Monthly Archives: April 2007

The World Economic Forum’s Global Risks 2007 – Part II

Expert opinion suggests that levels of risk are rising in almost all of the 23 risks on which the Global Risk Network has been focussed over the last year – but mechanisms in place to manage and mitigate risk at the level of businesses, governments, and global governance are inadequate.
      Global Risks 2007, World Economic Forum

In addition to identifying 23 core global risks of an economic, environmental, geopolitical, societal, and technological nature that no global organization can afford to ignore in its risk planning and risk mitigation efforts, this report also offered the “5 Pathways” to mitigation.

  • Improving Insight

    Move risks from the unknown to known through research.

  • Enhancing Information Flow

    Allow information to flow effectively between decision-makers and those experiencing the risk first hand to provide early warning, inform the public, and exchange best practice.

  • Refocus Incentives

    Create incentive frameworks that allow decisions to be made to reduce risks.

  • Improve Investment

    Provide the investments necessary to mitigate risks.

  • Implement Through Institutions

    Improve the framework needed to mitigate risks for which an institutional response is required.

The report also pointed out which risks are reduced by each of these mitigations.

  Mitigation
Risk Insight Information Incentives Investment Institutions
Oil Price Shock / Energy Supply Interruption       X   X   X
US Account Deficit   X         X
Chinese Economic Hard Landing   X         X
Fiscal Crisis Due To Demographic Shift       X   X  
Excessive Indebtedness   X   X      
Climate Change   X     X     X
Loss of Freshwater Services   X     X     X
Tropical Storms   X   X       X
Earthquakes     X   X     X
Inbound Flooding       X   X   X
Terrorism   X   X       X
Proliferation of WMD       X     X
Interstate and Civil Wars         X   X
Failing States   X       X   X
Transnational Crime   X     X     X
Retrenchment from Globalization   X     X     X
Middle East Instability       X   X   X
Pandemics   X   X       X
Infectious Diseases (Developing World)   X       X   X
Chronic Diseases (Developed World)     X   X    
Liability Regimes   X     X    
Critical Information Infrastructure (CI) Breakdown   X   X      
Nanotechnology Risks   X   X      

They also provide two possible institutional innovations for managing global risks.

  • Country/Chief Risk Officer

    In the public sector, governments would appoint a single Country Risk Officer, prioritize risks on a cross-sectional basis, and explore private sector techniques of risk assessment, management, and transference. In the corporate sector, the Chief Risk Officer would be responsible for all categories of risk, risk reporting, consolidation, and aggregation.

  • “Coalition of the Willing”

    Different groups of countries / corporations would come together in a non-exclusive fashion to create a system of flexible geometry to mutually mitigate risks.

Lastly, although not specifically mentioned in the report, you can address each risk on an individual basis using reason, logic, and common sense to develop appropriate mitigations, which will be the subject of Part III.

No Advanced Sourcing at Oracle

I was recently asked what I thought about Oracle’s Advanced Procurement Solution, and its optimization offering (new in version 12.0) in particular. The short answer is that it doesn’t make the cut in my book. The core sourcing cycle consists of spend analysis, RFx, auction / bid collection, decision optimization, and contracting. In order to be considered an advanced sourcing application, in my book, the underlying spend analysis technology, decision optimization technology, and contract management technology must support advanced capabilities. Although Oracle Procurement Contracts might be considered a fair contract management tool, it is certainly not advanced and it is by far the most developed of the offerings.

Oracle’s sourcing optimization product is pretty basic. It only supports three constraints: header, which can be used to constrain the maximum award amount or exclude one or more suppliers by scores, line constraints, which determine which, and how many, suppliers can split a line item award, and to what extent, and supplier which can be used to globally limit the number of suppliers and the award to certain suppliers. Basically, they support basic exclusion, capacity, allocation, and qualitative constraints. Not bad compared to most of the “optimization solutions on the market, but not really advanced sourcing.

Regular readers will note that I have four basic requirements for a true strategic sourcing decision optimization product:

  1. solid mathematical foundations
  2. true cost modeling
  3. four key categories of sophisticated constraints:

      capacity, basic allocation, risk mitigation, and qualitative

  4. sophisticated what-if capability

Since it uses ILog CPlex, it meets the solid mathematical foundations (provided that the underlying model is a true representation, and not a heuristic simplification), it has basic what-if capability, it mostly meets the minimum constraint requirements, but definitely falls short on true cost modeling. In order to allow for true cost modeling, a decision support must support tiered bids (or discounts that can model the tiered bids), flexible discounts, separate cost components (or at least flexible adjustments), and fixed costs. To the best of my knowledge, although Oracle’s tool does offer some volume discounts, it does not support multi-level tiered bids, flexible discounts, separate cost components (and at least freight should be supported), or fixed costs. In the constraint department, they do support basic capacity, allocation, risk mitigation, and qualitative constraints, but they are all tied to an item or an entire order. Qualitative constraints should be definable at the supplier, item, or location level, a concept the tool doesn’t yet support to the best of my knowledge, risk mitigation should be definable across item, group, or order, and only item and order appear to be supported, and capacity, allocation, and exclusion should be equally as flexible. Plus, the Oracle tool doesn’t have any constraints beyond these absolute basic constraints.

Does Dell Deliver?

