Taking a Strategic Approach to Supply Chain Risk Management · PDF file22 November 2011 Hilton...

22 November 2011 Hilton Metropole Hotel

Birmingham, UK

Sean Culey - Supply Chain Council

Taking a Strategic Approach to Supply Chain

Risk Management

Aligning Supplier and Customer Strategies

© ALL RIGHTS RESERVED – UK & Ireland SAP User Group 2011 Conference | 2 | 22 NOVEMBER 2011

Sean Culey – CEO / SCC Leadership Team

• CEO and founder of SEVEN – SAP Value Realisation experts

• Member of Supply Chain Council’s European Leadership team

• Proven track record in helping companies align strategic goals with

operational activities and metrics and realising business value of their

SAP investments

• Extensive end-to-end supply chain experience in Australia, America,

Africa and Europe with many different companies, in many different

industries such as FMCG, CPG, A&D, Pharma & Metals

• Frequent speaker and article writer on SCOR®, Organisational Greatness,

Supply Chain Excellence, Customer Value Chains, Risk and SAP value

realisation


AGENDA

• The Supply Chain Council and SCOR®

• Risky business? Risks and the Supply Chain

• Define your Supply Chains

• From Supply Chains to Value Chains

• Understand the Impact on your Supply Chains and Value at Risk

• 7 Points to take home

• Supply Chain Risk Management (SCRM) Tools - SAP

• Barriers to SCRM


The Supply Chain Council


About Supply Chain Council

• Formed in 1996 to create and evolve a standard industry process reference model of the supply chain for the benefit of helping companies rapidly and dramatically improve supply chain operations

• SCC has established the supply chain world’s most widely accepted framework – the SCOR® process reference model – for evaluating and comparing supply chain activities and their performance

– It can be used to describe supply chains that are very simple or very complex using a common set of definitions and enabling a common understanding

– It lets companies quickly determine and compare the performance of supply chain and related operations within their company or against other companies

• SCC continually advances its tools and educates members about how companies are capitalizing on those tools

– With membership open to all interested organizations

– Global presence, volunteer driven


Approximately 1,000 Member Organisations

Also developing chapters in India and the Middle East

0% 10% 20% 30% 40% 50%

Non-Profit/Academic

Consultant

Enabling Technology

End User

SME

Government

Member Affiliation

China

Australia/New Zealand

South Africa

Latin America

Southeast Asia

Japan

Europe

North America


SCC Industry Membership Scope

http://www.bp.com/home.do?categoryId=1&contentId=2006973

http://www.atkearney.com/main.taf

http://www.bayer.de/

http://www.boozallen.com/home

http://www.bcg.com/default.html

http://www.chevron.com/

http://www.lockheedmartin.com/wms

http://www.oracle.com/index.html

http://www.prtm.com/Home.aspx?id=422&LangType=1033

http://www.sap.com/index.epx

http://transfer.go.com/cgi/transfer.dll?srvc=dis&goto=http://corporate.disney.go.com/index.html&name=hp_ll_corpinfoimage

http://www.wyeth.com/

http://www.volvo.com/

http://www.gs1au.org/gs1_system/gs1_terminology/_gs1_terminology.asp

http://www.bearingpoint.co.jp/index.html

http://www.mew.co.jp/e/corp/index.html

http://www.mitsucars.com/MMSA/jsp/index.jsp

http://www.mitsui.co.jp/en/index.html

http://www.toshiba.com/tai-new/index.jsp

http://www.yamaha.co.jp/index.html

http://www.gatech.edu/

http://web.mit.edu/site/aboutsite.html

http://www.mckinsey.com/

http://www.dhl.de/dhl?skin=hi&check=yes&lang=de_DE&xmlFile=4037

http://www.dow.com/

http://www2.dupont.com/DuPont_Home/en_US/

http://www.amrresearch.com/default.asp

http://www.apqc.org/portal/apqc/site


From Supply Chains to Value Chains

Supply-chain generally accounts for between 60% and 90% of all company costs1

Fortune-10 Company Supply-Chain Cost % Total Costs2

GM Ford Conoco Wal-Mart Chevron IBM Exxon GE Citi1 AIG1

94% 93% 90% 90% 88% 77% 75% 63% 0% 0%


Reference Models from SCC

Cu

sto

mer p

rocesses S

up

pli

er

pro

cesses

Product/Portfolio Management

Supply Chain

SCOR ®

Product Design

DCOR™

Sales & Support

CCOR™

Cu

sto

mer p

rocesses S

up

pli

er

pro

cesses

Product/Portfolio

Management

Supply Chain

SCOR ®

Product &

Process Design

DCOR™

Sales &

Support

CCOR™


Supply Chains - Risky Business?


