Category Archives: Risk Management

Today’s Spend Management Priorities ARE Today’s Spend Management Priorities

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This spring, Ariba conducted a survey across 225 Procurement and Finacne executives across a variety of regions, industries, and company sizes to determine the spend management strategies and approaches that companies are adopting to cope with the global economic recession. What they found, as chronicled in their white-paper on “The Return to Profitability”, shouldn’t be surprising:

  • Identifying savings opportunities faster is the #1 focus for most companies
    Companies are looking for a quick ROI and immediate savings to demonstrate the value of spend management before seeking executive support and funding for a wider roll-out.
  • Increasing spend under management is a key initiative for most companies
    Companies are recognizing the advantages of more spend under management.
  • Automating procurement processes is becoming a top priority for many companies
    Almost two thirds of respondents listed the need for automation across the entire source-to-settle process in their top five priorities as they are feeling the pain of depending on paper and people-intensive processes.
  • Mitigating risk and managing supplier performance is critical
    Concerns range from meeting customer demand if critical suppliers are interrupted to reduced supplier innovation to deteriorating quality and service.

Ariba, which has adopted their own variation of the best-in-class, leaders, and laggards classification of Aberdeen with their pioneers, survivors, and stragglers classification, found that pioneers had over 75% of spend under management, made moderate to extensive use of technology, and had over 50% of suppliers under a formal management program while stragglers had less than 25% of spend under management, made low to no use of technology, and had less than 10% of suppliers under a formal management program.

As a result they made the usual recommendations that organizations should:

  • improve spend visibility NOW to help identify savings opportunities faster
  • make procurement automation a top priority to maximize savings and compliance
  • not be afraid to get outside help to capitalize on current market conditions

So what does this mean?

It means that you need to take action now to avoid falling further from the path of profitability and recovery. Because when software companies are spending tens of thousands of their own money to verify analyst results, which have been cross-verified by multiple analyst firms, it means the results are right and that you have to take action now.

What’s all this talk about risk?

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Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

The issue of global supply chain risk gets a lot of attention nowadays, and it certainly should. However, I’ve seen a few silly statements. One is that global sourcing is sooo over. Another is that nobody should buy in China. (OK, I exaggerate, but just slightly.)

Here’s my perspective:

First, we need to clarify what “sourcing” is. Wikipedia says “In business, the term word sourcing refers to a number of procurement practices, aimed at finding, evaluating and engaging suppliers of goods and services“. That’s the definition I’ve always used, too. It doesn’t mean actually buying, it means looking around. Global sourcing just means looking around globally.

With that definition, you can see what sourcing globally gets you. It gets you intelligence on the prices, costs, and viability of potential sources all over the world. In other words, it gets you a potential reward in the form of the lowest supply costs. Rewards in purchasing, as in investing, go hand in hand with risks. You can’t evaluate the risks without knowing the rewards. Fortunately, in purchasing higher rewards don’t always mean higher risks.

Let’s suppose a global sourcing program shows that the lowest landed cost suppliers are in some place various gurus find risky and you can save a tremendous amount by your company standards if you actually buy there. Would you walk away from a deal just because it’s risky? I hope not. That’s not the road to success. The computer industry ships about $30 billion dollars annually from China to the US. Quality and intellectual property problems are rare. What are some of the steps computer companies take? I can name four: Include quality experts in sourcing evaluations right from the start, buy only from foreign invested companies in China, have not just feet on the ground in China but trained brains too, and carefully reference-check for intellectual property issues before proceeding. It helps, too, that products such as laptop computers are “economically dense” in terms of cost per kilogram so that air freight makes sense.

Philosophically, when you evaluate risk during a sourcing process, you are not comparing the risk of one choice to a mythical risk-free world. You are comparing the risks of choosing one supplier to the risks of choosing (or staying with) another supplier.

Some risks are digital or binary. They are go no-go tests that should be applied before a potential source is even allowed to quote. A propensity to steal intellectual property is one such test. Lack of adequate quality standards and practices is another. But please don’t claim that no supplier in a country can meet those standards.

Other risks are more like analog. You can measure their severity. The best way is to see how often or how much or how often a situation would have to happen before what looks to be the lowest cost supplier is no longer lowest. Exactly how much would a supplier’s currency have to appreciate before it becomes (in hindsight) the wrong choice? Exactly how often would you have to ship by a premium method at your expense before your lowest cost supplier is no longer lowest? While you’re doing this remember that the second and third lowest cost suppliers have their own risks too. If volatile fuel prices (or cap and trade programs) cause one supplier’s cost to go up, they will also affect other suppliers’ costs.

I have a concern is that every company has strong momentum to stay with their existing supply base. If consideration of risk is not done well, it becomes just another excuse to keep on doing what the company has been doing all along. I saw it at HP when I was developing its global sourcing program. It took a few years to overcome.

