Author: Mike Farnworth

Life used to be so simple! After the oil price shocks of the 1970s, but for the occasional recession, periodic fall-off in customer demand, inflation, currency fluctuations and industrial unrest, supply chain management was a straightforward and predictable activity. Or so it seemed! But with the onset of the twenty-first century, we have witnessed inter alia the bursting of the ‘dot-com’ bubble, banking failure and credit crisis, oil and commodity price hikes, burgeoning demand for resources from China and other emerging economies, increased political uncertainty, growing consumer activism and social unrest, extremes of weather and natural disasters. Our view of life has changed radically over the last fifteen years!
Examples of the perils lurking in supply chains risk are legion: from apparel makers who have been exposed and punished by customers for using low-cost labour in south Asia; to the scandal of food and children’s toy manufacturers using defective or proscribed materials; to catastrophic failures of supplier performance and oversight leading to environmental disaster in the oil and gas sector and draconian fines and compensation.
If we were to burden ourselves with all the potential risks that could assail us, we might never sleep at night! The key to a tolerable existence is to ensure that we have identified what could hurt us, to the fullest extent possible. This will require us to recognise the context in which we are operating; assess the appetite we have for risk in the business; and identify the resources we have available to manage the potential risks to which the business is exposed.
And whereas we would always like to believe that we have thought of every eventuality, that we have an answer for everything, and that we possess the capacity successfully to tackle any issue head on, we need to be realistic and measured in our response.
There are five broad areas of supply chain risk that should concern us, and that should be put under the microscope by the supply chain function:

1. Failure or delay risk. This category covers the risk of complete, and possibly permanent, supply or service failure, or the risk to the inbound supply of goods or the provision of specific services. For example, the trends over the last couple of decades for outsourcing, off-shoring and globalisation has added complexity and uncertainty to what might previously have been straightforward arrangements for the provision of components and assemblies to manufacturing businesses. Factor in time zones, language, culture, complex logistics, project management and product life-cycle management, political and legislative uncertainty, you have a potent mix of issues which, if not carefully managed, can lead to a significant increase in difficulty in this area.

2. Brand and reputational risk. Here, we are concerned with the factors which could be disastrous for our brand or our business reputation generally, either due to failure or supply chain practices that are in conflict with our organisation’s principles and values, and the expectations of our customers and stakeholders. The response of many organisations to the dangers presented to brand has been to invoke ‘corporate social responsibility’ (CSR) programmes or ‘sustainable procurement’ programmes focused on gaining an in-depth understanding of economic, social/ethical and environmental risk.

3. Competitive advantage risk. This includes factors which might see our competitive advantage being undermined by, for example, the theft of intellectual property, counterfeiting of our products, or the ‘passing off’ of other company’s products as our own, or the diffusion of products through ‘grey market’ channels. Whereas imitation might be seen as a form of flattery, there is no doubt that differences in business culture across the globe can present us with problems in protecting our product portfolios: it is not always possible to rely on contractual instruments or legal protections in all the jurisdictions in which we operate.

4. Price and cost risk. Probably the most pressing risk facing most procurement and supply chain managers on behalf of their businesses, the risk that business costs end up being higher than anticipated or planned for, even where there are contractual arrangements in place for protection. Commodity price hikes can lead to the need for urgent upward revision of prices; lengthy supply chains can increase the costs of logistics, project management and obsolescence.

