Supplier risk managment

Saving money time and reputations with Supplier Risk Management 

Few things are as embarrassing or damaging as project delays – or, worse, failures. So it is surprising how often we see major infrastructure projects missing targets or pushing back deadlines due to unforeseen circumstances.

Many would suggest that the blame for missed deadlines and delays lies squarely on the shoulders of the current financial environment. There is some truth to this; both governments and private investors are making difficult choices about where to invest their limited funds and – occasionally – this means underfunding or delaying one project in order to allocate funds to another.

We would argue, however, that this is simply market forces at their best: capital should always flow to the places that provide the best return – either in financial terms or as improved service delivery.

In our experience, it is not the weak financial environment that is the most common reason for project delays, but rather that companies are simply not close enough to their suppliers and are therefore missing clear ‘stress triggers’. More often than simple financial stress, it is a failure – or more specifically a lack of resilience – within the supply chain that is the real culprit behind project delays.

Maybe a critical part has not been delivered on time or to spec; or a natural disaster has delayed shipping of key components; or a supplier simply does not have the experience or capacity to meet their contractual obligations. All of these issues – and countless more – could mean the difference between project success and failure.

All of this may be about to change. A small and savvy group of infrastructure players have recently started to place renewed focus on improving their approach to supplier risk management and resilience. Not surprisingly, evidence shows improving rates of success in those organizations that get their supply chain right.

The right way, not the easy way

Infrastructure leaders seeking to better manage their supply chain risk should start by looking at their contracts. Are they working with one supplier or a variety of suppliers? Have all interdependencies been assessed and understood? Have measurable targets been incorporated and are they being monitored? How are risks being mitigated within the contract?

The reality is often that simplicity and cost considerations have been prioritized over rigor when it comes to contracts. For example, we recently worked with a major infrastructure investor who – for a massive and rather complex project – opted to contract the work out to one ‘prime’ developer. This allowed them to reduce some costs, streamline reporting and allocate risk and responsibility conveniently.

Once the project got underway things began to unwind. The developer (a top tier global construction group), in an effort to save costs and reduce complexity, elected to conduct much of the work ‘in-house’ rather than contracting to specialist providers. Moreover, the contracts that were tendered did not provide the developer with sufficient ability to monitor – or act – on their key performance indicators. As a result, the project quickly started to go off the rails.

Taking a detailed approach

The challenge, in most cases, often comes down to poor planning and lack of rigor at the outset of the project. We believe that a vast majority of project delays and failures could be eliminated entirely if proper focus was placed on ensuring that contracts are developed and executed properly. But once contracts are already in place, the challenge of retroactively implementing stronger supply chain risk and resilience practices is often much more difficult.

Our client, the developer, needed to go back to the very beginning to reassess each parcel of work and identify which skills, capabilities and assets would be required to properly fulfill each parcel. Next, they needed to define what the key performance indicators would be for each supply line and supplier and plan how those would be measured and evaluated. They then assessed the potential market and counter-party risks and finally – rather than simply lumping all the parcels into one mixed bag – sourced the right group of suppliers to not only meet their unique specifications, but also to provide some spare capacity where needed.

The client also applied a simple piece of technology to gain greater visibility into their supply chain. Essentially, the software allowed the developer to view a set of both financial and non-financial data – keyed in directly by each supplier – which in turn helped generate a balanced score card and supported more effective risk identification.

The value has been immense. Not only did the project suppliers have a clearer understanding of what was expected of them, so did the developer. Milestones and metrics allowed for weekly – even daily – evaluation of progress while targeted sourcing approaches meant that each supplier could be counted upon to meet their quality, quantity and timing requirements. Moreover, the developer achieved unprecedented visibility into their Tier 2 and Tier 3 suppliers which allowed them to better identify supply challenges before they occurred.

Keeping the lights on

Once an infrastructure asset is operational, managers and owners must continue to focus on enhancing their supplier relationship management techniques to ensure they add resilience and mitigate risk in a way that enables the facility or asset to continue to operate effectively.

But while there are certainly distinct differences in the frequency, scale and monitoring of operational supply chains versus ‘capital build’ supply chains, the fundamentals are surprisingly similar: understand the unique interdependencies and specs for each element, assess the potential suppliers, and create robust and appropriate contracts to ensure supply risks are mitigated.

Regardless of whether you are planning a supply chain for a development project or an operating asset, one consideration must remain above all else: logistics. Procuring and paying for a new gas turbine will not do any good if you cannot get it from the manufacturing site to the development site.

Some items will be fairly easy to transport: gravel and dirt are generally sourced locally and almost any truck will do; uranium fusion cores for nuclear power plants will require more specialized and sophisticated logistics providers. Ensuring that third party logistics providers have the appropriate capability, competency and financial security will therefore be key.

Ultimately, we believe that those infrastructure developers, owners and operators that are able to take a considered and detailed approach to their supply chain will not only reduce project delays, limit down time and minimize cost over-runs, they will also be more likely to eliminate unnecessary risks, enhance their resilience and protect their public reputations.

By Roger Bayly and Andrew Burn, KPMG in the UK

Share this

Share this

Sign up now

Receive email alerts when new content is available

Tell us what you think

INSIGHT: Resilience

INSIGHT: Resilience
In the latest edition of Insight, we explore some of the world’s most impactful stories of resilience. We talk to infrastructure policy makers, owners, developers, analysts and investors to find out what keeps them awake at night and what they are doing to manage risk and enhance resilience.

Inside INSIGHT: Resilience

  • Subscribe to related feeds