Proactive Value Chain Risk Management

February 6, 2013

FMI and GMA Supply Chain Conference

Proactive Value Chain Risk Management

A.T. Kearney - GMA Conference Feb 6, 2013 2

External events, internal structural designs and human

biases have a ripple effect and impact across

the a company’s value chain

The role of Value Chain leaders has never been

more critical to proactively managing this risk …and ultimately your company’s success

“The inability to predict outliers implies the inability to predict the course of history,” Nassim Nicholas Taleb, The Black Swan. The Impact of the Highly Improbable

Why is this relevant to you?

The speed of business is hastening

Growing regulatory, economic and

geopolitical uncertainty


In a more uncertain world, macro-economic, business ecosystem and organizational factors accelerate business risks

• Resource scarcity & price volatility

• Consumer demographics and preferences

• Technology disruption

• Longer, more complex supply chains

• Increased portfolio complexity

• Shortened response times

• Regulation & activism

• No risk governance

• Limited coordination and poor capabilities

• Ignore the improbable

Example Risk Drivers

Business Risk

Probability x Impact

Macro- economic

Business Ecosystem

Organization


Hyper connectivity amplifies effects of macro-economic factors on business

• 35% increase in avg. unit labor costs since 2007

• Emerging economies have overtaken advanced ones in output

Sources: EIU, Dow Jones, UN, IMF, comScore, CMO Council, World Intellectual Property Organization, OEDC Environmental Outlook,

World Bank, A.T. Kearney analysis

Key Macro-Economic Factors

Increasing Globalization

• 5% CAGR in food prices from 2000 – 2011

• 47% of world will be battling severe water stress by 2030

Resource Scarcity & Price

Volatility

• 54% of consumers will end loyalty if not given custom offerings

• More internet users have used social networks than email

Consumer Preferences

• 70M boomers will retire by 2030, leaving 35M jobs unfilled

• 11% reduction in global working age population by 2050

Demographics

• Asia R&D spending at 9% growth rate vs. N. America 2%

• 27% CAGR in patent applications from Asia vs. 4% from US (’00-’10)

Technology Growth


Business / industry ecosystem factors are manifested in a variety of trends

Long, Complex Supply Chains

Increased portfolio complexity

Shortened Response Times

New Customer Engagement Models

War for Talent

Regulation & activism

• Over 50% of CPG identified Supply Chain inefficiency as a major gap

• Lack of flexible manufacturing assets is a key barrier to New Product Development

• Supply chain leaders have 87% more avg. inventory turns per year than laggards

• Online Retail Industry in the US will be worth $279 Billion in 2015, a 50% increase

• 65% of global companies and 80% in advanced economies face talent shortages

• U.S. borders inspected 3.3 billion lbs of imported meat and poultry products

• >65% expect an increase in product variations

• Avg. # SKUs increase in US grocery stores (‘05 vs. ‘11):

– Fruit: +38%

– Vegetables: +37%

• Retailers are competing on delivery times (same day delivery)

• 42% of millennials want option of online purchase with return to store option

• 31% employers worldwide cannot fill positions

• FDA Warning Letters: 44% increase in 2012

Sources: World Economic Forum, IBM, Juniper Research, CSCO, Manpower, Wipro, Towers Watson, Chain Link Research, U.S. Census

Bureau, Global Simplicity Index, Forrester, Kantar Retail Analysis, Forrester, A.T. Kearney analysis

Example Business Ecosystem Factors


Human Biases

Internally, structural designs and human factors don’t help us manage risk either

Internal Challenges to Risk Management

What other challenges is your company facing in managing risk?