“The biggest risk is not taking time to think about

the risks”

“Anything that holds me back from

delivering to the customer is classified as a risk”

ISO 31000 defines ‘Risk’ as

“The effect of uncertainty on objectives”

What is Risk?


Risk is a fact of life

Iceland ash cloud

BP Oil spill

Global

Financial Crisis


The Environment we face in 2011 and Beyond

• Harsh economic realities and uncertain times

• Globalisation – new markets but also new competitors

• Overriding focus on cost reduction - ‘Lowest Cost’ mindset

• Reduction in demand for traditional manufacturing

• Consumer confidence at all time low

• Retail sales struggling

• Heavy job losses globally

• Companies in ‘survival’ mode!

• Credit crisis has seriously impaired cash availability across the supply chain

• Driving bad behavior by some

• Challenging customer/supplier relationships and collaboration efforts


Risk and the Supply Chain

Source: InForum www.InForuminc.com

http://www.InForuminc.com


Impact of Globalisation on Supply Chain Risk

• Traditionally, supply chains were internally controlled • However, we now live in a global economy • Organisations have looked at ways to lower costs, and have

outsourced and off-shored key functions • Managing this outsourced, global, Supply Chain has created new

challenges and levels of complexity • This increased complexity has dramatically increased the

volume and nature of external and internal risks that the business is exposed to and which need to be managed

• Many companies have changed their supply chain design without identifying the impact this may have on their business if issues arise

• Many strategic actions taken to drive costs out of Supply Chains have generated greater levels of risk!


Japan - 11 / 03 /2011


Wake-up call Supply Chain Risk Management

Source: MIT Centre for Transportation & Logistics


Detecting major supply chain risks

Whoops! Now what?


The Future? • Availability of downstream data will force

trading partners to re-think value creation

• In 2011 to 2012, developed markets like the UK and US will experience a shortfall of talent and budget

• 30% of the outsourced manufacturing to low cost countries will return

“China is already outsourcing

manufacturing to Vietnam!”

2015 Gartner Predictions


What Keeps You Up at Night ?

Stock Market Volatility, Oil Prices, Labor, Political Instability, Security, Currency Fluctuations

Reducing Total Supply Chain Costs

Supply Chain Resiliency & Sustainability:

Risk Management & Green

Reducing Inventory/ Working Capital/ Asset

Management

Competing in a Global Market

Providing Superior & Consistent Customer Service While Increasing Revenue & Margin

What is in control, what is not? What risks will cause a crisis if left unmitigated?


Circle of Concern

Circle of Influence

Separate risks within your circle of influence and circle of concern

Economic Recession

Currency Devaluation

Labour Disputes

Computer Virus

Product Tampering or Counterfeit

Fires or Explosions

Natural disasters

Disease or Infestation

Civil Unrest or Terrorism

Earthquakes or Tsunamis

Fuel Prices

Social Disputes


Circle of Concern

Circle of

Influence

Spike in RM

costs

RM supplier

failure

Poor Product

Quality

Excess

Inventory

Transportation

carrier failure

Executive

misdeeds

Sudden drop

in Demand

Design Change

Uneconomic

T&C’s

Failure of major

software

system

Machinery

Breakdown

New competing

product

New

competitors

Employee theft Tighter Supplier

Terms

Cash flow

Crisis

Executive

misdeeds

Sudden drop in

Demand

Separate risks within your circle of influence and circle of concern


Frequency of Internal vs External Risks

Source: MIT CTL – Global Differences in SC Risk

Frequencies and Priorities

Never Rarely Yearly

Internal Risks nearly

twice as likely

as External Risks

Which Risks are

most important to your Supply chain?


“It is not the strongest of the species that

survives, nor the most intelligent.

It is the one that is the most adaptable to

change” Charles Darwin

NEED TO EVOLVE TO ADAPT TO OUR CHANGING ENVIRONMENT

Survival of the fittest?


