Risk Management of Chemical Substance Reporting Information #7 - Supply Chain Risk Management Models

In this article we will examine Supply Chain risk management models in terms of;

1. The traditional purchasing model.
2. The impact of chemical substance reporting.
3. Aerospace supply chain trends.
4. Towards developing a sustainable supply chain.

The Traditional Purchasing Model

Traditional Focus

• Manage the supply chain.
• Purchase raw materials - Chemical substances, mixtures, etc for use in the article transformation cycle.
• Purchase machinery - For use in the article transformation cycle.
• Make or buy? - Make articles internally or buy articles from the supply chain
• Purchase consumables - Hardware, software, stationary, etc.
• Monitor supplier performance - Quality and delivery.
• Achieve cost reductions - on-going cost reduction of supplier articles.

Purchasing Risk Analysis Models

Krajic Matrix

This is a simple 4 box matrix where you classify the types of substances, mixtures and articles purchased by an organisation:

The logic is to examine (a) Strategic and bottleneck items the need to be carefully managed to prevent supply chain disruptions; (b) Leverage items will present the highest impact on profit, requiring purchasing intervention to maintain or reduce costs.

Having identified the and classified the substances, mixtures and articles purchased by an organisation. The next step is to take the quadrant's (strategic / bottleneck / leverage) and perform analysis using the models below:

Michael Porter Five Forces Model

The five forces model has been in use since the 1980's. The five forces model examines the state of a given market, to show the level of competition in terms of the strength of buyers/suppliers, barriers to entry, threat of new competitors, etc.

1. Industry Rivalry / Competitive Rivalry - At the core of the model is market itself, against which industry rivalry may exist.
2. New Entrants - As a market becomes more profitable, it is more likely to attract new entrants. However as more and more new entrants arrive, profitability within a market place is likely to deteriorate. Factors which can prevent new entrants from entering a market place are referred to as 'Barriers to Entry', these include (a) High development costs; (b) Regulations - Industries may be highly regulated; (c) Patent protection - existing markets may be protected by patents; (d) Distribution channels - Existing companies may have highly controlled distribution networks; (e) Existing customer loyalty to existing products; (f) Switching costs, there may be high costs for existing customers to switch to new suppliers; (g) Threat of retaliation from existing companies in the market.
3. Substitute Products - Alternative products could pose a problem, however the ability of substitutes will depend on (a) Price versus performance - will the cheaper alternative produce the same level of performance?; (b) Buyers may incur switching costs to switch from one supplier to the cheaper alternative products.
4. Bargaining Power of Buyers - This refers to the power of the customer in relation to the selling organisation which will depend on (a) Number of customers in comparison to the number of available article types, the more articles that exist and fewer customers willing to purchase, results in more power to the buyer(s); (b) Purchase volumes - If a buyer purchases in large volumes, they may be able to exert more power over the supplier; (c) Importance of a given article to the buyer; (d) Amount of differentiation between competing articles; (e) Buyers need to increase profit margins by lowering the costs of purchased articles.
5. Bargaining Power of Suppliers - Suppliers play a pivotal role in that they provide inputs such as chemicals and mixtures and other raw materials used in the article transformation cycle. The power of suppliers will depend on (a) Number of suppliers in a market; (b) Size of the suppliers - This may restrict them to potentially further grow in a market - to the point of potentially taking on the buyer organisation role); (c) Article differentiation - on supplied articles; (d) Switching costs for buyers to switch between different suppliers.

In the context of risk, the five forces model allows the overall market to be examined, in particular to assess the power of suppliers, as well the threats to an article.

PESTLE Analysis

In the figure below the traditional Political, Economic, Social and Technological model is extended to include Legal and Environmental factors:

We can show an Aerospace specific PESTLE example as being:

SWOT Analysis

SWOT analysis is traditionally used to identify areas of weakness for an organisations as well as areas for potential growth. In the context of a purchasing risk model, we can use it to look at a potential/existing supplier to look for potential issues. SWOT consists of a simple 4 box matrix:

The figure below presents a simple SWOT analysis for a typical Aerospace company:

Porters five forces analysis showed us the extent of competitive rivalry within each quadrant and then using PESTLE and SWOT identification of internal and external influencing factors.

