RISKY BUSINESS

Strategic risk if not well managed has the potential to destroy the greatest value for an organisation yet; it is where management, risk/audit and board risk committees tend to spend the least amount of time. (Arash Rashidian).

What are some of the risks organisations face?

  • Labour model disruption
  • Lagging digitisation
  • The pace of change
  • Digitisation misconceptions (AI, Robotics etc)
  • Climate change liability
  • Remote working for workforce
  • Dated policies and procedures
  • The War for Talent ( shortages )
  • Sustainability
  • Trade wars

With organisations average spend being upwards of 60% through 3rd party suppliers how are they managing the supply chain risk?

Supply chain risk can be defined as “the implementation of strategies to manage both everyday and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity” (Wikipedia)

If you are working in the supply chain you will be familiar with the trend that  the world is becoming more influenced by VUCA – Volatility, Uncertainty, Complexity and Ambiguity.

These drivers are increasingly used in recent years to describe the current business environment and the impact it has on the supply chain performance.

Countries such as the United Kingdom and Australia have legislation holding large organisations to account ensuring that there are no suppliers using modern slavery in the manufacturing and provisioning of goods and services supplied to that organisation

The food industry is seeing an increasing demand by consumers for clarity of provenance–also leading to a focus on supply chain risk.

 How do we manage supply chain risks in our businesses today?

 Supply Chain Visions, Inc. has developed a model that targets 4 areas, Strategic, Operational, Financial and Physical risk as per the picture below.

SCRM 
SCOPE

Most organisations today are managing risk through Enterprise Risk Management methodologies like Bow-Tie and Monte Carlo.

Monte Carlo simulation performs risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty– a much more realistic way of describing uncertainty in variables of a risk analysis. Below is an example of a simulation presented in a histogram format.

Image result for monte carlo risk analysis

Bow-tie  is a risk evaluation method that can be used to analyse and demonstrate causal relationships in high risk scenarios. A Bow-tie diagram does two things. Firstly, a Bow-tie gives a visual summary of all plausible accident scenarios that could exist around a certain hazard. Secondly, by identifying control measures the Bow-tie displays what a company does to control those scenarios.

From <https://www.cgerisk.com/knowledgebase/The_history_of_bowtie>

Image result for bow tie risk analysis

Diagram CGE Risk Management Solutions

I have seen this being introduced in complex organisational environments as it provides a simple clear high level management view of what can be a complex analysis.

There are known risks,  where organisation’s can use a typical approach for risk identification mapping out and assessing the value chains of all major products and services, and unknown risks, which by their nature are difficult or impossible to predict, quantify, or incorporate into the risk-management framework 

McKinsey has developed a practical approach methodology to managing unknown risks a model colloquially known as the Swiss cheese model.

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Australia and New Zealand have adopted the ISO 31000 standard for risk management. Standards New Zealand state that Using AS/NZS ISO 31000 will assist organisations to:

  • increase the likelihood of achieving objectives
  • be aware of the need to identify and treat risk throughout the organisation
  • improve the identification of opportunities and threats
  • comply with relevant legal and regulatory requirements and international norms
  • improve financial reporting
  • improve governance
  • improve stakeholder confidence and trust
  • establish a reliable basis for decision-making and planning
  • improve controls
  • effectively allocate and use resources for risk treatment
  • improve operational effectiveness and efficiency
  • enhance health and safety performance, as well as environmental protection
  • improve loss prevention and incident management
  • minimise losses
  • improve organisational learning
  • improve organisational resilience.

From <https://www.standards.govt.nz/search-and-buy-standards/standards-information/risk-managment/>

Having common standards allow risk to be benchmarked in a macro environment. Comparison and correlation will enable risk management improvements both on a micro and macro level.