5. Quality risks. These include factors concerned with quality failure of inbound goods, poor product or service quality and field defects resulting in customer dissatisfaction. Whereas emphasis has shifted from end-of-line inspection to the control of processes and the reduction of variability, the pursuit of low-cost supply chains has in some instances been at the expense of repeatable quality.
So how should we tackle these risks? The starting point is to gain a detailed understanding of our supply chains – and this will require a collaborative approach with suppliers – to map relationships, and identify potential ‘hot spots’. Then we prepare a risk ‘register’, with two dimensions: the likelihood of something happening; and the severity of that possibility, next we prioritise the outputs. Finally, we prepare our action plan to tackle the most pressing items, and identify the measures we should take, as appropriate, to avoid, manage, mitigate or prepare contingencies for each of the risks we have identified.
We do need to exercise a degree of caution, however. An accurate perspective on risk is important. Can we clearly define patterns in what is described as ‘common cause failure’: if we do not understand the extent to which events might be part of a pattern, we may tackle them in the wrong manner. Conversely, ‘special cause failure’ requires us to ensure that we have the capability and expertise correctly to diagnose a problem. ‘Severe starting conditions’ requires us to understand correctly the scale of a potential risk that we might seek to understand – have we underestimated the impact or severity of a risk event?
But even when we have identified a source of risk, how effectively can we quantify the impact of those risks? Can we put a price on the loss of our reputation or the damage to our brand, for example? We need to be able to develop an approach that quantifies the ‘risk and reward’ perspective – what is the cost of risk, and what is the reward for effective management of it? – usually boiled down to a fraction of a known and measurable financial target, such as our estimated profit.
In preparing our approach, there are some key questions we should ask to achieve balance in the management of risk in our supply chains:
–  What is our stance towards risk as an organisation – are we averse to, neutral towards or embracing of risk? (The risk ‘appetite’)
–  What level of risk are we prepared to accept, balanced against the effort of managing that risk? (The risk ‘profile’)
–  How much are we willing – and able – to invest to manage the portfolio of risk? (The risk ‘budget’)
–  To what extent can we find creative solutions to work around the risk? (The risk ‘opportunity’)
– Does the organisation have – or have access to – the skills to manage the risk? (The risk ‘capability’)
The management of risk can never be an exact science: there are no cast-iron guarantees. But neither is it all doom and gloom! It is possible, with commitment, imagination, an effective approach and a robust process, successfully to identify and manage the vast majority of supply chain risks. And awareness is the first step on that journey.

October 2014

Mike Farnworth MA (Hons) MSc MCIPS MCMI MIC
We are approaching the time of year when most organisations are starting to look at budgets. And logically, your Procurement team should be well on the way to developing their own plans for spending the organisation’s cash, and developing and enhancing their contribution to the success of the organisation over the next period.
In organisations large and small, it might also an appropriate time for the CEO to review the contribution made by the organisation’s Procurement professionals, and to start to consider what expectations the organisation should have of its key departments.
The first question a CEO should ask is: what are my expectations for the contribution that Procurement can make in my organisation? If you can articulate this, the chances are that you are working with a function whose capability is good, and one which is communicating its goals and targets clearly. Your expectations of capability will be high, and you will set a challenge to deliver more aggressive results in the coming year. Even if you do understand the core capabilities of your Procurement activity, are you missing anything? You’ve probably invested heavily in the competence, so you want to know whether there is further value to be derived from the activity.
In this article, we will identify the key areas of contribution that a Procurement function could – and should – be able to promise your organisation. Some of them might surprise you – but if you aspire to run an organisation that maximises the contribution from Procurement, you should be monitoring carefully all the areas in this checklist. Here are a few common expectations:

1. Managing cost and value. No CEO – or CFO, for that matter – worth their salt could afford to ignore the potential, and indeed the duty, of the Procurement function to save money and reduce overall costs, sometimes termed the ‘Total Cost of Ownership’. This isn’t just about getting lower prices for goods and services, it’s about ensuring that full value is extracted from the supplier relationship across a whole swathe of categories. This should include: assurance of supply, meeting regulatory requirements, guaranteeing service and quality levels, and exploiting the innovation potential of suppliers. Not just what’s needed today, but into the future, too.

2. Reducing risk and vulnerability. The more organisations rely on external partners to deliver competences – be that goods or services – the greater the propensity for risk and vulnerability to lurk within an organisation’s supply chains. You can’t plan for everything, but Procurement needs to be able to demonstrate an understanding of the likely sources of risk – maybe as part of a focus on sustainability in the extended enterprise – and develop either mitigation or contingency plans based on measures of the scale of impact and likelihood.

3. Improving productivity. Is your Procurement team measuring – and seeking to improve – its performance and contribution? Whether your organisation takes a tactical or strategic approach, there are many productivity metrics that you can choose from to track productivity gains: these could include the number of contracts managed and executed per buyer over appropriate timeframes, the average length of sourcing cycle, the number of strategies for categories of spend which are developed and implemented.

4. Supporting and differentiating your brand. Your organisation’s mission or vision statement sets out how your organisation wants to be perceived in the marketplace and how it wants to be differentiated from its competition, such as offering quality and reliability, faster delivery or time-to-market, better service, lower cost, or more innovation. Make sure that your Procurement team’s decisions and metrics – and outward-facing supplier management approach – support your organisation’s brand and differentiation strategy.

5. Delivering Customer Satisfaction. Sometimes, Procurement teams can feel separated from your organisation’s customers. However, you rely on Procurement for a number of key aspects of the customer experience, such as assuring continuity of supply, maintaining high quality levels, to keep your promises. Moreover, consumers of your products and services are becoming increasingly conscious of the sustainability agenda, and your corporate attitude towards social, ethical and environmental standards. Ensure that your Procurement associates realise that they can personally be responsible for your organisation’s success, or failure, to meet customer expectations.

