Siemens Logistics and Assembly Systems: Implementing a Supply Risk Management Sy

Question

Siemens Logistics and Assembly Systems: Implementing a Supply Risk Management System

Early May 1998, Peter Geisler, vice president, Siemens Logistics and Assembly Systems (L&A), headquartered in Munich, Germany, sat together with his team to find solutions for the challenges ahead. The vast amount of recent supplier imbalances and bankruptcies in their industry was causing them headaches. Additionally, a new law in Germany had been introduced that specifically required companies to provide their shareholders with information concerning their risk management activities. It was clear to Peter and his team that the amount of existing and potential risks in purchasing exceeded the ability of his team to manage those risks with their existing tools. Especially for high-tech components, where single-source situations were frequent, the non- or mismanagement of risks could be lethal. During the meeting, Peter got to the point quickly: “We have to develop and implement a new risk management system for our purchasing department that helps us to identify all relevant potential supply risks, so that appropriate countermeasures can be developed on time.”

L&A belonged to “Automation and Control,” one of seven operational divisions of Siemens AG. Siemens L&A had a unique market placement and was the world’s market leader in logistics and assembly systems, with solutions for airports, manufacturing/assembly, automotive, distribution and industry, parcel and freight, letter sorting systems, flats sorting systems, reading/coding systems, integrated mail processing, postal IT solutions and placement systems since 1985. Siemens L&A had 11 R&D centers globally distributed and 17 locations for production and assembly in Europe as well as in the Americas and AsiaPacific. Total sales were approx. € 2.3 billion in 1998. The main share of these sales was created by the SIPLACE Placement Systems of Peter’s line of business: Electronics Assembly Systems. Siemens L&A Electronics Assembly focused on the different market segments for electronics assembly systems such as machines for electronics assembly, hightech equipment for electronics production and solutions for electronics production.

The various activities of Siemens L&A Electronics Assembly Systems promised not only great opportunities but also posed significant risks for the company. In 1998, risk management became a hot topic particularly with regards to Siemens L&A Electronics Assembly Systems. Its business was characterized by a strong dependency on suppliers due to the fact that many single- and sole-sourcing strategies were in place.

L&A Electronics Assembly Systems but also for the whole electrical engineering and electronics industry. Some specific materials were only produced by a few suppliers for the whole electrical engineering and electronics industry. At the same time, companies tried to bundle their purchasing volumes and thus further reduce the number of direct suppliers. As a result, however, supply risks increased if, for any reason, a key supplier could no longer deliver the required materials.

The traditional medium quantity and flexible production in Canada and U.S. as well as in northern parts of Europe shifted to Asia, where large quantity production sites had been established. The trend of shifting production volume to Asia involved significant risks that needed to be anticipated and managed by Siemens L&A. In May 1998, Germany implemented new legislation that made corporate risks more visible to investors and thus forced companies to establish adequate risk management systems. Over the last few years, business risk especially in new product development and volume-demand changes had been examined. However, there had not been enough attention to understand the risks that existed in purchasing and supply management. These risks connected to suppliers, and the supply markets could significantly affect the operations of an organization and therefore its financial performance. For example, if a single-source supplier was forced to file for bankruptcy, stopping its production of semi-finished components, this could potentially lead to the standstill of several customer plants. But until recently, there was not enough know-how to measure the potential financial impact of supply risks in many multinational companies including Siemens AG.

With regards to the legal requirements, the supply chain of each Siemens L&A plant around the world had to be examined for potential risks along the supply chain. Thus, supply management and risk management were no theoretical problems anymore. As a result, there was a clear necessity to create a supply risk management system to support the daily operations of Siemens L&A Electronic Assembly Systems and satisfy government’s and investors’ requirements.

The Purchasing Department: Starting Point for a Systematic Supply Risk Management System

Peter Geisler, responsible for the purchasing department at Siemens L&A Electronics Assembly Systems, knew that the recent changes had increased the pressure on his team. Risk management had been an increasingly significant issue in general and in modern supply management in particular. Peter knew that a systematic management of risks was essential; however, the question of how to proceed had remained unanswered so far also in his purchasing function. He was especially struggling with the lack of appropriate instruments for risk management and especially with the difficulties connected with predicting insolvencies of suppliers.

The purchasing department of Siemens L&A Electronics Assembly Systems was organized in operational purchasing sections that were assigned to the globally positioned factories and complemented with a strategic supply management group.

The objectives of the purchasing function were driven by innovation, customer focus and global competitiveness. The strategy was focused on materials, sourcing processes and supplier management. The organization was CRM-, PLM- and SCM-oriented. The purchasing department was responsible for SIPLACE excellence-projects and for worldclass purchasing processes. The process-oriented supply risk management system was intended to be integrated into the controlling department.