Risk Event Detection and Response

Start of risk event

Early detection of risk event

Rapid response to risk event

Late detection of risk event

Delayed response to risk event

Delayed response to risk event

ELAPSED TIME

VA

LU

E O

F O

RG

AN

ISA

TIO

N

T0 T1 T2 T3 T4 T5


Define Your Supply Chains


1st DAY on the job as Supply Chain Risk Manager!

• Where do our raw materials come from?

• What does our SC look like?

• You may know and trust your supplier – but do you

know their suppliers? Or their supplier’s

supplier?

Good luck with that!

If there is a crisis, I need to know

yesterday!


The five distinct management processes link the supply chain together seamlessly from supplier to customer

Suppliers’

Supplier

Supplier

Plan

Customer Customer’s

Customer

Make Deliver Source Make Deliver Make Source Deliver Source Deliver

Internal or External Internal or External

Your Company

Source

Return Return Return Return Return Return

Return Return

End-to-End Supply Chain Processes

SCOR Model represents information, material & cash flow

Control the internal supply chain first, then the end-to-end. Map, plan and control everything from product design to reverse logistics


Define the key supply chain in your business

• Customer Segmentation (Columns)

• Product Segmentation (Rows)

• MTS vs. MTO vs. ETO


Future

Current

Developing the End in Mind: Current and Future Value Chains


Geographically map your supply chain

RM Supplier

sD1, sP1, sP4 Component Supplier

sD1, sP1, sP4

Retail, Inc

sS1, sP2

Factory

sP3, sS1, sM1, sD1

HQ

sP1, sP2, sD2, sS2


Understand external risks to your supply chain

RM Supplier

sD1, sP1, sP4

Component Supplier

sD1, sP1, sP4

Retail, Inc

sS1, sP2

Factory

sP3, sS1, sM1, sD1

HQ

sP1, sP2, sD2, sS2


How does your Supply Chain Compete?

• Different Supply Chains have different drivers

• Understand your different Supply Chains, then understand their drivers

• Work from the Customer back – put customer value first

• Understand the SERVE and COST-TO-SERVE equation

• Understand how to best ‘SERVE’ your customers

• Understand how to optimise the ‘COST-TO-SERVE’


How does your Supply Chain Compete?

Different Supply Chains have different drivers

• Reliability could be key, followed by Asset (working capital) management.

• Any lack of reliability in forecast, supplier performance, schedule adherence (etc) can have a major impact

Make-To-Stock (MTS)

• Responsiveness usual key.

• Responsive suppliers and sub-contractors, responsive to RFQ’s etc

Make-To-Order (MTO)

• ...

• ... Engineer-To-Order (ETO)


Define your supply chain competitive differentiator

Competitive Requirements

For each channel prioritize strategic performance using 1x Superior, 2x Advantage and 2x Parity

SC1 MTS

SC2 MTO

SC3 ETO

Reliability Superior Parity Parity

Responsiveness Parity Parity Superior

Agility Advantage Advantage Advantage

Cost Advantage Superior Advantage

Asset Management Efficiency

Parity Advantage Parity

Cust

om

er

Inte

rnal

Do I have a different tolerance of risk if my strategy is to compete on Cost versus Reliability, Responsiveness or Agility?


Attribute Strategic metric

Reliability RL.1.1 Perfect Order Fulfillment

Responsiveness RS.1.1 Order Fulfillment Cycle Time

Agility AG.1.1 Upside Supply Chain Flexibility

AG.1.2 Supply Chain Upside Adaptability

AG.1.3 Supply Chain Downside Adaptability

AG.1.4 Overall Value at Risk (VaR)

Cost CO.1.1 Supply Chain Management Cost

CO.1.2 Cost of Goods Sold

Assets AM.1.1 Cash-to-Cash Cycle Time

AM.1.2 Return on Supply Chain Fixed Assets

AM.1.3 Return on Working Capital

Cu

sto

me

r In

tern

al

SCOR Level-1 Metrics (KPIs) Se

rve

C

ost

to

Se

rve


• Strategies that focus on customer service (e.g., reliable

delivery) or where the cost of late or lost deliveries are high,

generally have a low risk tolerance

• Strategies that focus on cost reduction or where the cost

of late deliveries are low, generally have a higher risk tolerance

• Ultimately, the tolerance for risk will determine how much the enterprise will invest in mitigation measures vs. reactive efforts.

What is the business impact of a broken supply chain? How much are you willing to risk?