Dun and Bradstreet Rating

Dun and Bradstreet is a paid rating system commonly used to assess the financial status of an organisation. It can be used in to assess both a potential customer (ability to pay for articles / any bad debts) or as a potential supplier (cash flow / outstanding debts). A rating scale is provided based on financial strength and risk indicator.

Purchasing Portfolio Matrix

Using the Krajic matrix created earlier, with the Porters five forces model, the portfolio matrix shown below, can be populated considering the power of the buyer and supplier:

• Exploit - The buyer is in control, and is able to drive down costs from supplier.
• Balance - Middle ground between exploit and diversify.
• Diversify - Buyer offsets supply chain risk by using multiple suppliers.

It should be noted that the traditional purchasing model has evolved from the straightforward purchase of articles, into more strategic supply chain management, with an increasing emphasis on 'make less articles internally, externally source from the supply chain (at reduced cost)', to finally passing the burden of storage and distribution to lower tiers in a supply chain, as opposed to storing vast quantities of materials and finished articles.

Impact of Chemical Substance Reporting

In stark contrast to the traditional purchasing model of 'go-for-lean', the introduction of chemical regulations has necessitated the need for increased information flow from from the supply chain.

Establish Supplier Agreement

1. The need for chemical substance reporting requires supply chain agreement.
2. In order to achieve supply chain agreement, the supplier contracts may need to be updated / re-created.
3. Standard contract terms may need to be agreed, suppliers may demand extra expenses to cover the cost of establishing chemical substance reporting systems.
4. Specific reporting templates / data exchange formats may be required with supplier contacts

Method of Data Exchange

1. State which declarable substance lists data will be reported against. The declarable substance list will need to define the substance name, CAS number, threshold level, etc.
2. State which data exchange template is to be used for data exchange - XML form; web page; spreadsheet. The data exchange template will contain the data fields and data values which will be transmitted and received, with the received data then rolled up in an external reporting application.
3. Additionally / optionally develop a data exchange standard, as an enabler to creating industry standard data exchange standard. The data exchange standard would contain XML data exchange schema and a XML Template for transmittal and receipt of data using a data exchange template in a consistent manner. This existing in Automotive (IMDS) and Electronics (IPC/IEC), with development work being undertaken in Aerospace (IPC).
4. Supply chain acceptance and training to complete the chemical substance reporting will need to be factored in.

Initial Reporting

1. The traditional top down request approach assumes Original Equipment Manufacturers (OEM's) will flow down information requests for chemical substance reporting data down their respective supply chain's.
2. The information requests will flow down tier to tier, once it reaches the lowest tier, the information will then flow up tier to tier until it reaches the highest tier.
3. This approach assumes each respective supply chain tier has their own reporting systems in place to track chemical substance reporting data from a lower tier.

Acting on Information

When chemical substance reporting information flows up supply chain tiers, the purchasing function may be required to gain additional information:

1. Request additional information from the supply chain - How do the suppliers intend to manage a reported substance (phase out / substitute / obtain approval for a short-term usage).
2. Ascertain amounts of substances, materials or articles consumed annually (to check if substance use is greater than tonnage bands)
3. Begin the regulatory process for (a) Ensuring chemical substance usage is registered with chemical substance / mixture formulators / manufacturers; (b) Perform any regulatory tasks - notifications / registration / authorizations; (c) Assess any business continuity issues.
4. Perform risk assessments - (a) Assess exposure scenario; (b) Labeling; (c) Safe Use Guidance.

