Risk Management – Supplier Solvency
Sector: Oil & Gas
Client: European Oil Major
Challenge
Measure and Manage Supplier Solvency Risks: Client wanted to adapt Vendor Qualification Program (VQP) to measure and manage supplier solvency risk. Client concerns arose after the Credit Crunch when suppliers were unable to refinance, but they had no mechanism to alert them before suppliers became unable to perform contract obligations due to financial distress, aggravating the disruption of programme management timelines for development projects.
Challenge
Rubus reviewed the VQP, and designed and developed a Solvency Risk Management Plan that could be integrated with VQP, including methods to alert the Oil Major to supplier solvency stress, coupled with the ability to intervene to mitigate the risks, and collateral required to execute plan. The key deliverables included:
- Vendor Matrix: Qualifying vendors based on how critical their contribution was to the project, and their comparative replaceability with an alternative supplier.
- Solvency Risk Metrics: Providing soft and hard solvency metrics based on news alerts and data gathered when onboarding supplier, plus ongoing periodic reviews.
- Alerts: Defining thresholds and events that trigger alerts of elevated supplier solvency risk.
- Escalation to Counter Measures: Providing the decision tree of countermeasure options to mitigate the risks (with different pathways based on Vendor Matrix), including protocols for enhanced review, redundancy planning, and specialist intervention to support critical suppliers, including turnaround support and financing as the lender of last resort.
- Collateral: Adapting existing VQP questionnaire to include metrics for both initial and ongoing review of solvency of key suppliers, and amendments to Supplier Contracts to supplier agreement to data sharing and the pathway of potential countermeasures to support suppliers in the event of distress.
- Outcome: Client approved, resourced and integrated the Solvency Risk Management Plan into their VQP.
Actions
Rubus reviewed the VQP, and designed and developed a Solvency Risk Management Plan that could be integrated with VQP, including methods to alert the Oil Major to supplier solvency stress, coupled with the ability to intervene to mitigate the risks, and collateral required to execute plan. The key deliverables included:
- Vendor Matrix: Qualifying vendors based on how critical their contribution was to the project, and their comparative replaceability with an alternative supplier.
- Solvency Risk Metrics: Providing soft and hard solvency metrics based on news alerts and data gathered when onboarding supplier, plus ongoing periodic reviews.
- Alerts: Defining thresholds and events that trigger alerts of elevated supplier solvency risk.
- Escalation to Counter Measures: Providing the decision tree of countermeasure options to mitigate the risks (with different pathways based on Vendor Matrix), including protocols for enhanced review, redundancy planning, and specialist intervention to support critical suppliers, including turnaround support and financing as the lender of last resort.
- Collateral: Adapting existing VQP questionnaire to include metrics for both initial and ongoing review of solvency of key suppliers, and amendments to Supplier Contracts to supplier agreement to data sharing and the pathway of potential countermeasures to support suppliers in the event of distress.
- Outcome: Client approved, resourced and integrated the Solvency Risk Management Plan into their VQP.