In the procurement and supply chain domain of risk management many suppliers of ERP, Sourcing and P2P systems have been developing management tools to deliver integrated reporting of Supplier Risk:

https://www.ariba.com/solutions/solutions-overview/supplier-management/supplier-risk

https://www.zycus.com/blog/supplier-management/5-supplier-risk-assessment-pitfalls-to-avoid.html

https://www.gatekeeperhq.com/risk-module

https://www.oracle.com/technetwork/apps-tech/grc-accelerators/supplierriskmanagementdetails-326886.pdf

https://www.coupa.com/products/supplier-management/risk-assess/

https://www.oracle.com/africa/applications/erp/procurement-cloud/supplier-qualification-management.html

https://www.bvdinfo.com/en-gb/solutions-for-your-role/supplier-risk-management-and-procurement

Procurement Leaders’ have launched a guide to third-party risk management which provides a summary of the maturity curve outlining progression of a function’s management of third party and supplier risk.

The guide is divided into four sections:

  • Functional Efficiency
  • Cross – Functional cooperation
  • Supplier collaboration
  • Network coordination

It describes each maturity level in detail and provides supplementary details on the activities and tools teams can apply at each level.   Procurement Leaders are a global entity that provide procurement and supply chain insights for a global membership through research and white papers.

This is another procurement focused organisation that has seen a more intensified focus on supplier and supply chain risk.

SUMMARY

In a VUCA world many businesses are under increasing pressure to take a more proactive approach to mitigate risks.

Along with traditional risk functions within businesses, supply chain risk partnering with emerging technologies enable organisations to accomplish risk management more efficiently.

At Kearney’s paper “Are you prepared for a black swan event” highlights that the focus on risk by procurement leaders comes at a time when procurement stakeholders (CEO,CXO, CFO, COOs etc) who have been dealing with business risk for many years have higher expectations of procurement leaders to manage supply chain risk.

Procurement teams that are maximising this opportunity and looking at risk management in innovative ways are starting to benefit, demonstrating an opportunity for the procurement function to help build resilience and add value to the whole business.

The advent of Big Data and innovative technology has enabled greater insight for organisations to accomplish this more efficiently. By embracing risk management, procurement can use it to deliver immediate value to all businesses and also enhance its own internal brand.

At What Cost?

At what cost?  a blog about the unintended consequences of continually driving cost savings Year on Year from your suppliers.

Lets start with a definitions to whet the appetite;

Cost savings also known as cost reductions or ‘hard’ cost savings, are savings that directly impact the company’s bottom line (i.e. profit/loss).

In relation to procurement ; The aim of Procurement savings are to drive down procurement costs, improve supplier terms and decrease product prices. A cost-effective procurement process would help a large organization generate millions of dollars of savings every year.

What do you think ? Do you agree?

There is a very fine line when continually requesting cost savings from your suppliers year on year, especially when  only focused on the input price and not Value or Total Cost of Ownership. Suppliers have to make a return on investment for their shareholders.  Continually squeezing margins can drive many unintended consequences. 

I have a saying that is a different take on squeezing blood out of a stone.  In the context of your suppliers “If you continue to squeeze a stone with your hand what happens to your hand ? –  ( It will be your hand that bleeds)!”

The Construction Industry

A great example of unintended consequences of cost out in New Zealand is the systemic issues in our construction industry. An industry’s boom / bust cycle is constantly under review. (NZ demographics for the construction industry show 90% of organisations have less than 10 employees – atypical compared to many OECD countries). For many years there has been a focus on fixed price construction at lowest cost combined with the drive to transfer as much risk as possible to the supplier. The articles below highlight the issues the big companies (10% of the industry) have had over the last few years entering liquidation or writing off millions of dollars;

https://www.stuff.co.nz/business/opinion-analysis/111232667/a-history-of-mainzeals-collapse-in-10-chapters

https://www.stuff.co.nz/business/property/105930927/collapsed-construction-firm-ebert-linked-to-previous-company-failure

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11994098

https://www.tvnz.co.nz/one-news/new-zealand/calls-change-after-collapse-another-major-nz-construction-company

In boom time liquidation should be unheard of. This is one of the unintended consequences around costs and fixed prices!

“Sometimes it costs you more to do something that it is actually worth”

Do you have any examples of when this has occurred?

