Managing Sourcing
Risks
Dirk De Waart
Management
Consultants
Where Innovation Operates
Agenda
PRTM Introduction
Supply Chain Risk
A New Model For Managing Sourcing Risks
Case Study
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PRTM Introduction
Management
Consultants
Where Innovation Operates
Our Focus:
Defining and Implementing Operational Strategy
PRTM is the premier operational strategy consulting firm

We help clients envision and design more effective operations

Our specialty is implementing changes to affect measurable results
Operational Innovation
Game-Changing Ways to Win
Business
Strategy
Operational
Strategy
Operational
Execution
Where and Why We’ll Win
How We’ll Win
Executing to Win
We focus on the critical link between business strategy and
execution

Operational strategy orients your business and economics for competitive
advantage

We help you establish a winning operational strategy…and realize it
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PRTM Global Experience

31 years of operational strategy and innovation


More than 600 consultants worldwide
 Aerospace and Defense

17 offices worldwide
 Automotive

Over 1,200 clients and 6,000 projects
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Industries

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 Consumer Goods
Major commercial sectors:
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Sourcing Risks
Defined
Management
Consultants
Where Innovation Operates
We Are Seeing Increased Emphasis On Supply Chain Risk
Risks have increased ….
•
Number of natural disasters has tripled since 1970
•
Man-made disasters have increased by 50% over the same period
… while at the same time the vulnerability to these risks
has grown

Outsourcing and off shoring have increased sourcing and distribution
risks

Lean and JIT have taken away traditional buffers against supply
chain risk

Supplier reduction waves have increased exposure to single source
suppliers
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Supply Chain Disruptions Can Have Significant Impact
Statistics show that a crisis will hit large companies every 4-5
years and 73% of companies that suffer a disruption of 10 or more
days will shut down or experience considerable, long term effects
Source: Crisis Management International
Unprepared companies can be significantly impacted by these
events….
A lightning strike at an Ericsson supplier’s plant disrupted production for three
weeks and significantly impacted process yield. Ericsson lost $400M as a result
and eventually withdrew from the mobile phone business
A fire in one of Toyota’s suppliers’ plants shut down production for 5 days.
Costs related to disruption: $195M
After Hurricane Mitch hit Central America, Dole had no alternative sources and
suffered a $100M loss
… and there are many more undocumented cases!
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Sourcing Risk Is An Important Type Of Supply Chain Risk
Planning risk (e.g.
unplanned demand)
Logistics risk (e.g.
port shut down)
Plan
Sourcing risk (e.g.
supplier shutdown)
Deliver
Return
Suppliers’
Supplier
Source
Make
Return
Deliver
Return
Supplier
Internal or
External
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Source
Make
Return
Deliver
Return
Your Company
Manufacturing risk
(e.g. factory shutdown
or labor strike)
| © 2008 PRTM Proprietary
Source
Return
Make
Deliver
Source
Return
Return
Customer
Customer’s
Customer
Internal or
External
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A New Model For
Managing Sourcing
Risks
Management
Consultants
Where Innovation Operates
Common Models For Managing Sourcing Risk Are Inadequate
Current models for sourcing risk management are either
too simplistic (relying on expert opinions) …..
Impact
H
M
L
L
M
H
Risk
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Common Models For Managing Sourcing Risk Are Inadequate
…. or unrealistic
Suppliers
Suppliers’
Suppliers
Etc.
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Processes
Etc.
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Common Models For Managing Sourcing Risk Are Inadequate
We developed a new model that is flexible, scaleable,
and easy to implement
Specific
Be specific about what contributes sourcing risks in the
company and identify the unique risk and impact attributes
Measurable
Quantify the risks and their potential impact on the business
Actionable
Move from studying risks to mitigating them. Pinpoint the
risks that will have the most severe impact on the business
and define initiatives to mitigate them.
Realistic
Understand what resources are required to mitigate risk
and prioritize the initiatives to address resource constraints.
Time Phased
Develop actionable implementation plans with clear roles and
responsibilities
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Case Study
Management
Consultants
Where Innovation Operates
Started With Defining Risk Attributes
Specific
In defining risk management for sourcing, the “object” is the
material sourced and supplier from which the material is sourced

1,500 part numbers sourced

200 suppliers
The “attributes” determine the risk and impact of the risk on each
object relative to other objects

