000.00 USD per year.

ROI type: saving9. The laborious research into geo coordinates, querying of risk exposure and documentation of results, which has up till now been a manual process, is also obsoleted and contributes to increased usage of information.

Besidesahighlevelofefficiency,automatedprocurementofriskinformation offers another benefit: an almost real-time earlywarning system.Oneof the10 largestautomobile componentsuppliers has calculated thetime advantage as a result of au-tomatedearlywarningstobe1.5days10.Thismeansthatintheevent of a catastrophe, the crisis teams can initiatemeasurestoovercomeandlimittheresultantdamage1.5daysearlier.Inthecaseofautomobilemanufacturers,penaltiesforcomponentsuppliersintheeventofproductioninterruptionsof200,000.00

USD per hour are not unusual, whereby ROI Inc. works on significantly lowerpenaltiesof 25,000.00USDperhour in theROICalculator.Thetopicisextremelyrelevant:Accordingtothestudy“SupplyChainResilience2013Survey”bytheBCI(BusinessContinuity Institute), 75%of the519 international companiessurveyedreportedatleastoneoperationalinterruptionin2013.

Assumingthatrespondingtoacrisis1.5daysearliercanunderoptimal circumstances completely prevent a supply disruptionatthecustomer,penaltiesofaround600,000.00USDpercrisis situationcanbeavoided(assumption:shiftoperationOEM16h/day,25,000USDpenalty/hour).Taking intoaccounttheproba-bilityofoccurrence, this absolute value is again relativized fordeterminingtheROI:Fromastatisticalperspective,aneventthatactuallyresultsinpenaltypaymentsoccurstwiceinthreeyears,that is,0.67timesperyear11. Inaddition,onecanalsonotas-sumethateveryoperationalinterruptionalsoresultsinasupply disruption at the company’s own customers. Consequently,an assumption ismade for calculationpurposes that this only occursduringevery2ndcrisis situation.Asa result,avoidanceof penalty payments amounts to 200,000.00 USD per crisis situation.

ROI for ROI Inc.: 200,000.00 USD per annum. In addition, poten-tial is increased, as this assessment contains no idle time costs due to production stoppage in the company’s own manufac-turing line (electricity, personnel, maintenance, etc.) ROI type: saving (dependent on crisis situation, however).

5.3 ROI Through Lower Costs for External Premium Information

5.4 ROI Through Time Advantage

8Theefficiencysavingsrecordedareintherangefrom37%–70%timesavings.Source:ownresearch. 9OnlyapplicableforanROIvalidationtotheextentthatappropriatesourcesarealreadybeingused.10InternalROIevaluationofagloballyactiveriskmethodscustomer.Sector:industry/manufacturing.11 DetailsondeterminingtheannualROIinthecaseofdamagesduetocrisissituationsareprovidedinSection3“ProcessModeloftheStudyandDefinitionofTerms”

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Besides thetimeadvantage,anearlywarningsystemprovidesanopportunitytominimizeadditionalcoststhatariseasaresultofcrisissituations.Thisincludescostsarisingfrompersonnelas- signedtothecrisisteam,increasedlogisticscostsforensuringad-herencetodeadlinesandquantities(e.g.charterflights)aswell ascostsresultingfromreplacementprovisioningforoutstandingdeliveries.A concrete example:OnMonday, July 7, 2014, theriskmethodsGmbHSupplyRiskNetworksoundedanalarmatallitsaffectedcustomersregardingthefailureattheChevronPhil-lipschemicalplantinPortArthur(Texas),oneoftheworld’slar-gestlocationsforthemanufactureofethylene,andissuedawar-ningaboutaworldwideshortage.Ethyleneisthemostimportantcomponentinthepetrochemical/plasticsindustry.Thepriceontheethylenespotmarketatthispointintimewas0.5775USD/lb.Ittookaround72hoursforknowledgeaboutthesignificanceof this incident to trigger the first price reactions on the spotmarket.Thepriceinitiallyrosebyaround5%to0.60500USD/lb.,andthenreachedan18-monthhighof0.66000USD/lb.onJuly15.TheearlywarningmechanismprovidedROIInc.theopportu-nitytocoveritsownethylenerequirementsbeforeothermarketplayersdrovethepriceupby16%withinoneweek12.

