Effective Management of Supply Chain Risk Training Course

Benefits of managing supply chain risk

• Why do we subcontract: Porter’s value chain
• Exercise – Porter’s value chain evaluation
• Benefits of subcontracting v loss of control & potential negative impact on buyer’s organisation
• “A supply chain is only as strong as its weakest link”
• Negative consequences of risk in the supply chain, loss of control, potential of reputational damage
• Why supporting suppliers to achieve success, benefits the buyer
• Interdependency nature of relationship
• Avoiding litigation
• Benefits of pro-actively managing supply chain risks, pre-warned = pre-armed
• Developing a plan to recognise potential risks / challenges and effectively minimising their impact

Different causes and types of supply chain risk

• Different type of risks which potentially might impact the supply chain:
  • Operational
  • Strategic / relationship
  • Legal and reputational
  • Contractual / misunderstanding / miscommunications
  • Offshore sourcing / globalisation
• Identifying sources of Supply Chain Risk: within supplier’s organisation / industry sector; within buyer’s organisation / industry sector; and within the wider macro environment, STEEPLED / PESTEL
• Framework for gathering information on potential risks
• Exercise – STEEPLE
• Ensure you are not setting yourself up to merely react to potential risks, firefighting, but are aware of the cause of the potential risk. “Treat the cause not the effect” (Edward Bach)
  • Benefits of undertaking a ‘root cause analysis’. 5 Why’s methodology
  • Look at common examples of root causes: flawed sourcing strategy; poor vendor selection / incapably supplier selected / single source; poor specification; inadequate demand / supply planning process; natural / manmade disaster; poor internal controls / cultural differences; market conditions etc
• Exercise – 5 Why’s

 

Eliminating, avoiding and mitigating against supply chain risk

• When to start managing potential risks? 
• Four step approach:
  • Step 1: Understanding internal need using internal needs analysis. Stakeholder involvement, clarity of expectations & needs to ensure goods / services procured are fit for their intended purpose
  • Step 2: Identifying best strategy to adopt: make / buy plan, new design or commercial off the shelf. Pros and cons of each option
  • Step 3: Undertake thorough and comprehensive due diligence. Supplier evaluation and selection
    • Sources providing insights about suppliers (3rd party credit rating services, ISO, London Stock Exchange, Companies (Miscellaneous Reporting) Regulations 2018 etc.) and their reliability as an information source
    • Use of Requests for Information, Invitation to Tender (ITT), Request for Quotation (RFQ) – asking the right questions to get required insight
    • Internal tendering governance - preventing potential of correction and fraud
    • Carter’s 10C’s approach
  • Step 4: Ensure the Express Term contract adds value in providing clarity:
    • Promise clauses – clearly set out obligations / promises on supplier, especially acceptance / measurement criteria / quality standard (Key Performance Indicators /scorecards – use of quantitative not qualitative measures); AND clearly set out dependencies on buyer ensure no risk of supplier being hindered / frustrated by the buyer 
    • Procedure (governance) - Right to transparency / visibility of progress. Role of Buyer’s representative in directing Supplier, importance of understanding terminology used between ‘shall v should’/ ‘will’ v ‘may’. Ability to adapt / change requirements. Use of subcontractors by the supplier. Right to assign by the supplier
    • Liability / Consequences – clear allocation of liabilities, especially fitness for purpose with Conformance Specification v Performance Specification and consequences if breach of contract. Understanding meaning and use of: waiver; exclusion; disclaimer and; indemnity express term clauses

