Supplier Risk Management
in highly regulated industries:
Aerospace & Pharmaceutical
Daniella Picciotti
RISKS FROM SUPPLIERS IS
EVER PRESENT
Risk impacts all industries
Suppliers contribute to risk
How do highly regulated industries approach supplier risk management?
Industry comparison
Aerospace
Project Based
Regulations
Pharmaceutical
Product Based
Regulatory
Industry documents
Aerospace
• Requirements
– Quality Management System
AS9100C
• Guidelines
– International Aerospace Quality
Group (IAQG)
– Aerospace Recommended
Practice (ARP 9134)
Supply Chain Risk Management
– Supply Chain Management
Handbook
Pharmaceutical
• International Committee on
Harmonization (ICH) Q9 –
Quality Risk Management
– Patient Protection
– Risk is the combination of:
– probability of occurrence of harm
– severity of that harm
Risk: Cause and Effect
CAUSE
Definite fact about project
or its environment.
RISK
Uncertainty that could
affect project if it occurs.
EFFECT
Impact of risk on program
objective(s).
The objective of risk management is to reduce risks
to a level acceptable to the program / customer.
Risk Responses
RISK RESPONSES
Transfer – Subcontract,
outsource supplier
TRANSFER
AVOID
PROBABILITY
HIGH
LOW
ACCEPT
MITIGATE
Avoid – Change direction,
adopt alternative approach
Accept – Mitigation costs are
too high, risk is unavoidable
Mitigate – Create mitigation
plans and steps
LOW
HIGH
IMPACT
Risk Identification Aids

Logistical
– Risks identified and nominated
• Financial (cost) & Delivery
– Life Cycle Cost (LCC)
est/analysis
– Cost / Schedule Simulation and
Analysis Results
– Design to Unit Production Cost
(DTUPC) & Design to Cost
(DTC) estimates/goals
by Integrated Product Teams
– Program reviews
– Lessons Learned from Programs
/ Projects
• Quality
– Six Sigma Data
– Supplier Risk Assessments
– Supplier Assessments

Technical
– Project work scope and
constraints
– Tech Perform Measures (TPMs)
– Test, Logistics and Support Data
– Trade Study Results
Supplier Risk Types and Impacts


Delivery Risk
– Missed Contract Deliveries
– Increased Program Costs
– Contractual Penalties
– Customer Dissatisfaction
Quality Risks
– Rework Costs
– Missed Contract Deliveries
– Contractual Penalties
– Customer Dissatisfaction
– Counterfeit Parts

Financial Risk (cost)
– Loss of Supply
– Cost to Qualify New Source
– Missed Contract Deliveries
– Contractual Penalties
– Customer Dissatisfaction

Technical Risk: Design Maturity
(New or Immature Design)
– Unforeseen Cost Growth
– Late Supplier Deliveries
– Missed Contract Deliveries
– Contractual Penalties
– Customer Dissatisfaction
Interaction
Does your company regularly visit suppliers?
Yes or No
If yes – what is the trigger?
If no, do you know why?
Risks seen when visiting a supplier - examples
•
•
•
•
•
Landscaping is looking shabby
No receptionist, when last time there was
Lights are off in segments of the production line
Nonconforming material area is packed
You’ve just met the 3rd QA Manager in the last 12
months
• Metrics posted on the walls are months out of
date
• Others??? What have you seen???
Shift in Focus
Aerospace
•Supply chain networks
•Areas of supplier risk
•
•
•
•
Financial
Geopolitical
Regulatory
Operational
Pharmaceutical
• Global Supplier Issues
–
–
–
–
–
Melamine
DEG
BPA
Residual Solvents
Prop 65
Systems Approach
Aerospace
• Supply chain
environment
• Industry Orgs
• Dept of Defense &
NASA
Pharmaceutical
• Supply Chain
Knowledge
• Industry Orgs
• Food & Drug
Administration
Pharmaceutical: ICH Q9 Risk Flowchart
Aerospace Examples of supply chain risk
• Airbus & Boeing: delivery disruptions
– Strain on small suppliers led to supply disruptions
• Aircraft
• Operating income
– Worked with suppliers: prioritize & improve
production
• Collapse of component supplier
– Unexpected shortage of a rare metal
– Internal investigation noted engineering prediction
• DoD sensitive to contractors that “add no
value”
Pharmaceutical Examples: Supply chain risk/impact
• Pet Foods
– 2007
• Toothpaste
– 2007
• Heparin
– 2008
Supplier Risks
• Supplier / Subcontractor Risk warning signs
– SMT activities, awareness of risk indicators
– Other areas of risk may include:
• Management:
– turnover in senior leadership
• Export/Import: ITAR, TAA
– Foreign Suppliers
• Operational:
– capacity
– adding shifts
• Quality Assurance:
– changes in QMS registration
• Terms and Conditions:
– taking exceptions to numerous items
• Labor:
– union contracts expiring
– increases in use of contract labor (temp)
Poll the audience
When visiting suppliers: what function(s)
participate:
a. purchasing
b. quality / supplier quality
c. engineering
d. some combination of a – c
e. we don’t visit suppliers
New strategies create opportunities
• Active supplier risk management
• Drive recall / rework down
• Drive risk management up
Small steps yield big results
• Separating winners from losers
– Monitor changes
– Mitigate risks
• Effective supply chain risk management is
– Incremental
– Justifies costs
• Gather & analyze risk information
– Employees & suppliers have useful data
– Collaborative framework to apply risk management
Poll the audience
Does your company have a supplier approval
or rating system/program?
Yes or No
If yes, what are the contents and frequency
of updates?
Risk Management Lessons Learned
Tips
 Common criteria to assess risks
 Special attention to “high-consequence” risks even with “low
probability”
 Ensure regular reviews of key risks, with all IPT Leads in attendance
 When you identify a risk, identify any assumptions that go with it
 A risk with probability near “1” is not a risk--it’s a problem…Plan for it!!
 Ensure everyone understands developing new business is part of the
job
 Risk reduction activities are always a good topic for Six Sigma project
Traps
 Acceptance of additional scope without assessing
associated risks and implications
 Focusing on cost risks to the exclusion of
schedule and technical risks
Summary
•
•
•
•
Risk management is evolving
Supplier risks are internal & external
Focusing on first-tier suppliers is obsolete
Paradigm shift in supplier management
It’s not
easy
It’s a
moving
target
Bibliography
• Price Waterhouse Cooper
• International Aerospace Quality Group (IAQG)
• Supply Chain Management Remains
Aerospace Challenge - STANDARDS
OUTLOOK by Dale K. Gordon
• International Committee on Harmonization
21CFR 111, 210, 211