Shed Light on Your Suppliers

While shareholders' visibility requirements have been responsible for the growth of the audit industry, companies continue to be plagued by other stakeholders requesting information on risk and performance. These include potential joint venture partners, benchmarking agencies, credit-rating agencies, environmental impact organisations, local government and customers.

Customers, in particular, are increasingly looking for information on risk and performance because, even though globalisation has exposed companies to a myriad of potential suppliers, there is still no objective means of assessing and developing interdependent relationships.

With the introduction of the balance scorecard, understanding risk as a cross-functional issue is gaining ground. A global initiative to consolidate these assessments into a global standard and to provide visibility to stakeholders through a shared IT platform is taking shape, driven by a global collaboration.

BRINGING RISK TO LIGHT

The Lumus Standard, formed in 2001 within the supply chain community, is a global standard to manage risk and performance simultaneously across thousands of organisations. The name 'Lumus' is derived from the Latin word for transparency.

It is particularly useful for companies that hold virtually no stock in their system and are thus exposed to thousands of companies, down to third- and fourth-tier supplier level, across the globe. No single company has the resources to monitor this risk on an ongoing basis, which is why a global open standard is needed.

Lumus CEO Herman Potgieter says: "The Lumus Standard aims to align the various industry development companies, initiatives and resources around a common platform, to drive performance and monitor risk on a global basis.

"As the long-term sustainability of industries is dependant on the pace of business development to ensure it is in line with world-class standards, Lumus exposes both buyers and suppliers to an open forum of assessment that will help create more industry sustainability."

Led by organisations such as Ernst & Young, Pfizer, Ford, the Supply Chain Council and the United Nations Industrial Development Organisation (UNIDO), various industries have joined together to develop the standard and methodology.

With developing and developed economies representing the global footprint, the concept was piloted in South Africa in 2005 and is now being rolled out globally.

UNTANGLING THE CONFUSION

By integrating mature methodologies into a global framework, the Lumus Standard is based on collaboration and the impact this has on risk and performance. As an open standard, it establishes a global network of service providers who can conduct assessments subject to the Lumus Foundation rules. Audit companies, with their experience in compliance and risk, are obvious service providers.

The standard uses a balance scorecard approach to risk and performance and rates an organisation across 14 key performance areas. The rating uses practices and performance measures to evaluate each area on a scale of 0–5, with 5 indicating world-class performance.

It follows a maturity approach, providing a roadmap for a company to deploy practices when it is ready. A major characteristic of the initiative is that it allows stakeholders to specify their expectations so suppliers can identify and address their development areas. The same applies to shareholders, who get substantially more insight into the operational health and running of the organisation.

"In today's globalised world, information is the key to success."

Approaching risk from a balance scorecard perspective offers numerous advantages, as it factors in the interdependencies between performance areas. For instance, the impact of human resource management on operational performance, product quality and market responsiveness can be seen in real time.

It therefore provides stakeholders with a view on risk many months before the financial impact appears on the mainstream information channels, such as annual reports and stock exchanges. The system also allows the company to govern the confidentiality and exposure levels of the data.

THE POWER OF SHARED INFORMATION

Getting directors, management and shareholders to accept this level of visibility is a major challenge. The more visibility shareholders have, the more they tend to haunt management. To management, this may seem to be an unwanted hassle and personal exposure. In addition, as capital and shareholders are often fickle, the early identification of risk can lead to a flight of capital, further damaging the organisation.

However, from a supply chain perspective, the Lumus Standard can provide the means to manage risk on an ongoing basis. Companies invest heavily in long-term relationships and the cost of switching supplier is considerable. Lumus can identify risk or performance issues at an early stage through the application of appropriate practices. As an open standard, it uses service providers who can assess risk and performance. In particular, it consults companies that have supported the standard, providing a common basis to identify areas that require intervention.

Market-related risk can also be addressed. Buyer organisations state their procurement requirements on the shared knowledge base, which means performance can be tracked against market requirements.

In fact, both UNIDO and the Supply Chain Council use the data for macroeconomic research and benchmarking to search for market trends.

Potgieter explains: "A major impact of the initiative is the development of organisations on a supply chain or cluster basis. Competition is shifting from a single company competing alone to industry clusters working together on a global scale. This entails hundreds of organisations collaborating with local government, business development agencies and large corporates. Risk and performance is starting to migrate from a single-company view to that of a network of interdependant organisations. You therefore require a cross-industry approach to monitor risk."

In today's globalised world, information is the key to success, and the Lumus Standard is an important step towards a shared, objective source of information. As Potgieter explains: "What makes the initiative unique is not only the scope of the industries it serves, but the fact that this is addressing risk on a cross-industry collaborative basis. Companies seldom operate in isolation and, as such, we need to develop tools and approaches which operate on a cross-industry and global basis."