Source: SCC Risk SIG

Competitive strategies help define risk tolerance


GET CONTROL!

• Develop Customer Value Teams focused on the end-to-end Supply Chain

• ‘Control Tower’ mindset

• Build Trust! Internally and externally

Understanding Your Supply Chain is the best Risk Mitigation strategy you can make!



End-to-End Supply Chain Visibility is Key


Information management is the new competitive battleground – data ownership is key


Focus on the bottom line impact


Put Finance at the heart of the Value Chain!


Understand the value at risk and impact on your key strategic drivers


If my SC strategy is Reliability….

• Do we have reliable suppliers? Do we reward reliability? Do we measure Reliability?

• How do our Supply Chain risks impact my ability to be reliable?

• Do my risk mitigation actions increase, or decrease, my reliability?

Align Risk strategies to Competitive Strategies


Align Risk Strategies to Competitive Strategies

Focus on identifying and mitigating risks that will cause

the biggest impact to your Supply Chain’s competitive

strategy

Performance

Attribute

Supply Chain

SC1 MTS

SC2 MTO

SC3 ETO

Reliability S P P

Responsiveness P P S

Agility A A A

Cost A S A

Assets P A P

• Quality Issues

• Poor planning & control

• Insufficient Production Capacity

• Forecast Inaccuracy

• Poor 3PL performance

• Poor system performance control

• Poor SOURCE control

• Political issues

• Poor Inventory Management

• Economic crisis

Risks


Impact of Risk on Supply Chain strategy

Projected estimated Impact Year 1

ATTRIBUTES RELIABILITY RESPONSIVENESS AGILITY COST ASSETS

SCOR

METRIC

Perfect Order

Fulfillment

Order Fulfillment

Cycle Time

Supply Chain

Flexibility

Supply Chain

Mgmt Cost

Cash-to-Cash

Cycle Time

Scorecard

Baseline

75.0% 7 (days) 62 (days) 10.1% 22 (days)

Risk Cat 1 -2.5% 0.5 2.0 0.05% 3

Risk Cat 2 -3.5% 0.01% 1

Risk Cat 3 -2.2% 0.5 1.0 0.01% 3

Risk Cat 4 -2.0% 1.0 0.3 0.02% 1

Risk Cat 5 -1.3% 0.02%

Risk Cat 6 -3.5% 0.01%

NET IMPACT -15.0% 2.0 3.3 0.12% 8

Total 60.0% 9.0 65.3 10.22% 30


• Probability and Impact should be understood

VAR= Impact * Probability

• Prioritise those with highest score

• Choose appropriate risk response

› Acceptance - Accept that it could happen, and be aware of that fact

› Avoidance - No longer do the thing that causes the risk

› Transference - Transfer the risk to a third party (insurance for example)

› Mitigation - Reduce the impact or probability by taking an appropriate action (e.g. safety stock, contingency planning, multi-sourcing, training)

Probability

High

Imp

act

High

Value-based Mitigation


RELIABILITY: POF by Supply Chain

DELIVER:

Sales Order

OTIF

MAKE:

Schedule

Adherence

SOURCE:

Supplier OTIF

PLAN:

Forecast Error

SOURCE:

Overdue PO’s by

Vendor

SOURCE:

Overdue PO’s

by Buyer

RELIABILITY: POF by Supply Chain

Aligned and Integrated Metrics


Top Mitigation Strategies

• Collaboration

• Postponement

– Delayed differentiation

• Modularity

– Component commonality

– Process standardisation

• Redundancy

– Extra inventory

– Buffer capacity

– Dual/Multi-Sourcing

– Production flexibility

• Performance-based Contracts

• IT Investment

Example of Risk Management Project Summary

Risk Improvement

Project 4

Risk Improvement

Project 1

Risk Improvement

Project 2

Risk Improvement

Project 6

Risk Improvement

Project 3

Risk Improvement

Project 5

50

Projected Annualized Benefit Year 1

ATTRIBUTES RELIABILITY RESPONSIVENESS AGILITY COST ASSETS

SCOR

METRIC

Perfect Order

Fulfillment

Order Fulfillment

Cycle Time

Supply Chain

Flexibility

Supply Chain

Mgmt Cost

Cash-to-Cash

Cycle Time

Scorecard

Baseline

75.0% 7 (days) 62 (days) 10.1% 22 (days)