The Implications of a Still Absent Supply Risk Management System in the Purchasing Department

Peter and his team were well aware of these facts. Nonetheless, supply risk management was not yet determined and was still focused on reactionary and expensive crisis management. This meant that the status “nothing has happened” was not a stable one but could be enforced by convincing management, colleagues and employees to screen potential risks and developing countermeasures before they occurred. Of course, it was more expensive to develop two alternative solutions for a single functionality. For example, finding and integrating a second supplier for strategic relevant single-source commodities was costly. These costs, however, would pale in comparison to the costs connected to a complete production standstill of one or several plants due to the loss of a single-source supplier.

Risk awareness and sensitization had become two central key concepts necessary for a successful management of such risks. However, still missing was the actual system that would promote risk awareness and sensitization and thus would have made supply risk management a part of life for the purchasing department at Siemens L&A Electronics Assembly Systems.

Peter knew that it was difficult to determine the necessary resources and potential benefits of such a system. The decision for a supply risk management would therefore mainly be a top-management decision. Nevertheless, he wanted to support the decision process with a systematic approach to supply risk management in his purchasing department.

For specific commodities, risk management was already standard, and quoted commodities of Siemens AG even got hedged in order to avoid market price fluctuations. However, if Peter looked at the management of other risks in the areas of purchasing and supply management, he was faced with a completely different picture: Proactive risk management was far from standard.

Due to his long-term experience, Peter knew that there were always risks connected with purchasing and supply management activities of a company, regardless of whether they were recognized, managed or ignored:

• A standstill of one’s own production plants due to missing supply from a bankrupt supplier.

• A deal in China may fall apart due to missing Guangxi.

• A supplier facing problems to handle the large amounts ordered.

The dramatic and noticeable rise of company bankruptcies among its own suppliers was considered to be one of the main risks of Siemens L&A Electronics Assembly Systems. The company had to be able to rely more on its suppliers and sub-suppliers in the course of lower real net output ratios and to reduce its inventory at the same time, which had the following effect: Lean supply chains were becoming increasingly more fragile. Bankruptcies of important suppliers were the most painful reminder of this effect.

Early recognition and proactive prevention of potential supplier bankruptcies were certainly weak spots, although these bankruptcies seldom came without advanced warning. But problems with the management of many other supply risks needed to be discarded and dealt with as well. This was the only way the negative impact of an absent supply risk management system in the purchasing department on profit, market position and image of Siemens L&A Electronics Assembly Systems could be avoided in the future.

As a consequence, the project was receiving top-management attention and the expectations were high. To overcome the above-mentioned problems, Peter had to answer a number of questions: Why is supply risk management still misunderstood as expensive crisis management? How can supply risk management be regarded as an efficient and effective part of corporate strategy implementation? And how does a company avoid the negative consequences of bankrupt key suppliers?

These questions had to be answered immediately in Siemens L&A Electronics Assembly Systems. Peter and his team had to quickly develop a systematic supply risk management process to meet business and legal requirements.

The Requirements for a New Supply Risk Management System

It was clear for Peter that supply risk management meant much more than the fulfillment of legal requirements. It was also important to consider the business implications shortly before the turn of the millennium. The supply risks to the supply chain focusing on inventory management and time-optimized production could only be combated through a smart combination of preventive measures, standard action plans and insurance-based steps. The business requirements for a supply risk management system were strongly influenced by the high-quality principles of Siemens L&A Electronics Assembly Systems because quality management principles had to be integrated into the new supply risk management approach.

For the management of the purchasing department the biggest challenge was to establish a systematic supply risk management process—compliant with legal requirements— as a core module of the overall risk management and monitoring system of a company.

The systematic use of a supply risk management system should in future allow a timely reaction to risks created through suppliers and supply markets. This implied that possible supplier insolvencies needed to be identified early in the purchasing processes. A rating of every single supplier would be conducted systematically in a supply risk management system. Ratings were based on the factors revenue level, capital base, financial figures, success potentials, connections to banks and attractiveness of industry. Risks and their dimensions were of special importance for ratings. The outcome of a rating would only be positive if companies were able to manage their financial and performance risks successfully. Therefore, Peter thought that the purchasing department of Siemens L&A Electronics Assembly Systems should try to develop a system that could be connected to the financial rating throughout the group. In this way, they could even have the chance to have a positive impact on the financial rating of Siemens AG.