No Risk

Governance

Limited

Coordination

Poor

Capabilities

Past, Not

Future Focus

Ignore Root

Causes

Ignore the

Improbable

Organization

Deficiencies


Leaders manage their exposure to risk through a delicate balance of management objectives and actions

Advantage Take the hill

Resilience Protect home turf

Recovery Run for

(re)cover

Ob

jecti

ves

Action Firefighting Strategic Focus

Na

rro

w

Bro

ad

A.T. Kearney Risk Ambition

Leaders intentionally

apply a different level of

“ambition” based on the

type and level of

exposure


A.T. Kearney Risk Ambition

• ANTICIPATE FUTURE environmental requirements and consumer demands

• ACTIVELY MANAGE brand image – resilience in light of Foxconn working conditions

• RESPOND to the Gulf of Mexico oil spill

This balance is observed in all companies to varying degrees – but more often is an afterthought rather than forethought

AdvantageTake the hill

ResilienceProtect home turf

RecoveryRun for

(re)cover

Ob

jecti

ves

ActionFirefighting Strategic Focus

Na

rro

wB

road


• Rogue behavior • War for talent

• Market liquidity • Interest rate volatility

• Global economic volatility

• Disruptive business models

• Execution error • Non-compliance

• Regulatory scrutiny (Health, Safety, Finance, etc. )

• Decision making and monitoring

• Code of conduct

Realizing your ambition starts with a holistic view of risk across seven areas of impact to your organization

A.T. Kearney’s VistaTM Risk Framework and Examples

• Loss of IP • Compromise of assets

Business & Commercial

Enterprise &

Governance

Financial

Regulatory

Operational

People

Security

Source: A.T. Kearney


To get started, we need to think about the building blocks for proactive risk management and ourselves a few basic questions

Building blocks for proactive risk management


Risk governance must align with business objectives and ensure a single vernacular for risk prioritization and tradeoffs

• Align risk management strategy and vision to business objectives

• Employ single risk vocabulary within / across functions and BUs for prioritization and tradeoffs

• Establish cross-functional team and accountability to set policy and ensure “hand-offs” between verticals

• Separate actions from oversight/ audit roles to ensure proper checks and balances

How do you do on managing tradeoffs?

Select leading risk practices - Governance

• Is it clear how your company manages risk tradeoffs / priorities across enterprise?

• Is there a common company-wide risk vernacular?

Practices Key Questions


Risk scorecards should include leading and lagging indicators as well as internal and external performance measures

• Employ a mix of both leading and lagging indicators for risk management

• Metrics should measure both internal performance as well as monitor external events and drivers

• Ensure definition of metrics and calculations are standardized within and across functions and business units

Select leading risk practices - Metrics

• Do you know your risk exposure today?

• Are you improving?


Are your metrics consistently defined, tracked and communicated?


Process rigor must combine discipline with new techniques to better understand a broader set of risks and opportunities

• Map product value chains on periodic basis to understand vulnerabilities, identify key risks and mitigation actions

• Leverage advanced techniques to better understand improbable events

• Pursue value chain collaboration to unlock new value and better manage key ecosystem risks

• Ensure key business practices incorporate sufficient risk considerations

Select leading risk practices – Process Rigor

• What techniques and tools do decision makers use to identify risk?

• Do all business processes reflect appropriate risk considerations?

• How frequently does your company reassess its vulnerabilities?


How do you do on managing tradeoffs?


Underlying any risk management capability is data visibility and a means to “connect the dots” across disparate input signals

• Build data transparency across value chain to prioritize risks and mitigation

• Use data mining and predictive analytic techniques to analyze past activities to forecast future behavior

• Establish means to learn, synthesize information and “connect the dots” across disparate input signals

• Collaborate with partners to share data and analytical models

Select leading risk practices – Analytical Tools

• Do you have transparency across your product value chain?

• What tools & techniques are used to monitor risk and risk management practices?


Do you have 20-20 vision across your entire value chain?


Finally, risk management is most effective and truly proactive when it is a part of the culture: a forethought vs. an afterthought

• Recognize and reward those that effectively manage or capitalize on risk

• Ownership of risk transcends typical organization boundaries

• Acknowledge and embrace risk and uncertainty – take control rather than be a victim and make it work to your advantage

Select leading risk practices – People and Culture

• Is risk a part of your day-to-day dialogue and planning?


Is risk a forethought or an afterthought in your organization?


How well organized are your building blocks for proactive risk management?

Elements of a risk management operating model



Paul Schroder Principal A.T. Kearney

Presenters

Office

(312) 223-6022

Email

[email protected]

Office

(703) 562-4119

Email

[email protected]

Dave Powell Partner A.T. Kearney

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Proactive Value Chain Risk Management

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