Eliminating, avoiding and mitigating against supply chain risk continued

•  Aligning Express Terms to own organisations’ attitude to risk, risk taker v risk adverse. Appreciating limitations of re-allocation of risk in statute (Unfair Contract Terms Act) and depending on negotiating position with supplier / bigger picture objectives:
  • Bargaining position (Porter’s 5 forces / Best Alternative to a Negotiated Agreement (BANTA) and Best Realistic Alternative (BRA); 
  • Strategy / objectives (Relationship v Task)
• Structuring contractual relationship to support governance and collaboration. Supply Chain Management (SCM) AND Supplier Relationship Management (SRM) - ‘Strategic’ not ‘Reactive’ approaches. Encouraging feedback on performance to create opportunity for improvements
• Exercise – Needs analysis scoping and red team review
• Exercise – Carter’s 10C’s
• Exercise – Drafting Performance Specification KPIs
• Exercise – Review of express term indemnity, disclaimer and exclusion clauses

Minimising criticality / pro-active management of supply chain risks

• Clarify ownership of liabilities / potential risks to ensure party holding responsibility takes ownership of what is required of them and the consequences if they fail and proactively manages the potential risks. Ensure no promises / liabilities hidden in the small print and therefore overlooked
• Placing the potential risk with the party best placed to manage it, not always the supplier

Minimising criticality / pro-active management of supply chain risks continued

• Evaluating all identified potential risks on the supplier and undertake a vulnerability assessment of supplier to determine best approach
  • Determining criticality of potential risk: Probability (vulnerability) v Impact (financial / time / reputation)
  • Different approaches to supplier chain risk management planning – 4T’s: Tolerate, Transfer, Terminate, Treat
  • Express term contractual remedies for managing supply chain risk:
    • Monetary compensation v a practical solution / remedy / Plan B
    • Whether monetary compensation alone is desirable based on ease of sourcing an alternative supplier within project timeframe
    • Amount and type of monetary compensation – direct, indirect / consequential, limited or unlimited
    • How to realise monetary compensation / remedy without going to court.
    • Added protection of insurance
    • Option to terminate or not in event of breach

Minimising criticality / pro-active management of supply chain risks continued

• Crisis management process:
  • Pros and cons of a Business Contingency Plan (BCP)
  • BCP v Disaster Recovery Planning (DRP)
  • Force Majeure options
  • Exit strategy – contract termination and supplier transition planning, especially intellectual property rights
• Appreciating best time for buyers to negotiate / agree express terms and ‘Plan B’s’ with suppliers is when they have a strong bargaining position
• Setting in place good governance for Supply Chain Management (SCM). Drucker – ‘if it cannot be measured, it cannot be managed’
• Gathering meaningful performance information to enable early warning of risk materialising
  • Streamlining supplier data gathered so meaningful insights and enabling comparisons
  • Ensure easy means to collect information
  • Use technology to collect and analysis
• Different types of controls:
  • Preventative controls
  • Directive controls
  • Detective controls
  • Corrective controls
• Different approaches to managing performance - ‘carrot verses stick’
• Action Plan approach to capture any misunderstanding between stakeholders, internal and external. SERVQUAL ‘service gaps’ – Gap, Explanation, Remedy
• Adopting a flexible project management approach which enables ability to easily adapt to manage potential risks. Agile v waterfall project management styles
• Exercise – Evaluating criticality of a potential risk, Traffic Light Analysis
• Exercise – 4 T’s ‘Treating’ a risk, solution not problem
• Exercise – Carrot v stick approaches

Embedding supply chain risk management into corporate culture

• Risk evaluation as a continuous process to manage challenges but also seize opportunities
• Creating a risk awareness culture:
  • Evaluating organisation’s present attitude to risk:
    • Compliance
    • Hazard management
    • Control management
    • Opportunity management
  • Formulating risk management policies and procedures to:
    • Reporting of risk events, line manager responsibilities
    • Capturing information on hazards, vulnerabilities and risks
  • Using information to make improvements / lessons learnt:
    • Quality Management System (QMS)
    • Total Quality Management (TQM) v Quality Assurance (QA)
    • Six Sigma (Define, measure, analysis, improve, control)
    • Deming’s PDCA (plan, do, check, act)
• Exercise – PDCA

 

Final questions