supplier risk management speaker... · what does it mean when an organisation is “being...

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Supplier Risk Management

CIPS London Branch—25 February 2016 University of Westminster, London


Tonight’s topics

What does it mean when an organisation is “being restructured”?

What can you do about it?

What does a robust supplier risk management system include?

Visibility through your supply chain


About me

Lee Swinerd,Director, RestructuringMidlands & South

T: +44 (0) 121 335 2396 M: +44 (0) 7770 734203E: [email protected]

23 years at KPMG

Chartered Accountant

Turnaround, transformation and liquidity team

Head of KPMG’s Supplier Failure Risk Management service offering


What does it mean to be “restructured”?


What is ‘Restructuring’ - Overview

Turnaround Financial restructuring

Insolvency / formal restructuring

Underperformance / Stressed

Stressed / Distressed

Distressed / Insolvent

Significant business change

Transformation


Transformation

Transformation is achieved by driving fundamental change in an organisation’s business model, objectives, operating models, value chain, processes, culture and infrastructure from Strategy through to Execution.

Fundamentally changing the “business model” of an entity

How does it do business?

What back office structure does it need to support the front end business?

Tend to be very large scale programmes that last up to three years

Examples

Project Worksop

However, transformation can be the “new restructuring” so beware the situation


Turnaround

The repair of value destruction for the benefit of shareholders, company and / or its management in stressed and distressed scenarios with the aim to make the company “healthy and viable”.

Operational restructuring

Closing down sites / footprint rationalisation

Moving production from high cost to low cost economies

Cost reduction

Workforce optimisation

Exiting high cost “head office” locations

Stopping value destructive activities

Generally focussed on improving profitability (P&L driven actions)

You probably will not find out about these activities unless it is a public company


Financial Restructuring

Financial Restructuring focuses on helping companies and their stakeholders to get the most appropriate capital structure put in place to allow valuable businesses to survive and thrive.

This is a balance sheet driven activity

Aimed at reducing financial leverage (or gearing)

Reduce the debt burden of a company

Improving cash and working capital management

Could also involve disposing of assets

Sell subsidiaries

Sell property

Sale and leaseback


Insolvency / Formal Restructuring

Insolvency is usually associated with the death of a company. This is often true in the UK, but not necessarily the case in other jurisdictions.

UK insolvency proceedings

Administration

Liquidation

Company Voluntary Arrangement (CVA)

UK non-insolvency proceedings

Scheme of Arrangement

Non-UK

Chapter 11 (USA)

Other jurisdictions


Restructuring – what can you do about it?

This really depends on many factors that are relevant to both your organisation and your supplier.

The criticality of the supplier

Sole source

Dual / triple source

Ease to resource

Cost to remedy

Financial impact on your business

Reputational impact on your business

Your leverage in the situation

The amount of knowledge you have


Supplier risk management


What is Supplier Risk Management?

The identification and monitoring of risk within the supply chain, and an action plan to deal with potential problems, preferably before the problem arisesKey questions

What does a robust supplier risk

management system include and how are

weaknesses identified?

Do you have visibility throughout your supply chain as to your vulnerability

to a range of financial, operational

and increasingly, reputational risks?

What does it mean when an

organisation within your supply chain is

experiencing restructuring procedures?

How might it affect your business and

how can you mitigate the effects?Can you quantify the

risk?


In the news

Supplier Risk Management (“SRM”) is a hot topic right now and we believe that many companies are taking too much risk.

Foreign workers ‘used as slave labour’ by beds supplier to Next and John LewisEthical audits by a series of firms failed to spot their supplier was employing foreign workers for less than £2 a dayThursday 8 October 2015

Nestle battles slavery issues on two continentsFebruary 1st 2016Food giant Nestle is now dealing with issues ... relating to slavery on two continents. Along with Archer Daniels Midland Co and Cargill Inc., Nestle is now ... involved in a lawsuit at the US Supreme Court over child slavery.


In the news

January 25, 2016

Complex supply chains spell trouble for companies trying to manage risk

Suppliers can pose particular risks to a company’s reputation. Apple suffered a rash of bad publicity in 2010 following 14 suicides at Foxconn, its biggest supplier in China, and again last year when workers at another of its Chinese suppliers were filmed falling asleep at work.

Customers want to know that workers have been treated fairly

Retailers such as Primark were heavily criticised after the collapse in 2013 of Rana Plaza. The disaster in the a poorly constructed building in Bangladesh that housed overcrowded garment factories killed more than 1,100 people and injured many more. Primark, which is based in the UK, paid out millions of pounds in compensation as a result.

