Supplier Risk Management CIPS London Branch — 25 February 2016 University of Westminster, London © 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1
Tonight’s topics
What does it mean when an organisation is “being restructured”?
What can you do about it?
What does a robust supplier risk management system include?
Visibility through your supply chain
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2
About me Lee Swinerd, Director, Restructuring Midlands & South T: +44 (0) 121 335 2396 M: +44 (0) 7770 734203 E:
[email protected]
23 years at KPMG
Chartered Accountant
Turnaround, transformation and liquidity team
Head of KPMG’s Supplier Failure Risk Management service offering
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
What does it mean to be “restructured”? © 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
What is ‘Restructuring’ - Overview
Transformation
Turnaround
Significant business change
Underperformance / Stressed
Financial restructuring
Stressed / Distressed
Insolvency / formal restructuring
Distressed / Insolvent
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
Transformation Transformation is achieved by driving fundamental change in an organisation’s business model, objectives, operating models, value chain, processes, culture and infrastructure from Strategy through to Execution.
Fundamentally changing the “business model” of an entity
How does it do business?
What back office structure does it need to support the front end business?
Tend to be very large scale programmes that last up to three years
Examples
Project Worksop
However, transformation can be the “new restructuring” so beware the situation
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
Turnaround The repair of value destruction for the benefit of shareholders, company and / or its management in stressed and distressed scenarios with the aim to make the company “healthy and viable”.
Operational restructuring
Closing down sites / footprint rationalisation
Moving production from high cost to low cost economies
Cost reduction
Workforce optimisation
Exiting high cost “head office” locations
Stopping value destructive activities
Generally focussed on improving profitability (P&L driven actions)
You probably will not find out about these activities unless it is a public company © 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
Financial Restructuring Financial Restructuring focuses on helping companies and their stakeholders to get the most appropriate capital structure put in place to allow valuable businesses to survive and thrive.
This is a balance sheet driven activity
Aimed at reducing financial leverage (or gearing)
Reduce the debt burden of a company
Improving cash and working capital management
Could also involve disposing of assets
Sell subsidiaries
Sell property
Sale and leaseback
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
Insolvency / Formal Restructuring Insolvency is usually associated with the death of a company. This is often true in the UK, but not necessarily the case in other jurisdictions.
UK insolvency proceedings
Administration
Liquidation
Company Voluntary Arrangement (CVA)
UK non-insolvency proceedings
Scheme of Arrangement
Non-UK
Chapter 11 (USA)
Other jurisdictions
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
Restructuring – what can you do about it? This really depends on many factors that are relevant to both your organisation and your supplier.
The criticality of the supplier
Sole source
Dual / triple source
Ease to resource
Cost to remedy
Financial impact on your business
Reputational impact on your business
Your leverage in the situation
The amount of knowledge you have
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10
Supplier risk management © 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11
What is Supplier Risk Management? The identification and monitoring of risk within the supply chain, and an action plan to deal with potential problems, preferably before the problem arises Key questions What does a robust supplier risk management system include and how are weaknesses identified?
What does it mean when an organisation within your supply chain is experiencing restructuring procedures?
Do you have visibility throughout your supply chain as to your vulnerability to a range of financial, operational and increasingly, reputational risks?
How might it affect your business and how can you mitigate the effects? Can you quantify the risk?
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12
In the news Supplier Risk Management (“SRM”) is a hot topic right now and we believe that many companies are taking too much risk.
Foreign workers ‘used as slave labour’ by beds supplier to Next and John Lewis Ethical audits by a series of firms failed to spot their supplier was employing foreign workers for less than £2 a day Thursday 8 October 2015
Nestle battles slavery issues on two continents February 1st 2016 Food giant Nestle is now dealing with issues ... relating to slavery on two continents. Along with Archer Daniels Midland Co and Cargill Inc., Nestle is now ... involved in a lawsuit at the US Supreme Court over child slavery.
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13
In the news January 29, 2016 January 25, 2016
Supply chain scrutiny intensifies for battery materials
Complex supply chains spell trouble for companies trying to manage risk
Child labour concerns centre on cobalt production in Congo
Suppliers can pose particular risks to a company’s reputation. Apple suffered a rash of bad publicity in 2010 following 14 suicides at Foxconn, its biggest supplier in China, and again last year when workers at another of its Chinese suppliers were filmed falling asleep at work.
The digital revolution is supposed to be as transformative as the Industrial Revolution before it. But there is one area that has not changed. The new era of technology still relies on the use of the world’s finite raw materials.