Ethylene Spot Market Price

Hereaswell,preventionofpriceincreasescanbeindicatedonayearlybasisduetotheuseofthestatisticalprobabilityofoccur-renceofcrisissituations(2in3years)13 .

ROI per crisis situation for ROI Inc.: prevention of price increa-ses of up to 16 % related to the short-term demand to be met or 32,000.00 USD. The statistically determined cost containment is calculated at 21,333.00 USD per annum. ROI type: price con-tainment in a crisis situation.

Besides the real-time response to disruptions in the supplychain,theexistingriskinformationon“latent”risksandcurrenttrendsshouldbeanalyzedtodrawthecorrectconclusionsandto implementadequaterisk-avoidancemeasures.This includessupplier developmentmeasures, setup of alternative procure-mentsources,optimizationofwarehousing,insurance,modifiedprocurementpractice(riskasprocurementcriterion),changesincontractualliabilityclausesandmanyotheractivities.Preventi-onpromisesthegreatestbenefitbutisalsothemostdifficulttoquantify:Becausehowcanalosseventthatdoesnotoccurduetoprevention(anditspotentialextent)bemeasured?

Increased transparency through the risk structures along thesupplychainhelpsimprovetheinsurancecoverage(extent,ex-clusions,etc.)andconditionsinriskplacementintheinsurancemarket14.Ontheonehand,theinsuranceproviderscannolon-gersimplyrejecttheassumptionofriskbasedonthelackofrisktransparencyandimpossiblecalculationofcumulativerisksforexample–this isacommonproblemincompaniesthatpreferrequestingappropriatecoverforContingentBusinessInterrupti-on(CBI).ItisnotwithoutreasonthatspecialistinsurerssuchasAllianzorZurich,aswellasbrokerswiththeirownsupplychainriskmanagementexperts(e.g.MARSHRiskConsulting)supportcompaniesbymeansof initialcomprehensiveriskassessmentsoftheirsupplychains.Onaverage,approx.0.12USDinsurancepremiumper100.00USDofcoverisdueforCBIinsurance15. For amanufacturingcompanywithannualinsurancecoverageofupto20millionUSD, this equates toanannual insurancepremi-umof 24,000.00USD. According to the results of studies16 bySourcingInnovation,companieswithdemonstrablesupplychainvisibilitycanreducetheinsurancerateforCBIinsurancebyupto50%.Thisisa50%saving–peryear.

ROI for ROI Inc.: 12,000.00 USD per annum17 through a premi-um reduction of up to 50 %. ROI type: saving. It should be noted here that the possibility also exists that insurance companies may be prepared to additionally extend the cover because of the transparency in the supply chain and thereby increase the risk protection, partly on a cost-neutral basis.

5.5 ROI Through Price Containment in a Crisis Situation

5.6 ROI Through Insurance

12 IntheROIInc.casestudy,thevalueoftheshort-termdemandis200,000.00USD13 DetailsondeterminingtheannualROIinthecaseofdamagesduetocrisissituationsareprovidedinSection3“ProcessModeloftheStudyandDefinitionofTerms“.

14 Dr.GeorgBräuchle,MDofMarshDeutschlandGmbH. 15 SourcingInnovation,“TheROIofSupplyChainResiliency”(Nov.2013). 16SourcingInnovation,“TheROIofSupplyChainResiliency”(Nov.2013).

17TheROICalculatorusesasuccessiveincreaseinthisROIasthebasis,asanassumptioncanbemadethatnotallinsurancesareconcludedinthefirstyearwithnewconditions.

