As I started to write about Common Data Environment, some how my focus shifted to the impact of corona virus on projects . While the whole world is facing such a big threat, how can I alone drift away from it?. What is the impact of a pandemic like this on the project’s supply chain?. How did we miss this out as a risk?. Are there any better ways to detect and manage these types of risks?. These are some of the questions posed to me. The moments of truth when the chasm between theory and practice evaporates. These are opportunities to convert theory into practice, as there is no existing solution to this new problem.
How can we identify and manage difficult to detect procurement risks, especially for EPC projects?. This blog post is my inquiry for an answer to this question.
Impact on project procurements
By now infamous city of Wuhan in China is known for producing metal products, mechanical equipment and solar panels as well as electrical and electronics manufacturing. There are 164 manufacturing facilities in Wuhan. Their products are often used by the global construction industry. There are 13 plants that directly manufacture construction materials. It is not only that materials will be unavailable, it’s that materials will be unaffordable. Not only will supplies be disrupted, but stakeholders should also prepare themselves for other ramifications. Higher costs, the collapse of strategic partnerships, logistics breakdowns and possible legal squabbles as parties debate whether contracts may provide “force majeure” relief are some of them.
Top Supply chain risks identified for 2019-20
My search for global supplier chain risks revealed the following list of risks;
- Global trade wars and Brexit. Global trade wars between the United States and the rest of the world will continue to impact many manufacturing supply chains.
- Raw material shortages. Political instability and plant shutdowns are likely to result in shortages of critical raw materials.
- Safety recalls. Quality issues
- Climate change risk. Over the long term, climate change will continue to bring more frequent and severe weather patterns. Droughts, flooding, tropical storms, wildfires, volcano eruptions and earthquakes can be the results—with wide-ranging and devastating effects on global supply chains.
- Tougher environmental regulations. To counter the impact of climate change, authorities around the world have started to introduce stricter environmental regulations.
- Economic uncertainty. The global trade war, uncertainty over Brexit, and tougher environmental regulations etc leads to economical uncertainty.
- Cargo theft. Because goods are typically stolen while in transit, cargo theft predominantly threatens the supply of electronics and consumer goods
- Container ship fires. Several major container ship fires in 2018 and early 2019 highlight what continues to be a growing risk for maritime-dependent supply chains
- Border battles. In the United Kingdom, looming uncertainty over post-Brexit trade policies creates questions as to what new tariff and customs regimes might look like
- Drone risk in the aviation industry. “Airport disruptions related to air traffic safety are likely to become more frequent in 2019, and thus present a greater risk of disruption to aviation logistics operations
- Political and government changes
- Environmental risks triggering stringent controls
- Catastrophes – earthquakes and famine
- Cyber attacks
- Data integrity and quality
- Supplier consistency
That is quite a lot. Each item in the list can impact the availability of materials and equipment for EPC projects, especially material with long lead time to procure. Unfortunately, even this list prepared by experts does not contain the possibility of a pandemic, which is quite surprising to me. Experts have again failed to identify opportunity for a pandemic outbreak. The fact that this is happening even after having historical data favoring the possibilities is quite scary.
Why are we missing out those supply chain risks which we could have identified?.
- Project risk management still revolves around a known set of risks within organizations. which are classified in the lines of;
- Even though delays in procurement are identified as potential risks, project’s supply chain related risks are seldom ignored during risk identification.
- Risk management of unknown risks ends by covering their consequences with the force majeure clause, without probing the ways of unearthing and managing them.
- Risk response actions try to manage the outcomes than addressing the root causes.
- Lack of rigor in the usage of risk management tools and techniques which would have helped to identify the potential risks
These call for fresh approaches to risk identification and management.
5 steps to enhance EPC supply chain reliability
Step#1 – Identify items with long lead time for procurements
Step#2 – Identify the supply chains of items with long lead
Step#3 – Perform SWOT analysis of the suppliers in the supply chain against;
- Global trade wars
- Political instability
- Quality issues
- Climate change
- Environmental regulations
- Economic uncertainty
- Data integrity and quality
This exercise of analyzing the project’s supply chain against the list of top 10 project environmental lists will help to increase the confidence of the risk register. To achieve this, we must leverage the tools and techniques recommended by the Project Management Institute in their Project Management body of knowledge (PMBOK).
- Expert judgment
- Data gathering Brainstorming
- Data analysis Root cause analysis
- Assumption and constraint analysis
- SWOT analysis
- Document analysis
- Interpersonal and team skills Facilitation
- Prompt lists
Step#4 – Perform RPN analysis of the Risk Register along with urgency in detection
Here lies the opportunity to apply Risk Priority Number (RPN) methodology by adding one more parameter ‘Difficulty in detection’
Risks can me ranked based on RPN = Probability x Impact X Difficulty in detection where
- Probability corresponds to the probability of occurrence of the risk
- Impact refers to the impact on project outcomes
- Difficulty in detection. Higher the rating if it is very difficult to detect and lower the rating if it is very easy to detect.
Step#5 – Rank them in the order of Urgency and RPN
Urgency refers to how fast this risk must be addressed. It must be a reflection of the start date of the successor activity to the long lead item and the duration of the lead time for procurement.
Upon completion of these five steps, we will have a prioritized risk register specific to the supply chain of long lead items of the project.
The probable risk responses could be;
- Supply chain plan B
- Re-calibration of risk registers
- Factoring supply chain reliability as a key factor for vendor evaluation