Dick Locke, Global Procurement Group and Global Supply Training.

Remember The Three Key Objectives of Supply Chain Risk Management

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As emphasized in an article in Industry Week from last fall on “Supply Chain Risk Management”, from a risk manager’s point of view, the following are the three key objectives of an effective supply chain risk management strategy:

  • identify and prioritize critical business elements,
  • map the entire supply chain to determine interdependencies, and
  • identify the potential failure points along the chain.

Not only is it important to keep these objectives in mind as you are analyzing your current supply chain for risks, especially those that could result from the failure of one or more suppliers or logistics providers, but it is doubly important to keep them in mind when you start re-evaluating your global sourcing strategy in the forthcoming upswing. Otherwise, you could make decisions that will put you right back where you are today when the next inevitable downswing rears its ugly head.

Supply Chain Disaster Lessons

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Over on Supply Chain Digest, who recently updated their list of the “top supply chain disasters of all time”, you can find a short article chronicling some of their “lessons from supply chain disasters”. Simply put, the key lessons were as follows:

  • “Big Bang” Go-Lives are Risky Business
    Despite the fact that the risks of this approach are well documented, this approach is still taken all too often.
  • Pioneers Get Arrows in the Back
    Being the first increases your odds of failure dramatically … whether it’s a new technology, new methodology, or new market.
  • Do Not Ignore Early Warning Signs
    Just about every disaster post mortem uncovers dozens of indications of emerging problems that were ignored. These warnings are usually ignored or minimized because someone doesn’t want to fess up that things are not going as promised.
  • Avoid hard cut-offs/transitions
    Many project disasters are caused by hard deadlines. Hard deadlines, especially if the project schedule is too tight, are often the largest contributor to project failure.
  • Beware the ROI trap
    Many projects go south because they whittle away key elements for success just to make an (unrealistic) ROI expectation.

And they must be taken to heart. I’ve seen many projects, and companies, fail because they didn’t heed these lessons.

Organizational Versus Occupational Fraud

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his new column in the archives.

When do you draw the line between a person (or persons) being guilty of fraud versus the entire organization? The latter seems pretty sweeping, implying that every employee was guilty of perpetrating fraud; this is not the case, however.

Operational fraud — such as frauds that happen in the internal/external supply chain operations — can be divided into two basic classifications of fraud: organizational versus occupational.

When a person or persons commit occupational fraud, they have used their positions or roles to facilitate the perpetration of the fraud. A cashier who takes money from the till, an accounting person who falsifies deposits and pockets some cash, a buyer who accepts gifts, brides, or kickbacks for steering business to one supplier versus another, etc., are all examples of occupational fraud. Contractors and service providers can be guilty of occupational fraud, such as the attorney or technology consultant who submits bills for hours not worked. There is an implied trusted relationship that the person breaches in their less-than-trustworthy conduct.

When, at the highest levels of an organization, senior management (typically officers, but sometimes members of the board of directors) are guilty of perpetrating fraud via the use of the enterprise itself, in whole or in part, this is organizational fraud. What’s so unfortunate about organizational fraud is that many times honest employees in specific occupations are often left to suffer, such as when the organization folds. (Examples include Arthur Andersen, WorldCom, and Enron.)

Senior management and directors bear the burden of responsibility in their positions to set the right examples for the organization’s code of conduct. This is part of good governance for public companies as outlined in the COSO Sarbanes-Oxley compliance framework, but it is certainly applicable to private companies and government agencies alike.

The Sentencing Reform Act of 1984 provides guidelines for the penalties assigned to both individuals and organizations guilty of crimes. In brief, the penalties are assessed as follows:

(1) The greatest of the following:
(a) A base fine from an offense level table;
(b) The monetary gain to the organization;
(c) The loss suffered due to the intentional, knowingly reckless, behavior by the organization. (2) Application of a fine multiplier based on such factors as cooperation versus obstruction of justice, history of bad behavior, and whether the organization self-reported and accepted blame and responsibility.

In the tainted pet food scandal that hit the United States, melamine was added in China to the base ingredients to boost the tested protein levels and cover-up quality problems. A public official (an inspector) and an employee of the manufacturing company (a buyer, I believe) were both involved in the fraud: they used their occupations to perpetrate the fraud, which involved payoffs.

The pet food was then shipped from China to Canada where it was canned for distribution into the United States under various brand names. If, in the US or Canada, the corporate philosophy was to either not bother with quality assurance testing or not adequately fund quality assurance testingn (thus rendering it ineffective), in order to reduce cost-of-goods-sold and boost profits, this is, in my opinion, organizational fraud as perpetrated by the canning company in Canada and the US distributors.

Another good example is children’s toys in regards to the use of lead paint and design flaws which, even when manufactured to the specifications, represented a hazard.

The lesson here is very simple: You can outsource manufacturing, but you can’t outsource responsibility.

Norman Katz, Katzscan