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TheAberdeenGroupcreatedtheterm“AdvancedSourcing”asan expression to denote modern methodologies and tools aspartofstrategicpurchasing.This includes inparticularelectro-nic procurement processes (RfI, RfX, auctions), managementof product groups and strategic suppliers, spend analyses andcontract management18. Improved transparency on the onehandallowsforsettingupofresistantsupplychains,andontheotherforconsideringrisk-relevantinformationasaprecursortopurchasingdecisions.Oneoftheworld’slargestautomobilema-nufacturersalwaysincludessuppliers’riskscoresintoanawarddecisionaswellas locationrisk scores for individual suppliers’plants. This can generate immensebenefits: In a 2012 study19conductedoveranobservationperiodof5years,theFederationof EuropeanRiskManagementAssociations (FERMA,Brussels)foundthat28%ofcompanieswithexcellentriskmanagementdemonstratedahighEBITDAgrowthof>10%p.a.–comparedtoonly16%of thecompanieswithrudimentaryriskmanage-mentprocesses.Unfortunatelythestudydidnotinvestigatethedirectbenefitcontribution indetail,and there isconsequentlyno clear evidence as to exactlywhat percentage supply chainriskmanagementcontributed to theseeffects.However,otherstudies provide an extremely precise picture of the value-addofsupplychainriskmanagementasacomponentofAdvancedSourcing:Onaverage,theannualinfluenceablespendforprima-rymaterialsinmanufacturingcompaniesstandsatapproximate-ly6%ofrevenue20.AberdeenGroupputsthetotalcostofow-nershipsavingsofAdvancedSourcingatanindustryaverageof8%21.Assumingthatsupplychaintransparencygeneratesonlya10%portion(inadditiontoactivitiessuchasaggregationofre-quirements,e-sourcing,andmanagementofsuppliers,contractsand goods categories) of the 8% savings mentioned (that is, 0.8%savingsontheinfluenceablespend),thisresultsinasavingof0.048%–relatedtotherevenueofamanufacturingcompany.

ROI for ROI Inc.: up to 96,000.00 USD savings per annum (cor-responds to 0.048 % of revenue)22. Type: savings.

Disruptions in supply chains often unavoidably lead to delaysin revenue or even to complete revenue shortfalls. If produc-tiondoesnotreceivethenecessarymaterials,customerorderscannotbe fulfilled intimeorpossibly not at all.Whether thisresults inacompleterevenueshortfallornotalsodependsonthe sector. For example, the service industry cannotmaintaina“warehouse”tobufferpossibleproductionstoppageofacallcenter,forexample.Forthefoodindustry,adelayinsupplyme-ans a possible total loss, based on spoilt foodstuffs that havebeen in the supply chain for too long.However, all other sec-torsinwhichcustomer-specificproductsaregenerated,someofwhicharealsolinkedtocontractualframeworkparameterswithwithdrawal rights, can suffer complete revenue shortfalls as a resultoftotalstoppagesaswell.

Forexample,afterthefloodsinThailand,Canonlost607millionUSDinrevenueinitsprinterbusiness.Nikonreportedarevenuereversalof786millionUSD.Intelannouncedarevenueslumpinthe4thquarterof2011from14.7to13.7billionUSDbasedonsupplierstoppages–causedbythefloodsinThailand,whichinturnresultedinmissingelectroniccomponentsforproduction.HewlettPackardreportedadropinrevenueofasimilarmagni-tude(1billionUSD).

AccordingtoaninvestigationbytheBusinessContinuityInstitu-te,largersupplychaindisruptionscause9%ofrevenuelosses23. Thethreatoftheserevenuelossesshouldbeavoided,asthishasamajorinfluenceonmarketshares,customersatisfaction,finan-cing,andfinallyonshareholdervalue.Assumingthattwosupplychaindisruptionsoccurwithinthreeyears,ofwhichinturnonlyevery secondevent leads toactual lossof revenue, the threatoflossofrevenueperyeariscalculatedas3%oftotalrevenue.

ROI for ROI Inc.: avoidance of revenue shortfall of 6 million USD per annum24. ROI type: avoidance

5.7 ROI Through Advanced Sourcing

5.8 ROI Through Avoidance of Revenue Shortfalls

18AberdeenGroup,“AdvancedSourcing–MaximizingSavingsIdentification”(2012).19FERMABenchmarkingSurveyresultsinanutshell–November29,2012-Author:FlorenceBindelle.20100%revenue,ofwhichapprox.60%managedspend,ofwhich50%primarymaterial,ofwhichapprox.20%p.a.influenceable,resultingin6%ofrevenue.21AberdeenGroup:“AdvancedSourcing–MaximizingSavingsIdentification”(2012).22TheROICalculatorusesasuccessiveincreaseinthisROIasthebasis,asanassumptioncanbemadethatnotallinsurancesareconcludedinthefirstyearwithnewconditions.23 ZurichVersicherung“Strategicrisk:donotforgetyoursupplychain!”.24 Statisticalprobabilityofoccurrence:0.67.Annualized:6millionUSD.DetailsfordeterminingannualROIforcrisis-dependentdamagearelistedinSection3“ProcessModeloftheStudyandDefinitionofTerms”.

