Next Generation Supply Chain Risk Management: A Case Study

We are entering an era where it is becoming possible to detect supply chain risks much more quickly.  A case in point is offered by AGCO.  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, I learned about this public, Atlanta headquartered corporation’s journey to improve their sourcing and supply base risk management capabilities.

AGCO’s products are marketed under a number of well-known brands, including Challenger, Fendt, GSI, Massey Ferguson and Valtra. The manufacture and assembly of their products occurs at 34 locations worldwide and 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 more than 10 different enterprise resource planning (ERP) solutions for direct sourcing.

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

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 into establish new, systems, processes and capabilities to manage procurement risk. One thing Mr. Stone put in place was a clear communication and escalation process to deal with risks once detected.

To help support these changes, the company cleaned up their master data and then implemented a global instance of a supplier auditing solution. AGCO ended up selecting procurence, a small but highly capable Polish software supplier. The Procurence Meercat software is highly configurable and allows suppliers’ performance to be evaluated in areas such as collaboration (product innovation); risk, sustainability, delivery, and commercial performance.

The procurence Meercat software was complemented with various integrated third party data providers including a solution from riskmethods for quicker and more comprehensive risk notification. This software was described as “powerful and user friendly.”  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 components and raw materials that flow through that port to particular factories can be visualized.

riskmethods

The riskmethods Solution

The riskmethods solution was contrasted with only relying on financial reports.  Financial reports have value,” Mr. Stone said. But if a company’s balance sheet starts to indicate that supplier is struggling financially, “it is a while before that is picked up by some of the more traditional solutions, as you are likely relying on a quarterly or annual statement.”

In contrast, riskmethods works by continuously monitoring risks identified across more than 300,000 online and social media sources. After using riskmethods, AGCO found two bankruptcies that its other risk management tools absolutely did not 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 law suit and filed for bankruptcy.  AGCO knew right away that this supplier had lost the suit and began alternative sourcing.

But riskmethods 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, a supplier had major fire that burned down 2 of their 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 purchasing and logistics and material management teams needed to work with the implementation team in order that a component or raw material could be mapped from a supplier location, through trade lanes by carrier, to a particular factory.  AGCO has mapped their top 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 their 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 is hopeful that the community of current and future riskmethods customers can begin to collaborate on supplier issues more proactively. So, for example, if different customers in the community all are working to comply with e.g. 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. But the benefits of cross-organizational collaboration to better identify and manage supply chain risks go far beyond just compliance to new legislation. It offers a new way of working together to drive supply chain transparency within the entire value chain.

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.

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