Strategy

1. Inform customers regarding the presence of a chemical substance over a nominal threshold, so appropriate safety measures relating to article handling can be undertaken.
2. Investigate the moving production of an article to a non-regulated region, with the higher level article then imported back into the regulated region.
3. Perform a 'last time buy' to bulk buy any remaining stocks of the substances / mixtures before shortages arise, which could disrupt the production cycle.
4. Look for alternative suppliers, to provide substances, mixtures or articles (which do not contain the restricted substances). The vendor selection process may include checks to see if a supplier is capable of receipting supply chain substance reporting information and transmitting the reporting information to an agreed standard.

Aerospace Supply Chain Trends

Forward Integration

Forward integration occurs when a lower tier supplier integrates with a higher tier supplier either as a merger or an acquisition.

Backward Integration

Forward integration occurs when a lower tier supplier integrates with a higher tier supplier either as a merger or an acquisition.

Aerospace Specific Examples

Aerospace supply chains have seen vast changes in forwards and backwards integration. In the figure below some basic examples are shown:

Looking at specific examples

• 1990's - Increase in OEM outsourcing article manufacture to supply chain tiers. Lower level supply chain tiers gain article manufacture contracts. OEM's start to procure lower tier suppliers, who supplied articles to competitors. Transfer of technical knowledge occurred, detailed engineering definitions now more readily available across a supply chain (now including competitor). OEM's began to compete for lower tier suppliers to gain competitor advantage, even though Non-Disclosure Agreements existed. OEM's could disrupt supply chains for competitors by no-longer supplying articles to competitors.
• 2000's - Chemical regulations evolve. OEM outsourcing now a business as usual model. Electronics and Automotive industries launch chemical substance reporting systems. Start of the online era - everything everywhere online - purchasing evolves to on-line adaptability.
• 2010's - Rise in increased chemical substance tracing and reporting. OEM's begin to build facilities from western to eastern economies to generate both low cost models and potentially circumvent chemical regulations in other regions. Consumer awareness greatly increases (green consumerism). Rise in Growth in sustainable supply chains, rising growth in collaboration, evolution of the data supply chain. OEM's switch to a 'Risk and Revenue' model - Supplier shares burden of development costs but in turn, they receive a much larger share of revenue from potential future sales.

Why Is It Relevant For Chemical Substance Reporting?

The relevance of integration is important because:

1. Both parties in an integration may not be at the same state as each other in regards to chemical substance reporting systems / synergy. To elaborate further one party may have a highly developed reporting solution, based on internal sub-systems, whilst the other party system may be in a state of just having a set of assumptions and heavily process based tasks. The coming together of both parties may impede a good quality chemical substance reporting system from being implemented.
2. Integration can lead a blurring of responsibilities as one party that was previously a consumer or supplier, must now integrate as a technical authority within a supply chain (requesting data from supply chain tiers, performing regulatory assessments, registrations, etc)
3. Integration can blur the overall process of chemical substance reporting as identification of OEM's to lower tier suppliers now becomes much more difficult.

I will examine aerospace integrations as part of another post with specific references to growth by acquisition as a corporate strategy approach.

Towards A Sustainable Supply Chain

In recent years sustainable supply chains has become a hot topic, consumerism and society as whole have embraced moving towards environmentally friendly articles. What does sustainable supply chains really mean?

Sustainable supply chains can be described as:

• Rethinking a supply chain towards a more environmentally friendly use of resources.
• Move away from traditional lowest cost wins approach to supply chain, towards examining the risk to the environment, the cost of recycling and waste disposal.
• Analysis has to look beyond just the organisation and present the entire supply chain benefit case. Without this getting supply chain engagement may become a difficult task.
• Realizing potential value from leaner processes, reusing materials, which in turn has the potential for generating competitive advantage.
• Implementing sustainable supply chains is a long term strategy, it should not be seen as a short term, quick win fix.