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Supply chain risks are not limited tomeasurable andmaterialdamagestothecompanyprocessonly.Besidesquality,abilitytodeliverandprice, thecompany image is an importantpercep-tionandsuccessfactor.Thegoodreputationofacompanycanquicklybedamaged if increasedrequirements intermsofsus-tainability,businessethicsandCSR inthesupplychainarenotadheredtoduetoimproperbehaviorbybusinesspartners.Gre-ater information transparency (Internet, digitalization) meansthatnewssuchas this travelsaroundtheglobealmost instan-taneously. Forexample,poorworking conditionsdue to faulty ventilationinaproductionarealedtoadustexplosionataChine-seautomobilesupplierinAugust2014thatresultedinthedeathsof70workers.ImmensemediapressureforcedGeneralMotorsmanagementtoissueapublicstatement,asthisoperationisasub-suppliertoGM.Thiscaseisnoteworthyinthatthereisnocontractual relationshipbetweenGMand this company.How-ever,thepublicexpectsanindirectinfluencebytheautomobilemanufactureron its suppliersandsub-suppliers, to implementand maintain ethical and environmentally friendly minimumstandards.CIRANO25 researchedindicesthatallowaquantitativeassessmentoftheevaluationofreputation,includingbymeansof incidents that damage a brand. The result of this analysis26 wasthateveryreductionintheForbesImageIndexbyjustasin-glepoint for companies listedon the stockexchangecausesa 2.82 % reduction in company goodwill. Prominent exampleswerequotedofsupplyrelationshipsatNestlé(palmoilsupplierdestroysorangutanhabitats),SNCLavalin(dubiousbookkeeping)orApple(prohibitiononsuicidesandpoorworkingconditionsatthesupplierFoxconn).

ROI for ROI Inc.: avoidance of 3,760,000.00 USD damage to reputation per annum. ROI type: avoidance27.

5.9 ROI Through Protection of Reputation

25 CenterforInteruniversityResearchandAnalysisonOrganization. 26Study:“CorporateReputation:IsYourMostStrategicAssetatRisk?”CIRANO(2012).

27Statisticalprobabilityofoccurrence:0.67.Annualized:3,760,000USD.DetailsfordeterminingannualROIforcrisis-dependentdamagearelistedinSection3 “ProcessModeloftheStudyandDefinitionofTerms”.

$

“It takes 20 years to build a reputation and five minutes to ruin it.“ Warren Buffet

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6Template for ROI Calculation

Parameters•Numberofemployeesinprocurement&logisticswith(partial)riskmanagementresponsibility•Imputedhourlyrate/employee•Costsofoperationaldisruptionperhour(penalties,increasedlogisticscosts,idletime,etc.)•AverageA-categoryspend(p.a.)•AmountofcoverageofCBIinsurancep.a.(notpremium)•Revenue•Goodwill/marketcapitalization•Supplierstobemonitored(1sttier)

This studyestablishesunderstandableways forprofessionalderivationof returnon investment throughinvestinginsupplychainriskmanagement.Weconsiderthisapproachtobeafully-fledgedandpracticalalternativeto“valueatrisk”determination,whichisextremelytime-consumingandcostly.WealsotransfertheresultsintoafreelyavailablecalculationtemplatesoastooffercompaniesanROImethodologyforas-sessinginvestmentsinsupplychainriskmanagementinawaythatiseasytomanage.

Thefollowingdetailsprovideinputparameters:

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By means of the entries above, the annual ROI can be deri-ved according to the explanations provided in Sections 5.1 to 5.9 inclusive. As a general rule, not all savings will achieve 100 % results right from the start. Current insurance policiescannot be terminated ad-hoc, or Advanced Sourcing activitesrequireastart-uptimeuntiltheycanbeappliedtoalargepro-portionofthespend.Forthisreason,theimpactisextrapolatedaccordingtotopicforthefirsttwoyearsofSCRMapplicationintheROIcalculation,showingasuccessiveincreaseonanannual

basis28.Asadistinction ismade inROIdeterminationbetweenactualsavings(reductionofeffort/costscomparedwiththesta-tuspriortoestablishingasoftware-basedSCRMmethodology)andcostavoidance,bothROItypesaredisplayedseparately intheresults.ItisuptotheusertoselectwhichoftheROItypesdeterminedareincludedinthefinalanalysis.