Risk Project 1 2.5% 0.5 2.0 -0.05% 3

Risk Project 2 3.5% -0.01% 1

Risk Project 3 2.2% 0.5 1.0 -0.01% 3

Risk Project 4 2.0% 1.0 0.3 -0.02% 1

Risk Project 5 1.3% -0.02%

Risk Project 6 3.5% -0.01%

NET IMPACT 15.0% 2.0 3.3 -0.12% 8

Total 90.0% 5.0 58.7 9.98% 14

Opportunity Analysis Project


SCRM requires ‘Growth Mindset’

Growth Mindset

• Confront ‘brutal facts’ of current situation

• Develop ‘sense and respond’ processes and roles

• Focus on identifying weak-spots to continuously improve

• Increase focus on collaboration (customer and supplier)

• Focus on relationship management through joint metrics focused

on customer value

• Improve visibility across the End-to-End Supply Chain

• Develop a resilient, flexible organisation

• Focus on innovation throughout the end-to-end Supply Chain –

from product design to reverse logistics!


Top 5 Concerns Amongst Executives Worldwide

Financial risk, volitility and credit risk

Global economic performance

Speed, flexibility, adaptability to change

Consistent execution of Strategy by Top …

Excellence in Execution

43.80%

44.60%

46.60%

47.00%

55.00%

Cite challenge as being of 'Greatest Concern'

Source: The Conference Board Note: The global top 5 list is weighted by regional representation in global GDP as established by the International Monetary Fund

0% 20% 40% 60%


7 Take Away Points

• Best form of Risk Mitigation is to be in control – control of data, people, processes and partners

• Define the key supply chains in your business and clarify your supply chain competitive driver(s)

• Focus on identifying the risks to each supply chain

• Separate risks into your circles of influence and concern - control what you can influence, understand the impact and probability of what you cannot

• Determine the impact on your key strategic drivers and value at risk

• Create end-to-end, customer value chain teams focused on the key competitive drivers

• Develop Risk Mitigation strategies that support your competitive drivers and an implementation plan


Thank You!

[email protected]

http://supply-chain.org/

www.sevencsl.com




http://www.sevencsl.com/


Risk Management Case Studies: Cisco / BMW Motorcycles


Risk Management Continuum

Risk/Cost trade -off

Clu

ele

ss

Ris

k a

ware

ness

Ris

k a

ware

ness w

ith

so

me m

itig

ation

Full

risk m

itig

ation

Inte

gra

ted w

ith

score

card

Full mitigation

with integrated

KPIs


CISCO Risk management approach

4 main capabilities

• Product resiliency

• Supply chain resiliency

• Business continuity planning (BCP)

• Crisis management

Time to Recover (TTR) is Cisco’s primary KPI and is

Measured across multiple functions


BMW Motorcycles BMW is moving from procurement to total quality management

• Moving from China to Easter Europe (Cheaper, less risky, lower transportation costs)

• Focus on high quality and motivate/collaborate with supply partners


SCRM Tools and Barriers


Supplier Risk Management Collaboration

• Collaborate with Suppliers to cost-effectively identify and reduce the frequency and severity of unwanted events in the inbound supply chain

• Identify and understand the drivers that increase supplier risk

– Track supplier’s financial and delivery performance (on-time, cycle time, and quality)

– Map supplier’s geographic locations of the factory – determine geo-political and natural risks for the regions

• Analyse suppliers by high, medium, or low risk

• Proactively manage and mitigate supply chain risk

– Develop alternate sourcing plans

– Ask suppliers for their business continuity plans


Supplier Network Collaboration (SNC)


Supplier Risk Management Software to minimise supplier disruption and predict risk

Supplier Infonet Solution from SAP

A cloud-based analytic tool that helps to improve the performance of the organisation supply base and proactively manage both risks and

opportunities in an extended value chain.

• Alerts: Collect historical & current operational performance and combine with external content that might indicate operational disruption

• Benchmark analysis: Compare & assess supplier performance with peers

• Ability to predict supplier risks: Provide predictions of future performance along with root causes to proactively mitigate any disruptions

• Insight into n-tier supply base: A unique business social network that allows participants to see relationships and determine weaknesses multiple tiers down in Supply Chains

• Access to an information network: Using the social networking concepts embedded to provide visibility of external issues to help mitigate risk of disruption at any level.


Barriers to SCRM Adoption

Source: POLL of SCRLC members May, 2011

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