Keeping Your CPO Out of the Hot Seat — Supply Risk Mitigation

Spend Matters welcomes back frequent contributor Jason Magidson in this post.

A Fortune 500 company sole sourced a key raw material from a Japanese supplier, who produced this specific raw material in only one plant. In 2008, the plant exploded and burned to the ground. This same Fortune 500 company used another raw material in one of its products. In 2008, Chinese supplies of this key material became tainted and killed hundreds of people around the world. Other companies were forced to issue product recalls, but this one didn't have to. Despite these two disasters, the company didn't lose a single dollar in sales, and experienced no disruptions to its supply chain.

How did the company avoid disaster? To answer this question, we need to go back to 2007. At that time, their direct materials procurement team maintained a spreadsheet-based, manual, and fragmented risk mitigation process. Raw materials were often looked at separately, and there was not a holistic bill-of-materials view of each product's supply chain. So, no one had a quick company-wide way to see sources of supply, stocks of raw material across the company, which company plants handled each raw material, and how the materials were processed and moved through the network.

This process began to change when the CPO charged a team with creating a system that would protect the company's top 25 product revenue streams by implementing supply risk mitigation action plans for key materials in the products' supply chains. The key word here is "action." As Jason Busch and Sherry Gordon wrote recently about supply risk, "What is needed is a means to not only gain visibility into the right types of information to avoid risk elements from becoming a disruptive reality, but also to analyze and present this information in a way that enables organizations to take decisive action." As you'll see next, this company created a system that enabled them to take action not only after a disruption, but critically, take action beforehand in order to minimize or eliminate the impact from certain risks.

Here's how the supply risk project proceeded: A direct materials sourcing manager and a procurement systems manager co-led a team tasked with building a risk mitigation action plan (RMAP) system. They engaged more than 100 stakeholders (including manufacturing personnel, buyers, sourcing managers, finance, suppliers, and IT) in a comprehensive requirements identification and system design process. This team also reviewed the bills of materials (BOMs) for each of the top 25 products and mapped out who supplied the materials, how they were transported, where they were stored around the world, and where they were processed.

A key goal, for each material, was to identify high, medium, or low supply risk along two scales: probability of occurrence and severity of impact. In using the system, category managers entered this information for each raw material and the system automatically calculated degrees of risk. The category managers then completed risk mitigation action plan (RMAPs) for important risks. Some of the action plans called for doing things before a potential incident could occur -- for example, in the case of the sole-source Japanese supplier whose plant exploded, the category manager had protected the company by setting aside a six-month safety stock of the raw material that was specifically marked for mitigating risk. In the case of the tainted Chinese supply, the company wasn't using it -- the RMAP had indicated the risk was too high. When the crisis hit, the category manager was able to take three actions: (1) quickly view key information in the system, including which products the raw material was being used in, material in stock and suppliers being used; (2) move stock around the network so none of the plants would run out; and (3) help other companies' buyers find safe sources of supply.

Another benefit of the RMAP system is that it helps the category manager identify some risk scenarios and indicate what actions should be taken under those scenarios. So, if and when a crisis occurs, they can move more quickly. (Imagine if BP had had a robust RMAP plan in place!)

The RMAP system also has sections that help the category manager review other types of risks, including:

  • quality risks (possible action plan: work with the supplier to improve)
  • supplier legal and financial/commercial risks
  • regulatory risks
  • supplier performance history
  • environmental, health, and safety risks

By the way, one of the unofficial goals of the RMAP project team was to keep the CPO out of the hot seat. In this respect, the system has succeeded more than once.

Jason Magidson

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