28ImpactofAdvancedSourcing:20%inyear1,50%inyear2,100%inyear3.ImpactofbetterCBIinsurancepremiums:20%inyear1,50%inyear2,100%inyear3.

LeverageforSavings&CostContainment Applicable(Y/N)Automatizationofmanualriskdatasearch,inputandupdating Y

Realizablecostsavingsforfee-baseddatasourcesofSCRMtools(bundlingbyproviders) Y

ReductionofCBIinsurancepremiumthroughsupplychaintransparency Y

“AdvancedSourcing“savingsthroughsupplychainrisktransparency Y

Identificationof1st&2nd-tiersupplychains,dataupdates,riskmonitoring Y

Avoidance/reductionofcrisiscoststhroughreactiontimeadvantage Y

Preventionofpriceincreases Y

Preventionofrevenueshortfall Y

Preventionoflossofgoodwill/shareholdervaluethroughreputationaldamage Y

$ 300,000

$ 250,000

$ 200,000

$ 150,000

$ 100,000

$ 50,000

$ 1,000.000,000

$ 1,000,000

$ 1,000

$ 1

Y1 Y2 Y3 Y1 Y2 Y3

$ 39,150

$ 45,000

$ 6,000

$ 48,000

$ 39,150

$ 22,500

$ 19,500 $ 8,700

$ 2,400

$ 8,700

$ 39,150

$ 90,000

$ 96,000

$ 12,000

$ 8,700

$ 200,000 $ 200,000 $ 200,000

$ 21,333 $ 21,333 $ 21,333

$ 6,000,000 $ 6,000,000 $ 6,000,000

$ 3,760,000 $ 3,760,000 € $ 3,760,000 €

• Identificationof1st&2nd-tiersupplychains,dataupdates,riskmonitoring

• “AdvancedSourcing“savingsthroughsupplychainrisktransparency

• ReductionofCBIinsurancepremiumthroughsupplychaintransparency

• Realizablecostsavingsforfee-baseddatasourcesofSCRMtools(bundlingbyproviders)

• Automatizationofmanualriskdatasearch,inputandupdating

• Preventionoflossofgoodwill/shareholdervaluethroughreputatio-naldamage

• Preventionofrevenueshortfall

• Preventionofpriceincreases

• Avoidance/reductionofcrisiscoststhroughreactiontimeadvantage

Savings through SCRM SCRM Cost Containment / Return on Prevention

CustomizableROIleverage(cf.Section5.1to5.9)enablesmappingofindividual,company-specificinitialsituations.Forinstance,whereacompanydoesnotperformariskanalysisonexposuretonaturalhazardsofsupplychainlocations(suppliers’plantlocations,logisticshubs,etc.)itisnotpossibletocalculatesavingsthroughfutureuse.Leveragesuchasthiscanthereforealsobesetton/a(notapplicable)(cf.figure)inordertocorrectlydetermineactualsavings.

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7Case Study: ROI Determination for a Medium-sized Company

A specific use case is as follows:Amanufacturingcompanywithannualrevenueof200millionUSDand20employeesinprocurementandlogisticswithriskmanagementresponsibilityhassofarbeenperformingriskmanagementwithout the supportof tools. Todate, riskmanagershavebeenusing informationoncreditratings,voluntarysupplierinformationandwebresearchforassessingtherisksituationofsuppliersduringthephase-instage.Thequality,procurement&logisticsdepartmentsperformon-siteauditsatalltop100suppliersevery1to2years,dependingonthesupplierclass.Templatesforvoluntarysupplierinfor-mationareusedtoattainsub-tierinformation(incompleteduetolackoftimeonthepartofleadbuyersandthehighdegreeofmanualeffort)andtoconfirmCSRconformityonthepartofsuppliers.Informationonlocationrisksatsupplierplantsandsupplychainhubsisnotavailable.TheinsurancedepartmenthasuptonowonlyobtainedCBIlumpsumcoverageintheamountof20,000,000.00USDp.a.duetolackoftranspa-rencyalongthesupplychains.Alargercustomercallsforsupplychainriskmanagementafteranaudit–theinvestmentdecisiontakenduringthedecision-makingprocessisbasedonanROIanalysis.