6. Managing working capital. 30 days? 60 days? 90 days? In some organisations, the timing of receipts and payments is critical – it can be a survival issue if not handled carefully. Organisations understand that they cannot afford to have more cash leaving the company than coming in during certain periods. Your Procurement team should be aware of that, and negotiate appropriate terms with your suppliers. Don’t just pay them late and hope that they don’t notice! And if payment terms are carefully aligned between customers and suppliers, the extension of payment terms becomes less critical.

7. Striving to be the best. While a handful of senior managers may be somewhat in the dark about what some of their departments do, most would say that they want the best performance possible out of each and every one of those departments. Whether they push for benchmarking or expect the individual departments to benchmark on their own, management teams want to know that departments like Procurement are promoting and adopting the latest best practices. And this extends to how effective the Procurement team is in communication with other stakeholders in the business to gain a full understanding of business requirements and to develop a dialogue around supplier requirements.

8. Recruiting and retaining the best talent. A key factor in the success of any organisation is the quality of its people, the level of competence – when measured both individually and collectively – and the continuing development of that competence. Training is an important part of the mix, but so too are job rotation, succession planning, mentoring and the recruitment of specialist skills as required. And the organisation needs to be built in a manner which reflects the nature of the activities being undertaken and the behaviours which are appropriate for a blend of strategic and transactional activity.

9. Generating Revenue. It’s well-understood that Procurement’s cost saving efforts can help an organisation’s bottom-line, but the fact that Procurement can actually generate revenue is still in the early stages of discovery among organisations. Through supplier rebates on employee and customer purchases, managing warranty returns and refunds, and other innovative practices, Procurement can actually bring cash into an organisation.

10. Creating competitive advantage. These days, with more and more activities and functions being outsourced, the marketplace isn’t just a competition between companies to gain customers – it’s a competition between entire supply chains. The suppliers that you select and manage often determine the relative strength of your organisation and your customer proposition compared to your competitors. Your expectation should be that Procurement develops a stronger supply chain than your rivals; and for what Procurement does, and how it does it, to be key elements in securing competitive advantage.
Now, it’s important to recognise that ‘Procurement’ is a process, not a function. Organisations too often get hung up on job titles, empires and hierarchies, only to end up with dysfunctional and isolated silos – and the lack of trust, poor communication and in-fighting that goes with it. To execute successfully, everyone has a role to play, and needs to be involved – it’s a ‘team game’. This requires engagement, both from and with multiple stakeholders, a clear definition of business needs, and a thorough understanding of what the process, and its key elements, should be.
If your Procurement team is presently addressing all of these expectations, urge them keep up with the good work and discuss with them how they are going to make enhancements to further improve their capability to deliver. If not, I would recommend an urgent meeting with your Head of Procurement – you’ve got a lot to talk about.

June 2014

Many organisations are grappling with the problem of implementing the principles of sustainability: how to balance the ‘triple bottom line’ of economic, social and environmental requirements for an organisation’s sustainability – in a way that meets both current and future objectives.

In today’s economic climate, organisations across all sectors – public, private and third sector – need to achieve increasingly stringent financial targets, as well as maintain their focus on social/ethical and environmental perspectives. These often opposing dimensions can create a headache for executives – ‘how can we achieve all our objectives when many are in direct conflict with each other’?

The procurement function plays an important role in an organisation’s drive to sustainability. As the interface between ‘internal customer’ and the ‘extended enterprise’ represented by suppliers and external agencies, it plays a key role in ensuring supply chain capabilities are consistent with, and directed towards sustainability objectives. Indeed, it could be argued that the sustainability agenda is a defining moment in the development of procurement as a function indispensible to organisational success.

We believe that ‘sustainable procurement’ is about the delivery of sustainable management principles through procurement best practice: as well as achieving improved security of supply, lower total cost of ownership and enhanced reputation, these should result in value improvement and better cost performance.

How can organisations buy more sustainably? Understanding the starting point in terms of sustainability of current customer requirements and supply chain practices is essential. Using sustainability assessment tools and processes, procurement staff can identify and prioritise products, services and processes for improvement. With targeted supply chain development against measurable economic, social and environmental criteria, organisations can improve the sustainability of their operations and supporting supply chains.

Xemptor Consulting Limited is leading the field in defining sustainable procurement best practice, and has been at the forefront of the development principles and processes with cross-sectoral focus and input. We are now working with organisations to improve their performance in this demanding field through the delivery of training programmes and the provision of expert support. If you think we can help you to shape your organisation’s success in this area, please don’t hesitate to contact us!