For Peter, it was important that his team understood the necessity for being able to evaluate and handle supply risks. “That what we consider normal and common in the (business) world becomes all the more amazing the more we become aware of the real supply risks. Therefore, we need some approach to identify these risks, evaluate these risks and deal with these risks but our own experience and gut feeling should not be replaced by a supply risk management system,” he explained to his team

The use of a systematic supply risk management meant that a company was not exposed to a broad spectrum of risks such as currency fluctuations, operational disruptions or legal problems. From his perspective, an appropriate supply risk management process could be divided into eight necessary steps:

Formulation/revision of risk strategy

Establishing risk management measures

Risk identification (“early warning systems”)

Risk analysis

Risk assessment

Risk management

Presentation of the risk situation

Comparison of current risk situation with plans

Identifying, analyzing, assessing and managing supply risks as the four core steps of supply risk management did not mean to solely focus on the functional areas of purchasing and supply management. It was clear in Peter’s mind that this approach would lead to failure. Risk management was rather one of the processes necessary for the support of the integral purchasing process. Therefore, the purchasing process needed to be analyzed in connection with the other sub-processes of purchasing and supply management. Only a process-oriented supply risk management approach would lead to success because the interdependencies between the individual processes would be taken into account.

The Implementation of PRIMA: Purchasing Risk-Management

Peter and his team intensely discussed the different steps of the depiction of a supply risk management and monitoring system. They adapted it to the needs of their purchasing department based on the Siemens corporate risk management. They defined the following core steps for their new “Purchasing-Risk-Management (PRIMA)” on the basis of prevention and proactive risk management (Figure 3):

• Identify potential risk sources

• Risk workshop: collection of data, analysis/evaluation, measures/concepts

• Risk controlling

Results of the Implementation of PRIMA

Tremendous preparation work was only needed at the beginning while setting up the data. Through standard templates and the reporting structure, both maintenance and updating were kept to a minimum. On the other hand, there remained the need to minimize supply risks. Recognizing and eliminating a risk factor in its earliest stages could make up for this hard work several times over. Peter and his team were well aware of this from the start. Thus, the introduction of a supply risk management system was no longer simply a matter for the purchasing function, the supply chain in total or a single department; it was a commitment of management.

In 1999, the use of PRIMA reached its first peak. In 2000, the rising number of company insolvencies among suppliers was causing top management of Siemens L&A Electronics Assembly Systems sleepless nights. In this time, Peter and his team held trainings for their employees and colleagues in order to put PRIMA on the final track.

The structured and standardized approach of PRIMA had proven to be very advantageous. It could effectively and efficiently analyze new business processes. Supply risk awareness was noticeably improved, which had direct impact on the management of suppliers. Supply risk management in purchasing and supply management was inseparably linked with the management of suppliers and particularly with the selection and assessment of suppliers. The first results of the implementation of PRIMA were very encouraging:

• High acceptance by management and employees

• Budgeting of supply risk management measures

• Improvement of supply risk transparency

• Creation of explicit decision templates

• Identification and responsibility assignment for supply risks

• Input for general strategic objectives

Furthermore, the introduction of PRIMA was encouraging due to the ability to predict supplier bankruptcies with enough advance notice that time remained to find another source. Thus, other companies without a systematic supply risk management system continued to be negatively affected by an increasing number of supplier bankruptcies, while Siemens L&A Electronics Assembly Systems started to benefit from its early investment into the development and implementation of a supply risk management system.

Peter and his team had developed a successful supply risk management approach based on their highly structured PRIMA approach with three core steps. Hence, they now had to document for other Siemens divisions how each of the core steps was actually structured.

Discussion Questions

1. Analyze the external events that lead to the necessity of a new risk management system at Siemens L&A Electronics and Assembly Systems.

2. Peter and his team intensely discussed the different steps of the depiction of a supply risk management and monitoring system. They adapted it to the needs of their purchasing department based on Siemens corporate risk management. They defined three core steps for their new “Purchasing-RIsk-MAnagement (PRIMA)” on the basis of prevention and proactive risk management. How would you implement such process in practice?

Explanation / Answer

1. The external events that lead to the necessity of a new risk management at Siemens L&A Electronics and Assembly Systems are:

- imbalances caused with suppliers

- bankruptcies in the market

- new law in Germany that focuses on companies to provide information about risk management to shareholders.

- less number of direct suppliers to deliver required materials.

- Shifting of production to Asia involved new risks.

2. Implementation of PRIMA would involve three basic steps, identifing the risks and their sources, collecting data, evaluating and analysing it and understading the measures and concepts of the risks arising, and controlling of the risk. Keeping into trach these three steps will make it easy and possible to implement PRIMA in the supply chain.

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