Global Fashion

Consumer demand can also driver unintended consequences and at what cost? The Global Fashion Industry was worth $2.4 trillion in 2018 with an expected growth of 5-6% Year on Year.

Consumer demand has driven a substantial growth in the fast fashion industry for cheap throw away fashion.

Andrew  Morgan’s documentary The True Cost on Netflix  is about the clothes we wear, the people who make them, and the impact the industry is having on our world. The price of clothing has been decreasing for decades, while the human and environmental costs have grown dramatically. Filmed all over the world, the documentary spans the brightest runways to the darkest slums, and features interviews with the world’s leading influencers including Stella McCartney, Livia Firth and Vandana Shiva, The True Cost is an unprecedented project that invites us on an eye opening journey around the world and into the lives of the many people and places behind our clothes.

From <https://truecostmovie.com/about/>

The consumer driven consumption for low cost fashion items and the link to sweat shops and industrialisation of resources creates unsustainable issues on our natural resources. Also forms of modern slavery through inhumane working conditions begs the question who really pays the price for our clothing?

Modern Slavery

Modern slavery is a critical issue derived by the demand to continually cut manufacturing costs at the expense of human rights – ( humane working conditions, a fair days pay for a fair days work )

Based on a recent CIPS modern slavery workshop I co-hosted in Australia, here are some of the global modern slavery statistics taken from the globalslaveryindex.org;

  • 40.3 million people in modern slavery world-wide (71% are female)
  • 24.9 million in forced labor
  • 65% of modern slavery is concentrated in the Asia Pacific region
  • G20 countries leaders in consumption: $354 billion of at-risk products imported by G20 countries on a yearly basis
  • Government response
  • Most at-risk imported products: electronic devices $200B, garments $128B, fishing $13B, cocoa $3.6B, sugarcane $2B

Who would have thought that in the G20 counties the average person employs 40 slaves!

The Australian statistics are also quite challenging, however in response Federal Government Legislation was introduced in January 2019 ( only the second country in the world to implement modern slavery legislation). The philanthropist Andrew Forest and his wife set up Walk Free Foundation with a vision for a world free of modern slavery and human trafficking.  https://www.freedomunited.org/about-us/

Australia’s Modern Slavery statistics;

  • 15,000 people in modern slavery in Australia
  • Forced labor is the most common form of slavery
  • Over $12B imported at-risk products every year
  • Number one on most active countries for response to modern slavery in the Asia Pacific region (before Act was introduced)
  • Most at-risk imported products: electronic devices $7.1B, garments $4.6B, fishing $180M, rice$40M, cocoa $23M
  • Most at-risk industries: service (cleaning & security), agriculture, fishing

Summary

Controlling costs is key to managing sustainable businesses, however driving an environment that continually puts pressures on suppliers has many negative unintended consequences. Global consumer demand and low cost not only creates irreparable environmental issues, it also builds an environment that ignores basic human rights. 

A new focus on Sustainability, Value, Quality, Risk and the Total Social Cost of Ownership (TSCO) should be something that all organisations should aspire to. Procurement is one of the enablers of this focus as 40-70% of business’s expenditure is through third party suppliers.

It is time for procurement to help lead a change by doing the right thing!

Are you on board?  Drive that change!

What is the cost of not?

Putting the P back into Procurement

If you have read my previous blog “Procurement is it time for a re-brand?” you will appreciate the debate that has plagued the procurement community for numerous years. For people who know me, I have always advocated in the need to put the POWER into Procurement. I thought I would have a little bit of fun ( although with some serious underlying benefits) by delivering a blog on Putting the P back into procurement.

If you are as passionate ( 1st P meaning ardent, enthusiastic, heartfelt, energetic) like me about procurement take a few minutes to think about what attributes are aligned to your values, reflects  your motivations, in a profession that is far reaching, in constant change and can deliver huge value/benefits for your organisation.

