Cover Story: Rethinking Risk

Supply chain executives are discovering new ways to apply technology and innovative processes to the challenge of managing uncertainty


Beginning in 2000, the PRM team at HP has trained about 750 people across several different functions at the company on the risk management approach, including procurement, finance, engineering, planning and marketing. HP also routinely trains staff at its suppliers on PRM, educating senior vendor staff about the shared benefits to be gained from proactively co-managing risk. The company is applying PRM to both direct materials and to indirect materials and services, such as advertising, power and spare parts. Supply chain risk management has been spreading rapidly throughout the organization, according to Nagali, who says that last year PRM affected $3 billion of HP's spend. The company's goal is to double that number in 2005. The project started with a focus on those items with the greatest uncertainty — such as memory, where cost uncertainties are quite high — and on those items with the greatest impact on the bottom line — such as components for product lines that have high margins. But Nagali believes that the PRM principles are broadly applicable and will eventually cover a significant portion of HP's total spend, with the potential for significant savings.

The key lessons that have emerged from the project to date, according to Nagali, are, first of all, that putting in place a PRM strategy requires changing people's approach to risk. "You've got to have people thinking differently," he says. "You have to change the mindset so that people understand that they can identify the risks, quantify them and manage them." And second, the PRM business process must be cross-functional. "It's not just one function on its own that can do this. You have to have the different players working in harmony."

Supplier Risk Management at Yazaki North America

Automotive industry supplier Yazaki North America has instituted a risk management program designed to identify potential problems with the company's own suppliers that could lead to supply disruptions. Based in Canton, Mich., Yazaki North America produces vehicle power and data solutions, providing electrical technologies to virtually every major automotive manufacturer and many of their top-tier supply partners.


Given the demanding nature of the automotive supply chain, Yazaki has, of necessity, made risk management an integral part of its supplier approval process. The principal driver, according to James Karakos, supply risk manager for Yazaki, is the size of the company's supply base, which comprises about 1,000 enterprises. "Around 75 percent of our suppliers are in the $1 million spend category," Karakos explains. "That means that our spend is highly diversified, and of course this poses the problem of tracking too many suppliers."

The challenge for the company's procurement staff has been to identify potential financial problems at a current supplier before they force the supplier into bankruptcy or otherwise impinge on the supplier's ability to meet its commitments. In the past, the procurement team would do the normal due diligence during the selection process — for instance, running a Dun & Bradstreet report on the supplier — but the company did not have a monitoring process in place subsequent to the supplier's selection. As a result, Yazaki could potentially be blindsided by a supplier bankruptcy, forcing the company to expend significant resources to identify a new supplier, ramp up production and expedite shipments to avoid falling short in deliveries to Yazaki's own customers.

Avoiding Crises

To address this issue, Yazaki took two steps. First, the company engaged the services of Open Ratings, a provider of predictive supplier performance technology intended to provide advanced warning and analysis of supplier problems. Open Ratings aggregates a variety of business information into a database containing some 100 million company records, covering financials, performance information, government data and so on. Yazaki uses Open Ratings' SBManager to collect and manage reports on its entire supply base.

Second, Yazaki formed a cross-functional three-person team with representatives from the procurement, legal and finance functions to meet on a weekly basis and assess the health of the company's suppliers based on the Open Ratings reports and on secondary "triggers," such as word-of-mouth coming from Yazaki's staff, public announcements regarding change in management or news that a supplier has lost a major customer. By aggregating and reviewing this information on a regular basis, Karakos says that Yazaki has a better chance of identifying financial, service or quality issues at a particular supplier before those issues can affect overall performance.

When an issue with a supplier pops up on the team's radar, additional resources from affected Yazaki manufacturing facilities or business units may be brought in to help decide what action to take in response. That response could include identifying a new source of supply for the components coming from the supplier or putting the supplier on "business hold" until the issue is resolved. "But the default option for Yazaki is first to help the suppliers resolve these issues," Karakos says.

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