January 29, 2016

Supply chain scrutiny intensifies for battery materialsChild labour concerns centre on cobalt production in Congo

The digital revolution is supposed to be as transformative as the Industrial Revolution before it. But there is one area that has not changed. The new era of technology still relies on the use of the world’s finite raw materials.

January 29, 2016

Babcock, BAE and Rolls-Royce step in to support steelmakerThe Ministry of Defence has brokered a deal under which BAE Systems, Babcock International and Rolls-Royce have underwritten bank loans to Forgemasters, which makes parts for Trident nuclear submarines

Forgemasters last week announced it was cutting up to 100 jobs after posting a £9.4m loss because of a decline in oil and gas exploration, high energy prices and slowing global economic growth


Why is this important?

Since 2009, the Supply Chain Resilience Survey report is a respected industry resource that considers challenges in building resilient supply chains.

73.5% of respondents do not have full visibility of their supply chains

Only 26.5% of organisations coordinate and report supply chain disruption enterprise-wide

76% of respondents report at least one instance of supply chain disruption last year.

44.4% of disruptions originate below the Tier 1 supplier 13% of organizations

do not analyse their supply chains to identify the source of the disruption

Key findings have shown that:


Why has SRM become critical in recent years?

Complexity of supply chains

Margin pressures

Scale of operations, increasing global reach

Global economic uncertainty

Growth


Other potential triggers

Introduction of the Modern Slavery Act

Sustainability focus and traceability

Conflict Minerals

Supplier risk management (or supply chain resiliency) is not just about the risk of financial and / or operational failure. Increasingly, it is the reputation of your organisation that is put at risk.


Supplier and

contract manage-

ment

Contract signature and

complete handover

Selection and proposal of

award

Qualification and shortlist of suppliers

Sourcing strategy selection

What does good look like - sourcing?

Sourcing process

Sourcing strategy

development

Determine business

needs


Off-boarding

Risk mitigation

steps

Risk detection

Supplier monitoring

Contracting

Due diligence

Risk filtering

What does good look like – supplier risk management?

Supplier risk management

Risk segmentation


Key Risks & Pitfalls

Most companies do not detect issues sufficiently early because they rely

on historic financial information or credit ratings

Large organisations with complex supply

chains can fail to understand total

exposure to a supplier, and failure

can result in:

Information about suppliers is

maintained in multiple functions

preventing an holistic view

M&A activity can increase exposure

Lack of visibility through tiers of

suppliers

On-boarding of new suppliers fails to take into account

available information


The visibility challenge

Many organisations have limited or no visibility through their supply networks. However, increasingly you need to be able to stand up and be counted.

Food suppliersAutomotiveAerospace


KPMG’s SRM Framework

Financial failure of supplier

Counterparty risk

Regulatory risk

Supply chain interruption

Risks in the supply chain fall into four key categories; we use this framework to focus in on key areas of concern to organisations or to structure a holistic assessment of an organisation’s SRM maturity against leading practice.


Identifying and monitoring risk

Independent assessments of

existing processes, including

Development of information

packs and clear plan on how data will be

collated Detailed supplier

assessments

Contract compliance

reviews

Ongoing monitoring

process.

Identification and monitoring can be achieved in different ways, depending upon the size and complexity of your supply network


Warning signs

Operational

Abrupt changes at senior management level

Poor quality performance

Missed deliveries / use of expedited freight

Sub-contracting / outsourcing


Warning signsFinancial

Rapid growth rates

Non-typical supplier requests (eg prompt pay, guarantees, inventory buy backs)

Worsening working capital position

Highly leveraged balance sheet / exotic corporate structures

Credit insurance coverage reduced or pulled


Dealing with potential supply chain disruption

There are many ways to deal with potential supply chain disruption risk. These are the most common that we see:

Financial

Accelerated payments

Revised contract pricing

Loans (secured and unsecured)

“Bailment”

Sourcing

Purchase core commodities

Dual source

Re-source

Supported

unsupported

Other

Takeover

Technical support


Examples of issues we’ve seen

Food delivery contractNew type of businessUnderpriced contractRan out of cashflow

Auto supply chainTier 1 / 2South East Europe4 jurisdictions Previous failed financial restructuringOperational challenges

Electronics distributionOver 100 licenseesSignificant financial support providedPoor controls / monitoring


Wrap up

Restructuring can take many shapes and forms

It is something you can do something about but the earlier you know the more options you will have

Supplier risk management is increasingly important and is not just about financial risk or failure

Businesses are looking to identify and monitor supplier risk and have formal processes in place

You need to have a holistic and global view of risk and exposure and have plans to either reduce or mitigate these risks

Your reputation is increasingly at risk


Questions & answers

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