Below is a small list of the P’s that put the Power into procurement. Lets get started with some examples from the list of how the P enables our procurement profession;

  • Positive
  • Proactive
  • Passionate
  • Professional
  • Pragmatic
  • People
  • Presence
  • Principled
  • Planned
  • Provider
  • Persuasive
  • Partner
  • Pact
  • Progressive
  • Pervasive

Proactive (definitions: Pre-emptive, active, hands-on, upbeat)

Does procurement in your organisation have insight and presents ideas and innovation to stakeholders before they know about it? How good do you know the market place, suppliers and your business goals and strategies? Procurement teams that have the “Trusted advisor status”  are leading the way by managing the incipient demand of their stakeholders. It is like being an evidenced based fortune teller!

Professional (definitions: expert , proficient, specialised and qualified, certified)

How many in your procurement team understand and are qualified and certified in procurement? How many are imposters?

Lawyers, accountants, doctors, engineers, designers are just some examples of industries that have rigorous qualifications and certification. Malcolm Gladwell in “Outliers” highlighted that mastery takes 10,000 hours of practice.

When stakeholders impromptu come for advice you know they think of you as an expert.

Principled (definitions: ethics, integrity, morals, values)

Peter Drucker the management guru  coined the phrase “Culture eats strategy for breakfast”. Teams that are not principled lack trust. I have had the pleasure of taking over a team that had no organisational trust. It felt at times you were walking in quicksand but like every journey of a thousand miles starts with the first step. Ethical and transparent procurement is a prerequisite for the procurement profession and without it you will not be able to deliver the basics let alone corporate value.

Planned (definitions: strategic, organised,  frame, premeditated)

The edited version of the 6Ps of planning is; Proper Planning Prevents Poor Performance. This is something that all teams not only procurement  should aspire too. There is much hype about agile and scrum but this is still a methodology that speeds up the planning function. My wife has an adage that I have adopted ” A dream is a goal with a timeline (deadline). Setting goals is key to any success.

Persuasive (definitions: Influencer, negotiator, diplomat)

To me persuasion is one of the key attributes for the Procurement profession. Procurement usually sits in some form of shared service , support capacity for most organisations. A key part of the role is to support the business decisions through 3rd party sourcing and engagement. How would you influence an executive if they disagreed with you about changing strategic suppliers when you know well inclusive of evidential data that they are the market leaders from quality, time and price?

So focus I have left for last  is one of the top concerns for most Executive (including CPOs) are people. People can be defined as a community or group and in this form we can all attribute the word Team. The great philosopher Aristotle first coined the phrase ” the whole is greater than the sum of the parts”. In a changing world, the war on talent and capability has increased. Employing the right people with the right attitude and the right capabilities are key for most roles within an organisation.  Attitude and open mindset are my key takeaways from managing teams since the age of 24. I also have a saying that if you are playing for Manchester United your transfer fee will be higher than playing for Auckland City – so how can we build a team like Man United in our profession? Have you ever been in a high performing team that has “Collaborative Confidence” everyone knows each others roles, the energy is fast pace with lots of customer delivery, satisfaction and fun.

Training and skills are essential so aligning to a global standard such as CIPS with its ethics exams and code of conduct enable people to feel confident, both from an individual, employer customer and supplier perspective.

I hope you have enjoyed this blog , along with a few smiles I am sure there are some useful takeaways

Please let me know your feedback and/or some ideas for areas you would like me to explore more deeply

What is Value Procurement ?

“beauty is in the eye of the beholder”  Margaret Wolfe Hungerford stated in her book Molly Brown in 1878. 

Is value as subjective as beauty?

The classic failure to consider subjective value comes from Karl Marx the labor theory of value. Marx introduced the subjectivity of value from its objectivity based norm.

