Analyze the external events which led to the necessity of a new risk management system at Siemens L&A Electronics and Assembly Systems?

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. In addition, 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.”

 

Siemens L&A: The World’s Market Leader in Logistics and Assembly Systems

 

Siemens 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 Asia-Pacific. 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, high-tech 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 regard to Siemens L&A

Electronics Assembly Systems. Its business was characterized by a strong dependency on

suppliers because of the fact that many single and sole sourcing strategies were in place.

 

A strong dependency on suppliers which were mostly single or sole sources was

not only a big problem for Siemens 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.

In addition to these developments, an increase in the sourcing volume from Asia added to the risk context 

 

The traditional medium quantity and flexible production in Canada and the United

States 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 which needed to be anticipated and managed by Siemens L&A.

In May 1998, Germany implemented new legislation which 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

 

Because of 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 because of missing supply from a

bankrupt supplier.

  • A deal in China may fall apart because of 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 a company avoids 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 tha
t 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 8 necessary steps: 1. Formulation/revision of risk strategy.

  1. Establishing risk management measures.
  2. Risk identification (“early warning systems”). 4. Risk analysis.
  3. Risk assessment.
  4. Risk management.
  5. Presentation of the risk situation.
  6. 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 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 subprocesses 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 adopted 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): 1. Identify potential risk sources.

  1. Risk workshop: collection of data, analysis/evaluation, measures/concepts. 3. 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 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 because of the ability

to predict supplier bankruptcies in advance notice that enough 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, whereas 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 had

now to document for other Siemens divisions how each of the core steps was actually structured.

 

Source: Siemens-Electronic Assembly Systems, L&A EA PU.

 

Figure 3. Purchasing-RIsk-MAnagement (PRIMA)

 

 

Discussion Questions

 

  1. Analyze the external events which led to the necessity of a new risk management

system at Siemens L&A Electronics and Assembly Systems?

 

  1. Peter and his team intensely discussed the different steps of the depiction of a

supply risk management and monitoring system. They adopted 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?

 

  1. Try to develop a Risk Key Figure evaluation before and after supply risk

measures are taken.

 

  1. Which lessons have you learned from this case study?

 

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