InputDescription InputNumberofemployeesinprocurement&logisticswith(partial)riskmanagementresponsibility 20

Imputedhourlyrate/employee $50

Costsofdisruptionperhour(penalties,increasedlogisticscosts,idletimeetc.) $25,000

AverageA-categoryspend(p.a.) $200,000

Amountofcoverage(notpremium)ofCBIinsurancep.a. $20,000,000

Companysales $200,000,000

Goodwill/marketcapitalization $200,000,000

Numberofsupplierstobemonitored(1sttier) 100

Basedonthecasestudy,thefollowingentriesandpracticalleversaredefined:

LeverageforSavings&CostContainment Applicable(Y/N)Automatizationofmanualriskdatasearch,inputandupdating Y

Realizablecostsavingsforfee-baseddatasourcesofSCRMtools(bundlingbyproviders) Y

ReductionofCBIinsurancepremiumthroughsupplychaintransparency Y

„AdvancedSourcing“savingsthroughsupplychainrisktransparency Y

Identificationof1st&2nd-tiersupplychains,dataupdates,riskmonitoring Y

Avoidance/reductionofcrisiscoststhroughreactiontimeadvantage Y

Preventionofpriceincreases Y

Preventionofrevenueshortfall Y

Preventionoflossofgoodwill/shareholdervaluethroughreputationaldamage Y

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Savings: Even for conservative estimates, the result shows that an in-vestmentof up to91,950.00USDworksout tobe completelybudget neutral in the first year (i.e. return through savings inyear1).Downtheline,theROIincreasesbyanadditional50 %to146,850.00USDinthesecondyearasaresultofthestrongereffectsofAdvancedSourcingactivitiesandtheoptionsforren-egotiationof insurancepolicies, forexample. Inyear3 the fullbenefitamountstosavingsof245,850.00USDperannum.

Cost avoidance:Furthermore, additional security is achievedas a result of theinvestment,throughriskavoidance.Statistically,for2crisissitua-tionsinaperiodof3years,preventivemeasurescanprovidethemaximumdegreeofprotectionandsavethecompanymillionsintermsoflossesresultingfromoperationaldisruptionanddama-getocorporateimage.

LeverageforSavings Y1 Y2 Y3Automatizationofmanualriskdatasearch,inputandupdating $39,150 $39,150 $39,150

Realizablecostsavingsforfee-baseddatasourcesofSCRMtools(bundlingbyproviders) $22,500 $45,000 $90,000

ReductionofCBIinsurancepremiumthroughsupplychaintransparency $2,400 $6,000 $12,000

“AdvancedSourcing“savingsthroughsupplychainrisktransparency $19,200 $48,000 $96,000

Identificationof1st&2nd-tiersupplychains,dataupdates,riskmonitoring $8,700 $8,700 $8,700

Total $ 91,950 $ 146,850 $ 245,850

LeverageforPrevention Y1 Y2 Y3Avoidance/reductionofcrisiscoststhroughreactiontimeadvantage $200,000 $200,000 $200,000

Preventionofpriceincreases $21,333 $21,333 $21,333

Preventionofrevenueshortfall $6,000,000 $6,000,000 $6,000,000

Preventionoflossofgoodwill/shareholdervaluethroughreputationaldamage $3,760,000 $3,760,000 $3,760,000

Total $ 9,981,333 $ 9,981,333 $ 9,981,333

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8Summary

Gartner Group categorized the global demand for SCRM solutions as “extremely important” in their “Strategic Roadmap for Supply Chain Risk Management (SCRM) Solutions”29 study,andconsideredtheavailablesolutionsasaninadequate“patchwork”.Arequirementexistsforapproachesthatassistcompa-niesincoveringthekeycriteriaforaprofessional SCRM solution.Themostcriticalparametersarelistedas:

29GartnerGroup“StrategicRoadmapforSupplyChainRiskManagement(SCRM)Solutions”(2012)byNohaTohamy.30Ownmarketresearchbyriskmethods;approx.300companiessurveyedinEurope,USAandAsiaPacific.31 Accenture:“Don’tPlayitSafeWhenitComestoSupplyChainRiskManagement”–“Leaders”considerSCRMtobeImportant(23%)andVeryimportant(61%).