Measurable elements that contributes to the magnitude of the risk and impact
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Started With Defining Risk Attributes
Specific
Example Supplier, Materials, and Impact attributes:
Supplier specific risk
attributes
• Financial health
• Delivery performance
• Dependency
• Physical location
For example:
Financial health
Low risk: QR > 1
High risk: QR < 1
(industry specific)
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Materials specific risk
attributes
Impact specific attributes
• Sole/single/multi sourced
• Lead time
• Available alternatives
• New supplier ramp up time
• Inventory
• Supply governance
• Demand increase
• Shelf life / storage constraints
• Supplier’s sole sourced
For example:
• Where used (product & process)
For example:
Sole/single/multi sourced
Where used by product
Low risk: Multi sourced
High risk: Sole sourced
Low risk: Used in one product
High risk: Used in all products
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Defined Approach To Measure Each Attribute
Risk Attribute
Measurable
Measure
Number of suppliers by material
Sole/single/multi source
Input from commodity managers
Demand increase
Forecast / usage
Financial health
Quick Ratio
Supplier dependency
Spend / Supplier Revenue
Etc.
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Measurable
Developed Scoring Method
Risk Score distribution
Min score Max Score
Material specific risk
attributes
700
• Sole/single/multi sourced
• Demand increase
• Shelf life / storage constraints
• Supplier’s sole sourced
0
0
0
0
200
100
50
200
Number of specs
600
500
400
300
200
100
0
Maximum risk score:
0-50
50-100
100-150 150-200 200-250 250-300 300-350 350-400
550
Score
Impact Score Distribution
• Where used (product & process)
• Lead time
• Available alternatives
• New supplier ramp up time
• Inventory
• Supply governance
Min score Max Score
0
0
0
0
0
0
100
100
100
100
100
50
600
Number of specs
Impact specific attributes
500
400
300
200
100
0
0-50
Maximum impact score: 550
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50-100
100-150
150-200
200-250
250-300
300-350
Score
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350-400
Measured Risk and Impact For Each Material Measurable
High
Risk/Impact “Isobar”
RISK
HIGH
PRIORITY
MATERIALS
(15% of PART
NUMBERS)
Sole sourced material
Low
High
IMPACT
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Measurable
Case In Point…
• Sole sourced material
• Supplier with quality and delivery
problems
• Used in 80% of products
High
Risk/Impact “Isobar”
RISK
HIGH
PRIORITY
MATERIALS
Sole sourced material
Low
High
IMPACT
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Determined Risk Profile By Commodity
Actionable
Primary Packaging
# Sources
5
Governance
Supplier sole source
4
3
Inventory
Shelf life
2
1
Ramp up of
alternatives
Storage cond
0
Lead time
Risk Profile:
• Single sourced
• Long lead time
• Long ramp up time
Environm
Where used process
Demand increase
Where used product
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Actionable
Identified Risk Mitigation Strategies
Risk drivers (e.g. poor supplier performance)
X
Add Inventory
Qualify & Purchase from Add'l Supplier
X
X
X
X
Qualify Add'l Site at Supplier
Identify Redundant Suppliers
Secure capacity
X
X
X
X
X
Centralize Procurement
Risk mitigation
levers (e.g.
qualify
additional
supplier)
Make: Manufacture Internally
X
Identify Alternative Process
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Revise Material Requirements
Identify Alternative Spec
X
X
X
Procure through Distributor
X
X
Collaborate in Forecasting
Provide Training / Assistance
Increase Site Audit Frequency
X
X
X
X
Form Customer Consortium
X
X
Establish Joint Service Agreement
Provide Performance-Based Incentives
X
X
X
X
Engage Supplier's Supplier (levers)
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X
X
X
Increase Inspection / Testing
Improve Financial State
Managed locally
Low Inventory Levels
Long ramp up time of
alternative
Long lead time
Used Late in the Process
Used in Multiple
Products
Looming External
Environmental Risks
Risk Impact Attributes
Short Shelf Life
Rapidly Increasing
Demand
X
Excessive Capacity
Utilization
X
Non conformances
X
Supplier sole source
X
Sole- or Single- Sourced
X
Poor FDA / Amgen Audit
Findings
X
Poor on time delivery
Under/Over-Dependency
on Amgen
Risk Mitigation Levers
Material Risk Attributes
Poor Financial Health
Supplier Risk
X
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Selected Appropriate Mitigation Levers For Each
High Risk Material
Actionable
In some cases, a combination of levers was required (e.g. build
inventory for period of qualifying additional supplier)
Risk Factors
Mitigation Strategy
• Sole sourced
• Shelf life and storage constraints
• Long ramp up time of alternatives
• Increase site and supplier stock
• Qualify additional supplier
• Supplier Management
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Next We Identified Resource Requirements
Identified
resources
required for
mitigation
initiatives
Estimated
workload per
task and
resource
Identified
constraints
Realistic
Reviewed with
functional
stakeholders
Incremental Expense
FTE Resources by function
35
30
Other
SCM
PM
GOP
SQM
QPR
QAL
B20 Staff
SS&P
PD
25
FTE
20
15
10
5
ov
-0
Ja 6
n0
M 7
ar
-0
M 7
ay
-0
7
Ju
l-0
Se 7
p0
N 7
ov
-0
Ja 7
n0
M 8
ar
-0
M 8
ay
-0
8
Ju
l-0
Se 8
p0
N 8
ov
-0
Ja 8
n0
M 9
ar
-0
M 9
ay
-0
9
Ju
l-0
Se 9
p0
N 9
ov
-0
Ja 9
n1
M 0
ar
-1
M 0
ay
-1
0
Ju
l-1
Se 0
p1
N 0
ov
-1
0
6
p0
N
Se
Ju
l-0
6
0
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And Finally Defined And Kicked-Off Specific
Initiatives With Approved Resources
Time Phased
Priorities were determined based on three factors:

Return on risk investment – investment required to move risk/impact “isobar”

Resource constraints

Judgment from senior management team
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Lessons Learned
Executive sponsorship is critical
Risks can be quantified but requires lots of data
Focus on few high priority areas for risk mitigation
Risk mitigation is cross-functional and requires broad support
Continue to monitor risk on regular basis and track progress
Balance complexity with risk
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Thank You!
ddewaart@prtm.com
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