Customers want to know that workers have been treated fairly
January 29, 2016
Retailers such as Primark were heavily criticised after the collapse in 2013 of Rana Plaza. The disaster in the a poorly constructed building in Bangladesh that housed overcrowded garment factories killed more than 1,100 people and injured many more. Primark, which is based in the UK, paid out millions of pounds in compensation as a result.
Babcock, BAE and Rolls-Royce step in to support steelmaker The Ministry of Defence has brokered a deal under which BAE Systems, Babcock International and RollsRoyce have underwritten bank loans to Forgemasters, which makes parts for Trident nuclear submarines Forgemasters last week announced it was cutting up to 100 jobs after posting a £9.4m loss because of a decline in oil and gas exploration, high energy prices and slowing global economic growth
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
Why is this important? Since 2009, the Supply Chain Resilience Survey report is a respected industry resource that considers challenges in building resilient supply chains. Key findings have shown that:
73.5% of respondents do not have full visibility of their supply chains
44.4% of 76% of respondents report at least one instance of supply chain disruption last year.
disruptions originate below the Tier 1 supplier
26.5%
of Only organisations coordinate and report supply chain disruption enterprise-wide
13% of organizations do not analyse their supply chains to identify the source of the disruption
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
15
Why has SRM become critical in recent years? Margin pressures
Complexity of supply chains
Growth
Global economic uncertainty
Scale of operations, increasing global reach
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16
Other potential triggers Supplier risk management (or supply chain resiliency) is not just about the risk of financial and / or operational failure. Increasingly, it is the reputation of your organisation that is put at risk.
Introduction of the Modern Slavery Act
Sustainability focus and traceability
Conflict Minerals
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
17
What does good look like - sourcing? Sourcing process Determine business needs
Sourcing strategy development
Sourcing strategy selection
Qualification and shortlist of suppliers Selection and proposal of award
Contract signature and complete handover
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Supplier and contract management
18
What does good look like – supplier risk management? Supplier risk management Risk segmentation Risk filtering Due diligence Contracting Supplier monitoring Risk detection
Risk mitigation steps
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Offboarding
19
Key Risks & Pitfalls
Most companies do not detect issues sufficiently early because they rely on historic financial information or credit ratings
Information about suppliers is maintained in multiple functions preventing an holistic view
Large organisations with complex supply chains can fail to understand total exposure to a supplier, and failure can result in:
Lack of visibility through tiers of suppliers
M&A activity can increase exposure
On-boarding of new suppliers fails to take into account available information
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20
The visibility challenge Many organisations have limited or no visibility through their supply networks. However, increasingly you need to be able to stand up and be counted.
Aerospace
Automotive
Food suppliers
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21
KPMG’s SRM Framework Risks in the supply chain fall into four key categories; we use this framework to focus in on key areas of concern to organisations or to structure a holistic assessment of an organisation’s SRM maturity against leading practice. Financial failure of supplier
Counterparty risk
Supply chain interruption
Regulatory risk
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22
Identifying and monitoring risk Identification and monitoring can be achieved in different ways, depending upon the size and complexity of your supply network
Independent assessments of existing processes, including
Contract compliance reviews
Development of information packs and clear plan on how data will be collated
Ongoing monitoring process.
Detailed supplier assessments
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
23
Warning signs Operational
Abrupt changes at senior management level
Poor quality performance
Missed deliveries / use of expedited freight
Sub-contracting / outsourcing
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
24
Warning signs Financial
Rapid growth rates
Non-typical supplier requests (eg prompt pay, guarantees, inventory buy backs)
Worsening working capital position
Highly leveraged balance sheet / exotic corporate structures
Credit insurance coverage reduced or pulled
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
25
Dealing with potential supply chain disruption There are many ways to deal with potential supply chain disruption risk. These are the most common that we see: Financial
Sourcing
Other
Accelerated payments
Takeover
Revised contract pricing
Technical support
Loans (secured and unsecured) “Bailment”
Purchase core commodities
Dual source
Re-source
Supported
unsupported
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
26
Examples of issues we’ve seen
Auto supply chain
Food delivery contract
Electronics distribution
Tier 1 / 2
New type of business
Over 100 licensees
South East Europe
Underpriced contract
4 jurisdictions
Ran out of cashflow
Significant financial support provided
Previous failed financial restructuring
Poor controls / monitoring
Operational challenges © 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
27
Wrap up
Restructuring can take many shapes and forms
It is something you can do something about but the earlier you know the more options you will have
Supplier risk management is increasingly important and is not just about financial risk or failure
Businesses are looking to identify and monitor supplier risk and have formal processes in place
You need to have a holistic and global view of risk and exposure and have plans to either reduce or mitigate these risks
Your reputation is increasingly at risk
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
28
Questions & answers
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
29