Parameters•Comprehensivemethodology(bandwidthofriskscovered)•Enablingofoperativeandpreventiveriskmanagement•Supportforcross-functionalusecasesfromProcurement,Logistics,Insurancedepartment,Compliance,CorporateSocialResponsibility,etc.

•Integrationofcompanydatafromexternalstructuredandunstructureddatasources

Over90%ofcompaniestodayarestillnot inapositiontode-monstratetheapproachdescribedbyGartner,oradaptedalter-natives,inamannerthatissupportedintermsofmethodology,organization,processandsoftware30.

However, 84%ofmanagers now consider the topic of supplychainriskmanagementtobetoppriority31.Thisclearlydemons-tratesthatthishasnowbecomeaconsciousrequirement,andthatinvestmentsinSCRM solutionswillenjoyhighpriorityinthelongterm.

TherelevanceofSCRMwasalsounderscoredbytheAccentureGlobalOperationsMegatrendsstudy“Don’t Play it Safe When it Comes to Supply Chain Risk Management”,releasedinJune2014.Accenturequestionedover1000companies in theUSA,EuropeandAsiaontheirROIexperiencesasregardsthetopicofsupplychainriskmanagement.Thosesurveyedincludedrepre-sentativesfromawiderangeofsectors:industry,telecommuni-cations,banking, retail,medical technology,chemicals,energy,consumergoodsandhigh-techproducts. The results are clear: Companieswhose topmanagementconsider supplychain riskmanagementtobe“Veryimportant”and“live”amethodologyusingthesupportoftoolsonanorganization-widebasisachieveanROIofover100%.ThismeansthataninvestmentinSCRMpaysforitselfwithin12months,andisthereforebudgetneutral.

DeterminingROIrepresentsanimportantaspectwhendecidingonsupply chain risk management solutions.Bymeansof thisstudy and the ROI Calculator,we offer a pragmatic, numbers-based option for determining ROI.We are acutely aware thatthe company-specific initial situation, the sector in which thecompany operates and other parameters must be taken intoconsideration.Asaresult,theROI Calculatoriskeptinanedita-bleformat.Thismeansthattheexternalshareofthevalue-addtransferredtosupplierscanbeadjustedintheROItemplate,forexample,by individualchangestotheROIcalculationformula. www.riskmethods.net/en/roi

BasedonthestudyandtheROI Calculator,atailoredreturnoninvestmentcalculationthatcanbeevaluatedinmonetarytermscanbeperformedforthecompany.Besidesthebenefitofthisevaluationinmonetaryterms,anumberofqualitativeparame-ters also support decision-making.Numerous aspects, such asthefollowing,needtobetakenintoconsiderationhere:compa-ny-wideavailabilityofrisktransparencyacrossalldepartmentsformoreefficient coordination ina crisis situation, cross-func-tionally aligned supplier development measures or optimizedawarddecisions, taking intoconsiderationtotalcostofowner-shipandriskprofileinformation.

BymeansofthisROIstudywehopetobeabletoprovideprag-matic support for decision-making regarding supply chain risk management.Wewouldappreciateyourthoughts,experiences,suggestionsorsimplyyourfeedbackofanynature.

ManagingDirectorriskmethods

CONTACT

About eckseler consult

Dr.HugoEckselerhasmorethan30yearsofexperienceinprocurementandsupplychainmanagementin leadinginternationalcom-panies,andisanactivememberoftheProcurementLeadersGlobalIntelligenceNetworkandtheGermanAssociationMaterialsManage-ment,PurchasingandLogistics.In2010hefoundedhisownmanagementconsultancy.

About riskmethods

riskmethodsprovidescompanieswithacomprehensivesupply chain risk management solutionforproactivemonitoringandassessmentofrisksinthesupplychain.Anearlywarningsystemforpotentialriskensuresthatproactivestepscanbetakentoavoidsupplydisruption,enforcecomplianceandprotectthecorporate image.TheSaaSsolution“Social Supply Risk Network”,whichwasdeveloped inGer- many,combinesstate-of-the-arttechnologywithcutting-edgeprovisionofriskintelligence,toestablishaleadingstandardinsupplychain riskmanagement.

Dr. Hugo Eckselereckseler-consultHeimdallstraße851107ColognePhone:+49(0)221 [email protected]

Heiko SchwarzriskmethodsGmbHOrleansstraße481669MunichPhone:+49(0)89 [email protected]

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