In the first post in this series, I provided background and context behind ADR's supply risk management process inside a bio / pharma company that wanted to take an aggressive stance in proactively identifying and managing supplier risk. This case example is a remarkable one to use in evaluating your own supplier risk management approaches, given the depth of operational and financial analysis, simulation, planning and management it covers. This installment is a continuation of that analysis, and we'll pick up where I left off previously.
As any organization considering the discipline of supply risk management knows, it would be impossible to assign the same level of focus and resources to all of your suppliers. Hence, it becomes critical to identify the groupings of suppliers that are most critical to your operations, and to then rank order a set of suppliers and overall supply risk priorities based on your analysis. ADR's approach to prioritizing risk elements relied on their own analysis as well as one conducted by Aon, a supply risk insurance underwriter. Beyond identifying sole source / single facility and single source / single facility areas, the next step in the process was to issue an RFI-based risk assessment survey to all suppliers. The organization then established a cross-functional risk rating of suppliers based on the returned RFIs, followed by a step that assigned relative risk rankings to suppliers that met the desired conditions.
Aon helped put together a detailed model including what the actual expense and timeline would be on a total cost basis to re-source a given material. The inputs to this switching model included such areas as the cost to identify and qualify suppliers, quality oversight, process validation, supplier audits, regulatory requirements, etc. The next step was to identify the current financial exposure that supply risks could cause, looking for unmitigated revenue disruption risk (on an overall company basis, by product line and by supplier). ADR's and Aon's process for this was to examine loss frequency and severity over a ten-year time horizon, which led to an output that quantified specific risk elements. This then allowed the team to calculate the present value (PV) of anticipated losses as well as to evaluate potential risk mitigation options from an NPV perspective.
Once the organization and the team members could see the potential risks quantified in present value terms, they could then both quantify and analyze the potential impact of specific risk mitigation options based on cost, time and resources to implement. Sample options included building risk inventory as safety stock, fully qualifying (pre-qualifying, in reality) alternative sources of supply and a combination of both options (not to mention other capabilities). After this, the next step was to identify the combination of best options and related costs based on the time and resources necessary to implement each suggested approach by "raw material, by supplier and by end product," and then to "calculate the NPV of each option" based on the same set of criteria. Included in this approach was a process for forecasting required inventory positions and the supplier qualification resources required.
This effort resulted in a recommended portfolio of options and levers including prioritized operational and financial (e.g., insurance) hedges and programs designed to protect against various risks. Finally, the team also considered the societal costs of under-investing in risk management (e.g., treatment shortages for patients).
Stay tuned for a final analysis of ADR's and Aon's risk planning and output suggestions, including a discussion of how companies in different industries (e.g., industrial manufacturing) can apply some of the same concepts.