Wikapedia states that the subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor necessary to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends.[1] The modern version of this theory was created independently and nearly simultaneously by William Stanley JevonsLéon Walras, and Carl Menger in the late 19th century.[2]

Value Definition

The holy grail and universal challenge is how to define value. Here are a couple of definitions to help us start to view value;

Value (noun)

  • the regard that something is held to deserve; the importance, worth, or usefulness of something
  • principles or standards of behaviour; one’s judgement of what is important in life

Value (verb)

  • estimate the monetary worth of
  • consider (someone or something) to be important or beneficial; have a high opinion of

Procurement Value

Michael Porter developed a model that is used throughout the procurement industry

He moved away from organisational departments focusing his value chain on systems, and how inputs are transformed into the outputs purchased by consumers.

Simply put, all the value that is created and captured from an organisation is described as the margin. This can be  defined in the following formula;

Value Created and Captured – Cost of creating that value = Margin   ( mindtools.com)

Building Consensus

Organisations are built up of formal and informal teams. Collaboration is key but how do you build consensus of what value is? The norm is to develop formulas and/or statements to enable the different groups to formulate a common understanding. Financial Management is full of formula to capture the common ground; Return on Investment (ROI), Return on Capital Employed (ROCE) to name a few ! All based on fiscal value.

However value can include, Social, Environmental, Economic , Ethical and Customer. How do we gather all these elements and deliver clarity and consensus?

There are many organisations offering tools and programs in building consensus. Below are a few examples should you want to take a further look;

Benefits Realisation

Benefits realisation management as defined by the Project Management Institute is;

a “Collective set of processes and practices for identifying benefits and aligning them with formal strategy, ensuring benefits are realized as project implementation progresses and finishes, and that the benefits are sustainable—and sustained—after project implementation is complete.”

Driven from finance departments this approach was to measure outcomes of the project investments made primarily at its evolution from Capital based projects.

The project requires needs and outcomes to be developed both tangible or intangible. Once documented through stakeholder consensus a set of measurements are determined. Projects are delivered. Post implementation reviews are designed to measure the outcomes and benefits derived through a post implementation review (hence benefits realisation)

Supplier Value

Value Procurement has been something I have been interested in for a long time.  I spent 4and a half years researching supplier value.

Aas stated previously in my blog on the future of procurement and supply chain 50-70% of an organisation spend is through third party suppliers. Extracting value from this relationship is key to business success.

My research was prompted by the need to understand if there is a common set of value characteristics chosen by organisations to determine key supplier status. My aim was to uncover (if applicable) correlation between countries, tenure within procurement and determine the importance of these characteristics when entering into key supplier relationships.

Could the determination of value be influenced by culture, the market dynamics, the economic environment, individual’s drivers and motivations or the organisations objectives?

I achieved something unique, consensus (correlation) between Australia and New Zealand Public Sector Procurement Professionals. After much testing, regression testing and statistical analysis ( thank you IBM SPS tool) here is the Value model I developed;

Figure 2  Public Sector Supplier Value characteristics

This model creates insight into suppliers and their propensity to deliver value prior to entering into a contractual relationship. A great tool to help give clarity for areas of due diligence for shortlisted suppliers. The key is in how you prepare the questions embedded within the tender documentation and extrapolate their responses.

This is only one of the possible elements that derives value proven through correlation of two jurisdictions.

Value Procurement

Porter developed a value chain methodology that is commonly used in procurement. There are many formulas that are associated with delivering value from the lens of the finance department. As illustrated with my supplier value model you can clearly see that defining value is complex.

Fundamentally Value is like beauty  “in the eye of the beholder!” Gaining consensus on any definition is the key element of capturing value.

To deliver Value Procurement it is mandatory that participation in setting strategic business plans within an organisation is a priority. Sitting on the side line is not appropriate – clear participation delivering input, ideas and design is.

Enabling value through developing trust within the whole executive team is a key skills for all procurement professionals.

A trusted advisor must deliver what the stakeholder requires. Being a friction free influencer is a priority competence, however that does not always mean doing everything the exec team think they need or want. A key part of Value procurement is an advisory that mitigates risk through ethical and transparent behaviour.

Emails and phones alone cannot build a trusting relationship. Face to face, time, consistency and delivering on expectations are key elements for building trust.

What rings true here is the old adage “People buy from people they like and trust.” So how are you liked and trusted within your organisation?