FINANCE AND STRATEGY PRACTICE CFO EXECUTIVE BOARD. Safeguarding Supply. Protecting the Enterprise from Unforeseen Supply Chain Risks

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1 FINANCE AND STRATEGY PRACTICE CFO EXECUTIVE BOARD Safeguarding Supply Protecting the Enterprise from Unforeseen Supply Chain Risks

2 KEY TAKEAWAYS: SAFEGUARDING SUPPLY 1 Focus Finance s involvement in supply risk management. While Procurement is the natural owner of supply chain risk management, Finance s broad business view allows it to develop a holistic view of suppliers and leading metrics to monitor supply risk. 2 3 Proactively identify early warning signals of supplier risks. Focus on leading indicators of risk beyond purely financial ones to gain a forward-looking view of supplier risk. Equip the frontline to monitor supplier risks. Provide buyers with scalable support to enable them to independently identify emerging supplier risks. 4 5 Develop a single view of counterparty risk. Combine exposure information with a forward-looking financial health assessment of individual counterparties to ensure a holistic and easily communicated view of risk levels. Leverage Existing Processes and Capabilities to Assess Data. Select existing counterparty risk metrics based on how stakeholders use the information and leverage existing reporting processes, cross-functional relationships, and internal skills to source and aggregate data. 2

3 ROAD MAP FOR THE PRESENTATION Importance of Supplier Risk Management Gaining A Forward- Looking View Developing a Holistic Understanding 3

4 Company bankruptcies and budget cuts which can negatively impact operations significantly increase the number of potential supply disruptions. Bankruptcies are rising globally: in the US they are up 240% over the last 12 quarters; in the UK, they have risen 75% between Q and Q1 2009; in Asia PAC, Australia is expected to see nearly a 6% increase in bankruptcies this year. Many companies have to do more with less as they contend with significant staff cuts deemed necessary for continued business health. Of the 90% of companies planning cost cuts, 20% plan on fundamentally restructuring their organization, while 40% plan cuts that they say will be unprecedented. GETTING WORSE Frequency of CEO s Public Statements About Supply Disruptions Number of Mentions in Analyst Calls Q1 Q2 Q3 Q4 Annualized Mass Layoffs at U.S. Companies Events Defined as 100 or More Layoffs at a Time 3,000 2,500 2,000 1,500 1, Bancruptcies in the United States and United Kingdom 8,359 3,262 10,452 3,689 11,221 4,059 11,993 4,525 Operational Cuts Already Underway Cost Cutting Efforts at Largest UK Companies Not Cutting Operations 10% 13,360 5,110 Q U.S. Chapter 11 Filings UK Number of Filings 90% Cutting Operations 0 Mar Apr May 2008 Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr n = 140. Source: U.S. Department of Labor Statistics. Source: FD Wire; Singhal, Vinod R., Don t Let Supply Chain Disruptions Torpedo Shareholder Value and Profitability, On the Move, Spring 2006; Procurement Strategy Council research. Source: The Hays Group, March 2009 UK Largest Businesses Poll. 4

5 Supply disruption through bankruptcy and overly deep cuts made by suppliers has a negative impact not just on company financial performance, but also in terms of quality and innovation. A MULTIPLYING COST Negative Impact of Supply Disruption on Profitability Relative Percentage Change, Control-Adjusted Performance Across Three Years 11% Sales Growth Shareholder Returns Across a three year period, a supply disruption can cause costs to rise by 11%, decrease sales growth by 7% and shareholder returns by 35%. Cost (7%) (35%) n = 827. Over 80% of quality executives are concerned that across the next 12 months, supplier financial distress will lead to meaningful quality fade. Source: Procurement Strategy Council. Concern That Deteriorating Supplier Health Will Lead to Quality Issues Quality Executives Perspectives on the Next 12 Months Funding for Innovation in Jeopardy R&D Budgets for 2009; Average of Respondents Beyond quality concerns, customers have reason to worry about the impact that cost cutting efforts will have on supplier innovation particularly as most companies expect R&D spending to be fl at or lower this year. Not Concerned 0% 18% Very Concerned Uncertain of Future Budget 13% Higher 21% 82% Concerned 66% Lower or Flat n = 17. n = 34. Source: Quality Executive Board survey. Source: Research and Technology Executive Council survey. 5

6 While Procurement is the natural owner of supply chain risk management, Finance s broad business view allows it to develop a holistic view of suppliers and forwardlooking metrics to monitor supply risk. A ROLE FOR FINANCE Finance and Procurement s Visibility Across the Business Illustrative Potential Acquisitions New Business Launches Cost Cutting Plans Finance Needs Potential Regional Partnerships Operations Business Needs Vendor Relations Finance Procurement What Finance Can Bring to Supplier Risk Management 1 2 Provide a forward-looking view of supplier risk through the analysis of leading indicators Offer a holistic view of suppliers across the organization both as customers and as financial counterparties 6