Why Supply Chain Risk Management

Overview

We are entering an era in which companies can detect supply chain risks much more quickly than in the past, but why supply chain risk management ?  AGCO’s experience provides a case in point.  AGCO is a global leader in the design, manufacture and distribution of a wide range of agricultural equipment.  In a discussion with AGCO’s Jan Theissen, Director of Strategy and Methods, and Jake Stone, Manager of Supply Chain Risk and Contract Management, ARC Advisory Group learned about this public, Atlanta-headquartered corporation’s journey to improve their sourcing and supply base risk management capabilities.

The AGCO Case Study Illustrates Why Supply Chain Risk Management

AGCO’s products are marketed under a number of well-known brands, including Challenger, Fendt, GSI, Massey Ferguson and Valtra.  The company manufactures and assembles their products at 34 locations worldwide.  Historically, each of these brands was managed as a separate supply chain.  Further, because the company had grown by acquisition, these different supply chains used 10 different enterprise resource planning (ERP) solutions for direct sourcing.

Beginning in 2012, Mr. Theissen, the newly appointed head of procurement, led a transformation of the sourcing organization.  AGCO moved from fragmented and decentralized procurement to a centralized commodity management structure to better leverage buying synergies and increase the overall maturity level of this organization.  An extensive change-management program supported implementation of standardized roles and responsibilities, and global policies and procedures.  The company formed a School of Purchasing to further develop the organization’s capabilities.

The risks associated with sourcing became part of each category manager’s job; these managers became responsible for supplier risk management, not just savings.  Mr. Stone was brought in to establish new processes and capabilities to manage procurement risk.  In addition to other important contributions, Mr. Stone put in place a clear communication and escalation process to deal with risks once detected.

To help support these changes, the company cleaned up its master data and then implemented a global instance of a supplier auditing solution.  AGCO ended up selecting a small Polish software supplier called procurence.  The company’s Meercat software allows companies to evaluate their suppliers’ performance in areas such as collaboration (product innovation); sustainability and ethics, delivery, and commercial performance.  

Software from another European company, riskmethods, was used to complement the procurence software with quicker risk notification.  The solution created a graphical view of the AGCO supply chain across multiple supplier tiers.  If a particular supplier’s continued existence becomes questionable, the way that supplier’s components flow to various factories and nodes in the supply chain is graphically illustrated and the appropriate category managers are automatically notified.  Or, if there is a problem at a particular port, the raw materials that flow through that port to particular factories can be visualized.

Mr. Stone compared this solution with Dun & Bradstreet financial reports.  “D&B reports have value,” he said.  But if a company’s balance sheet starts to indicate that supplier is struggling financially, “it can be a while before that is picked up.”

In contrast, riskmethods works by continuously monitoring risks identified across more than 300,000 online and social media sources.  After using the solution, AGCO found two bankruptcies that D&B reports failed to report on in a timely manner, but which riskmethods picked up almost instantaneously.  In one case, a supplier had been mired in litigation for over a decade.  While this company’s financial metrics looked strong, they lost the lawsuit and filed for bankruptcy.  AGCO knew right away that this supplier had lost the suit and began alternative sourcing.

But the solution is not solely focused on financial viability, it links to data sources focused on natural hazards, sanctions, macroeconomic and political developments, and corporate social reporting.  In another instance, the solution notified AGCO that a major supplier had a fire that burned down two of its warehouses.  “This was a major supplier.  We knew the same day.”  The appropriate global commodity manager was notified and began working the problem.    

In implementing the risk methods solution, the logistics and material management teams needed to work with the implementation team to map the flow of a raw material from a supplier location, through trade lanes by carrier, to a particular factory.  AGCO has mapped its Tier 1 suppliers, and is currently doing a criticality analysis to map their risks appropriately down to Tiers 2 and 3. 

Mr. Theissen says that AGCO will continue to work to enhance its supplier risk management capabilities.  The company wants to develop more predictive analytics so they can discover, for example, whether a decrease in product quality combined with slower deliveries might be “a leading indicator of bigger problems to come.”

Finally, Mr. Theissen expressed the desire that the community of riskmethods customers can begin to collaborate on supplier issues more proactively.  So, for example, if different customers in the community are all working to comply with conflict minerals legislations and one company has vetted an African supplier as using a vetted smelter, other companies in the network won’t have to duplicate that effort.

Recommendations

SCRM (supply chain risk management) is a relatively new supply chain software and content product category based on combining massive third-party datasets, with graphical views into a company's supply base, and role-based alerting. The ability to map risks across multiple supplier tiers and trade lanes in near real time, gives companies a powerful new tool to manage their supply chains far more intelligently and proactively.

SCRM is a somewhat difficult category to estimate a return on investment (ROI) for because the returns come only when an incident is detected and remediation occurs.  Incident remediation often means happier customers, but it is hard to put a revenue number on that as well.  Nevertheless, by estimating what deviations from a perfect order costs companies in lost revenues, and then looking at supplier incidents that could have been more quickly detected, it is possible to make a very rough estimate of the magnitudes of possible savings.  This is not a simple exercise, but is a worthwhile one.

However, remediation can only occur if the culture supports action.  “Firefighting teams” are needed that can assemble, collaborate, and remediate problems quickly and efficiently.  Without a bias toward action, these types of solutions will be largely a wasted investment. 

Nevertheless, these new SCRM solutions represent some of the cleverest and most promising supply chain solutions ARC has seen in several years.   

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Keywords: Supply Chain Risk Management, Risk Management, Visibility, ARC Advisory Group.