Applying a risk-management approach to supplier management

GE Capital

Applying a risk-management approach to supplier management

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GE Capital


Every company must procure goods and services, whether used directly in the manufacturing of products or indirectly to support ongoing operations. However, the question that faces every business is how efficient and productive the procurement function is in unlocking value for both customers and shareholders. Done well, procurement can provide cost benefits and even a competitive advantage. World-class procurement organizations deliver nearly four times greater savings on their direct spending and more than 13 times savings on their indirect spending through strategic sourcing practices, according to the Hackett Group. On the flip side, when not actively managed, procurement can create unduly costs for the business and even threaten the stability of the supply chain. The lifecycle management of quality and reliability of the supply base are critical to avoid disruptions. A single quality, liquidity, reliability or Applying a risk-management approach to supplier management

compliance event can erase years of savings derived from a successful procurement strategy. Because the potential risks associated with sourcing are great, it is crucial to mitigate your supplier management risks and take an enterprise approach to supply chain risk management. In doing so, GE has established sourcing practices to minimize our risk throughout the lifecycle of our supplier relationships. This article discusses these practices at a high level, providing an overview of how to implement a riskmanagement approach to supplier management.

Start by assessing the market and the supplier’s health Reducing sourcing risk begins with knowing and segmenting the market. Once this foundation is in place, the next step is to profile your suppliers. Most companies will do at least a due-diligence assessment of the supplier’s financial health in terms of evaluating its cash flow and debt structure. In our view, this operational assessment is necessary but not sufficient. At GE, we go further, as we assess what percentage of the firm’s revenue would be at risk if there were to be a disruption in supply. The idea is to identify red flags and potential exposure before a negative event so

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GE Capital that we can strategize and implement the appropriate continuity plans that are aligned with our greatest risks. With the financial and operational assessment done, we also evaluate the supplier’s reputational risk. In other words, to determine if the supplier is a good fit with GE values and commitment to integrity. This is a robust program that evaluates a potential supplier across several key compliance areas including work practices and environmental compliance. Finally, we assess the company for one of the greatest risks in the 21st century: IT security. It is a rule of thumb of modern business: Your IT security is only as strong as your weakest partner’s IT security. In fact, it’s worse than that: Your IT security is only as strong as your weakest partner’s weakest partner’s IT security. Information security risks cascade throughout the supply chain — just thinking about the scope of this risk can be daunting. But that doesn’t mean you can afford to ignore your supplier’s information security. At GE, we ensure that our suppliers meet our standards for perimeter and application security. We spell out our expectations for information security in writing and monitor to ensure standards are being met. Our standards and practices continue to develop and strengthen in this emerging risk area to keep pace with the rapidly changing environment. Sole-source supplier risk: Focus of risk mitigation A risk practice area that has been a specific focus is our exposure to sole and single supply sources. Programs in GE have been actively created for the last three years to reduce our global exposure to these sources and prevent the creation of new ones. Obviously, at times there are structural reasons for a single-sourcing arrangement, such as in the case of a new product introduction.


In that case, we have made a business decision to rely on one supplier in order to accelerate the development of a new product. Companies that build large, complex products, such as our aircraft engine division, may find it common to have structural single-sourcing arrangements. In recent years we have been successful in reducing cases of competitive single sourcing. That is, other suppliers exist but it would require time and effort to bring additional suppliers onboard. We believe this type of situation generally arises out of laziness as opposed to business necessity. In our view, there is almost never a good reason to have just one supplier of a commodity product. Companies are sometimes tempted use one supplier exclusively for one or more products in order to attain the best price discounts. If you make that choice, be aware of the attendant risks and be sure to mitigate by qualifying and establishing relationships with alternate suppliers should you need them. Beyond the pitfalls of single sourcing, other supplier/ sourcing risks we have identified include: • Interruption of material availability due to governmental restrictions, material scarcity, work stoppage and the like. This also includes environmental, political or terrorist events; • Financial/legal exposure due to supplier viability or solvency issues; • IP exposure, including supplier geographic concentrations; • Compliance, since a supplier poses a risk to GE’s reputation or our brands; and • Product quality/reliability due to a host of potential factors in the supply chain.

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GE Capital Your sourcing/supply risks will vary according to your market segment, company size, geographic location and organizational risk appetite. Strategic Sourcing Centers of Excellence At GE we leverage a Sourcing council of our top procurement leaders to ensure that we are sharing best practices and doing everything we can to drive the economies of scale that our size affords us. The council works in conjunction with our GE Strategic Sourcing Centers of Excellence (SSCoE), which we developed for eight key commodity and material categories. Each SSCoE is comprised of a multidisciplinary team, which meets twice a month, led by strong and emerging sourcing leaders. Close collaboration on these teams has increased our access to market intelligence and highlights cross-business unit strategic opportunities. Each SSCoE team creates an annual playbook that incorporates four critical elements that help shape the strategic plan for that commodity or material: 1. Market trends and landed-cost opportunities 2. Total company buy and segmentation 3. Common cost drivers/“should cost” analysis

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Conclusion A guiding principle at GE is that good sourcing decisions are not made on price alone. Rather, they are part of a sourcing strategy that defines business objectives, best practices and risk mitigation approaches. Sourcing is a competitive advantage for GE and we are excited about the opportunity to leverage our expertise to add value to our customers.

This publication provides general information and should not be used or taken as business, financial, tax, accounting, legal or other advice. It has been prepared without regard to the circumstances and objectives of anyone who may review it; therefore, you should not rely on this publication in place of expert advice or the exercise of your independent judgment. The views expressed in this publication reflect those of the authors and contributors and not necessarily the views of General Electric Capital Corporation or any of its affiliates (together, “GE”). GE does not guarantee that the information contained in this publication is reliable, accurate, complete or current, and GE assumes no responsibility to update or amend the publication. GE makes no representation or warranties of any kind whatsoever regarding the contents of this publication, and accepts no liability of any kind for any loss or harm arising from the use of the information contained in this publication. “GE,” “General Electric Company,” “General Electric,” “General Electric Capital Corporation,” the GE Logo, and various other marks and logos used in this publication are registered trademarks, trade names and service marks of General Electric Company. You may not use, reproduce, or redistribute this publication, any part of this publication, or any trademark or trade name without the written permission of GE.


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