About six weeks ago, Jason posted Vista, Office, and Outlook 2007 are a Nightmare over on Spend Matters. Since that time, one hundred comments have materialized in response to this post, and thirty three of those comments, or one-third, have been with respect to Dell machines – and similar problems. Furthermore, the first Flaming Laptop, if I recall correctly, was a Dell.

In my view, a good supplier is one that delivers a good product of good quality at a good price in a good time frame. It seems that Dell is only hitting three of these four metrics: quick delivery, competitive price, and comparable hardware power – quality, it seems, has slipped through the cracks. Quality assurance requires you test everything you use in the construction and delivery of your product and service – not just what you manufacture in-house. Dell seems to have forgotten that. It doesn’t matter what you are buying, who you are buying it from, or what their reputation is. Any supplier can make a mistake. And if you’re the one delivering the product to the end customer – it’s your responsibility to make sure all mistakes are caught before a product is shipped. At this point, all I can say is I’m glad they’re not making pet food, otherwise, with the recent fiasco, I do not think that a single pet in North America would be safe!

Procurement Contract Risk Management

As pointed out by JP Massin in his Strategic Sourcing Europe blog, APICS and Protiviti recently released a study on Procurement Contract Risk Management.

As noted by JP Massin, the conclusion is that a large proportion of organizations need to improve the management of their procurement contract risks and opportunities. And this seems to hold true across the board, for direct and indirect procurement alike.

The study does a great job of pointing out many types of procurement contracts management risks you should be aware of:

  • End-customer satisfaction risk
  • Authority limit risk
  • Regulatory non-compliance risk
  • Information security, access, and privacy risk
  • Terms and Conditions risk
  • Reputation risk
  • Environment, health, and safety risk
  • Inventory and obsolescence risk
  • Off-balance sheet inventory liability risk
  • Automatic renewals risk
  • Contractual and legal risk
  • Employee/third-party fraud risk
  • Outsourcing risk
  • Efficiency risk

It also does a great job of pointing out some key capabilities a company will need to tackle these risks:

  • Strategy and Policy
  • Processes, Practices, and Procedures
  • Organization and People
  • Contracts Management Process
  • Information Methodologies / Tools
  • Systems and Data

And provides some great recommendations, including:

  • Never underestimate the importance of having a clear process vision, and well-designed and defined objectives, strategies, and plans for the process.
  • No matter how well the process is designed, it cannot be effective without the right people and structure.
  • It is essential that technology be leveraged.

I would highly recommend downloading a copy of the Procurement Contract Risk Management study and reviewing it at your leisure to make sure you understand what the contract risks are, what the key capabilities you will need to mitigate the risks are, and where the major problem areas are in most companies so that you can insure they are not in yours.

Purchasing’s Tips for Supplier Relationship Management

A recent article in Purchasing entitled Supplier Relationship Management: Pathways to Convergence offered up a few tips on Supplier Relationship Management, complete with case studies, that could be useful. The article, which notes that, At the heart of any good supplier-relationship management (SRM) process is a belief in exacting metrics, open communication and a laser-like focus on finding and nurturing suppliers who are willing and able to bring new technologies and other innovations that have a positive impact on the bottom line of both companies.

Tell Suppliers What You Expect : Pitney Bowes
“We’re like any technology company in recognizing that our suppliers and partners will play an increasingly more critical role in our business strategies,” says Michael Dempsey, Vice President of Global Direct Procurement.”SRM provides the enabling mechanism for selecting, developing and leveraging the supplier capabilities we need to deliver superior customer value today and, more important, tomorrow. It’s vital to our success.”

Pitney Bowes segments its supply base, forms relationships with the top level of management in the top 5% of its supply base, and holds formal periodic business reviews. This feedback allows Pitney Bowes and its suppliers to work together towards one common goal.

Suppliers must ‘enhance’ customers’ experience : Fedex Express
Fedex Express in Memphis, Tenn. “depends on our suppliers to provide products, services or solutions to us that enhance our customers’ experience,” says Mary H. McDaniel, Vice President of Material and Corporate Sourcing. “Our customers depend on us to perform for them. We depend on our suppliers to perform for us.”

At Fedex, SRM is built into their four-step strategic sourcing process (assess, validate, source, manage), requirements are communicated to suppliers through Aeroxchange, and scorecards are used to track supplier performance. The results of the scorecard are used to develop action plans which are reviewed with suppliers during semi-annual meetings. In addition, the company holds a global supplier symposium every other year for its top 50 suppliers.

Suppliers should understand end customers’ needs Procter & Gamble
P&G uses a rigorous SRM methodology. “It starts with purchasing leadership involvement in relationships with strategic suppliers, and is focused on creating joint value for suppliers and our business,” says Mary E. Kostolansky, Director of Marketing Purchases at Procter & Gamble in Cincinnati. Furthermore, she states that “Our suppliers are an integral part of how we do business and we take a long-term view of these relationships to drive sustained results,” says Kostolansky. “We believe our suppliers can be a critical component in our ability to innovate and deliver sustainable value.”

P&G spends more time than ever ensuring suppliers understand retailer and end consumer needs and involves representatives of R&D, marketing, engineering, and other functions in the SRM process. Furthermore, P&G focusses on growing its business with top suppliers and on eliminating poor performers that are not adding value.

All-in-all, a good article on the basics. So heed the advice and don’t be in the 51% of Companies that Don’t Understand Risk.