Boston Scientific develops supplier risk management program
Medical device maker develops supplier risk index.
By William Atkinson -- Purchasing, 2/12/2009 2:00:00 AM
The concept of supplier risk management is still relatively new, as business strategies go. But in the era of global sourcing and volatile markets, supplier risk management is rapidly becoming every bit as necessary to global supply chains as in-house corporate risk management.
Supply chain professionals are identifying a longer list of potential supplier risks including financial (lawsuits, acquisitions, changes in financial viability, bankruptcy); governmental (regulatory problems); market dynamics (material shortages); and the impact of disasters (environmental or geo-political). Others can include misalignment of interest (suppliers and buyers growing apart in their visions), quality problems, delivery problems and service problems.
As a medical device maker, Boston Scientific Corp. in Natick, Mass. has been well ahead of the curve in its supplier risk management strategy development. More than three years ago, Boston Scientific's vice president of global supply chain expressed some concerns, explains Michael Kalfopoulos, manager of supplier engineering and risk. Perhaps the biggest risk management concern was around "medically-unfriendly" suppliers, or those that do the majority of their business with larger, non-medical industries and thus don't consider companies like Boston Scientific when making long-term product development plans.
"We realized that we needed to implement a formal system to make sure we were doing business with suppliers that would be responsive to its specific needs and minimize our risks," Kalfopoulos says.
"At the time, we were reacting to these issues," says Karen Weinstein-Millson, vice president, global sourcing and member of Purchasing's editorial advisory board. "We needed to be more proactive, because in this industry, we have fewer resources, but are required to do more."
Boston Scientific now defines supplier risk management as a proactive and systematic process for cost-effectively identifying and reducing the frequency and severity of unwanted events in the inbound supply chain that have an adverse effect on the business.
The company began to investigate how it could get better intelligence up-front by using certain criteria and data that would allow it to predict whether or not it could potentially have issues with suppliers. The strategy has four goals. First, be alerted to high risk suppliers that require attention, using a variety of information and data. Second, identify and understand the specific drivers that increase supplier risk. Analyze the data by high, medium, or low risk, as well as by indicator. Third, proactively manage and mitigate supply chain risk. Determine risk mitigation responses, develop business continuity plans, develop contingency plans, and prioritize mitigations. Finally, measure risk mitigation and impact.
"First we identified all of our suppliers that have greater than $10 million worth of revenue impact," says Kalfopoulos. "We then developed a list of questions in different categories." The responses allowed the company to categorize its supply base into a Risk Probability Index (RPI), which provides a measurement of the company's risk exposure for each of the suppliers. Boston Scientific used a number of sources to gather answers to its questions, including business newspapers and government websites. "We use a bottom-up approach, where we work with each of the plants to understand the supply base for mitigation action," says Kalfopoulos.
At first, it was difficult to get traction for the program as most companies would prefer to focus resources on cost reductions instead of risk management. "However, with the economic downturn, the risk management program is getting more attention, especially as it relates to supplier health," Kalfopoulos reports.
Weinstein-Millson sees the risk management program as a two-sided coin. "On one side is risk, and on the other is reward," she explains. That is, while the program alerts her organization to potential supplier-related risks, it also gives it the opportunity to help suppliers before problems become more serious. "We consider suppliers to be an extension of our organization, so it is necessary for us, in cases where the suppliers may not see the risks, to predict the risks based on the probability indicators we have," she says. "In this way, we can help them continue to be successful."
This has indeed turned out to be the case. "Based on our ability to plot the criteria and look at the RPI, we have been able to identify some suppliers where risks were indicated," Weinstein-Millson says. "As a result, we placed more focus on those suppliers and began working with them." The benefit for the suppliers was not losing Boston Scientific's business, or even losing revenues as a result of the issues. The benefits for Boston Scientific have been improvement in supplier reliability and performance.
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