Factors to consider:

• Benchmarks - Examine any benchmarks that exist (review similar articles / other similar industrial sector benchmarks). Use benchmark tools.
• Life Cycle Assessment - In Post #5 we discussed LCA and the role it plays as an enabler in developing a sustainable supply chain. I did state and will argue that implementing supply chain chemical substance reporting system is a pre-cursor to then proceeding with LCA analysis and then proceeding further with more qualitative data towards the development of sustainable supply chains. Your supply chain needs time to adapt firstly to identify chemical substances in use, assessing risks (against existing chemical regulations). There is quite a lot of overlap between chemical substance reporting LCA (map supply chain, communicate, analyse and assess). Doing both simultaneously will cause suppliers angst, doing one activity then the other is more prudent.
• Supply Chain Mapping - Identify all the actors within your supply chain across all tiers, this will identify the article transformation cycle required to implement your sustainable supply chain.
• Data Supply Chain - Develop a data supply chain, identify the flow of information across you supply chain map.
• Collaboration - Develop the message that collaboration is a good thing, supply chain tiers need to understand that collaboration will not lead to loss of competitive advantage when data is being shared across a supply chain.
• Think Sustainability - (a) Get the basics right - Start to power off items; recycle; buy green articles (recycled paper; printer ink; etc); Green Transport (travel by more environmentally friendlier means); (b) Learning to think green - Realization of the need to adopt sustainable supply chains.

Train the supply chain:

• Assess internal implementation - Look at what has been achieved internally, what worked well, and what did not work so well.
• Think of wider context - Expand horizon think of implementation across supply chain tiers. Rethink the supply chain, look at article transformation cycle, make supply chain become leaner, less waste more reuse; increase productivity; rethink distribution channels, use alternative modes of transport, optimize.
• Develop requirements - Begin to develop a set of requirements to flow down the supply chain. Perform an FMEA (see Post #6).
• Engage with supply chain - Test your logic, initial requirements and training materials. Perform an FMEA (see Post #6).
• Develop engagement materials - Training materials - on-line; web-ex; teleconferences.
• Train the supply chain.

Drive performance improvement:

• Develop processes to audit and benchmark the supply chain; Measure improvements over time, reward suppliers with greatest improvement (more orders), terminate contracts where suppliers persistently non-conformance.
• Industry collaboration - Review collaborative sustainability efforts - common approaches / standards.
• Assess environmental impacts - Become responsive to current and emerging chemical regulations. Understand supply chain agility; recognize cost impacts on the supply chain (of change); agility of supply chain towards a proposed change.
• Move towards greener operations.
• Perform an FMEA (see Post #6).
• Repeat the cycle.

There is no magic mix with sustainable supply chain development, just lots of different techniques which could be applied. The potential rewards it can reap are tremendous, once the process and logic becomes embedded through the various tiers of a supply chain. The best advice is to think internally first, see what works well then expand your horizons and consider the entire supply chain, engage and then test, then implement agreed approaches, audit and aim to improve supplier performance. It is a continuous improvement process, which in a world of diminishing resources, will become more and more widely adopted.

Conclusions

The purpose of this article was to present purchasing in the context of chemical substance reporting. In writing this article it has become apparent that purchasing has evolved considerably over the past 30 years from simply ordering articles at the lowest unit cost price; through to today where it plays a pivotal role in both chemical substance reporting and more strategically being the lifeblood of any commercial organisation.

The models presented in this article were chosen to reflect how different approaches to supplier assessment could potentially be undertaken.

Sustainable supply chains will become more and more utilized as scare resources pivotal to the production of aerospace articles become more scarcer. This is where the union between chemical substance reporting and purchasing will gain greater importance.

Engineering definitions offer too much variability in substance choice (in material or process specifications), it really is only by chemical substance reporting that we will reach a utopia of being able to identify which aerospace article contained which chemical substance, so as aerospace articles near their end of life, we can identify which articles offer the greatest benefit for recycling and reuse. Therefore the union between purchasing and chemical substance reporting will grow further still.

Feedback

Please share any experiences you have had with regards to risk management of chemical substance reporting information, whether from a declaration process or other perspective(s).

If you would like specific topics to be explored within the risk series, again please let me know.

If any organisation is interested in being interviewed as part of my PhD research project, please feel free to contact me via LinkedIn or via the TICS website. All information will be recorded anonymously, in return I can offer your organisation aid, in the support and design of chemical substance reporting system