Supply Chain Risk
North Lanarkshire Council · 24 November 2022
Back to Audit and Scrutiny Panel — 24 November 2022 and its agenda
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North Lanarkshire Council Report Audit and Scrutiny Panel Does this report require to be approved? ☐ Yes ☒ No Ref: KA/ASP/November22 Date 24/11/22 Corporate risk update – Supply Chain From: Ken Adamson, Head of Audit and Risk E-mail: adamsonk@northlan.gov.uk Telephone 07939 280602 Executive Summary To support the Council in mitigating risks and uncertainty, the Council operates risk management arrangements which identify, evaluate, manage, and control a range of key corporate risks. All risks identified and agreed as meriting inclusion in the corporate risk register are subject to regular monitoring and review by relevant senior management and periodic review/consideration of individual risks by both the CMT and the Audit and Scrutiny Panel (‘the Panel’) in line with the Council’s Risk Management Strategy and their respective governance roles. In line with the previously approved timetable for reporting on corporate risks, this report focuses on the deep dive of the ‘Supply chain’ corporate risk. The report provides an overview of the current risk environment and the existing controls and actions taken to date to mitigate against this risk, as well as further actions planned to continue to manage and respond to this risk. The increased costs associated with this supply chain risk will largely have to be managed within existing budgets which are not expected to increase in line with inflationary pressures and we can increasingly expect to see impacts on service provision, projects, programme of work items and challenges in delivering the capital programme as previously planned. This will require decisions to review and update previously approved plans and projects, assessing what will progress and what may need to be delayed/ceased. Ensuring we have ambitions which continue to be aligned with and underpinned by robust and realistic updated financial plans will be important in managing this risk. Recommendations The Panel is asked to consider the contents of the report and to: (a) note the updated deep-dive (at Appendix 1) which highlights that the residual risk score in relation to the ‘Supply chain’ (and associated inflationary pressures) corporate risk is unchanged and remains high; (b) note the current and planned controls and management actions relating to this corporate risk; (c) recognise the important role that short and medium-term financial planning has in allowing the Council to respond to pressures arising from this risk and the need to ensure that future plans and ambitions are realistic and aligned with available resources. The Plan for North Lanarkshire Priority All priorities Ambition statement All ambition statements
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1. Background 1.1 CMT has previously approved the corporate risk register for 2022-23. 1.2 The definition of a corporate risk is “those risks which can impact the Council in achieving its priorities and stated objectives or are more strategic in nature and require corporate oversight”. For example, such risks may have the potential to impact many Services, and/or can impact significantly on the Council in terms of financial costs and reputational damage. The Corporate Risk Register will reflect an amalgamated position of Service- level risks and may also include significant Service-level risks which have been escalated for attention at a strategic level. 1.3 Risks contained within the register are subject to ongoing monitoring and review throughout the year, with regular risk reporting to CMT and the Panel both on the overall register, and with detail on individual risks being reported by relevant Risk Leads. 2. Key issues arising 2.1 The environment in which the council operates has seen significant challenges over recent years. The COVID-19 pandemic had a huge impact on supply chains and the council's procurement activity. When combined with increased trade barriers arising from the UK's exit from the European Union, and impacts arising from the Russia/Ukraine conflict (including significant increases in the price of oil, gas and many other natural resources), this has only served to exacerbate the position, with challenges to supply chains (availability and costs) now expected to be present for many years to come. Pricing pressures are now being experienced across the entire range of goods and services with inflation currently at a 40-year high. Economic forecasters generally do not expect inflation to return to lower levels in the near future. Current pressures are resulting in increasing prices, delays and/or non-availability of certain items and there is no indication that these pressures will disappear in the short-term. We are also seeing increased volatility in the willingness to tender and in the reliability and financial sustainability of those from whom we procure goods and services. 2.2 Whilst Services are generally responding to current circumstances in line with expectations and to the best of their abilities, it is recognised that the Council has limited ability to directly control or mitigate the wider inflationary pressures associated with this risk or increase the level of resources available to respond to the pressures arising. The nature of some of the key drivers of this risk has significantly limited our ability to anticipate and react in advance or to respond to current market volatilities. 2.3 Increased costs will largely have to be managed within existing budgets which are not expected to increase in line with inflationary pressures and we can increasingly expect to see impacts on service provision, projects and programme of works and challenges in delivering the capital programmes as planned. This will require decisions to review and update previously approved plans and projects, assessing what will progress and what may need to be delayed/ceased and is likely to lead to associated negative impact on reputation from failure to deliver what was previously committed to. 2.4 As with likelihood above, the impacts will vary across the Council but the identified risks have the potential, if not mitigated, to impact significantly across a wide range of Council Services and to impact on the Council’s financial sustainability and the ability of the Council to deliver against key projects and corporate ambitions as laid out in the Plan for North Lanarkshire and the associated Programme of Work. 2.5 A key element of the Council’s response must be to ensure that corporate ambitions and associated financial plans are realistic and reflective of this new environment and recent reports to Policy and Strategy Committee have outlined to members how this process will be progressed. Attention is also being given to improving resilience planning, strategic and tactical procurement decision-making and further strengthening existing contract supplier management arrangements.
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3. Measures of success 3.1 CMT and the Panel are content with, and have an appropriate understanding of, the key risks facing the Council and how these are being managed. 3.2 The corporate risk management team will continue to report quarterly to CMT and the Panel providing an overview of key developments in risk management and updating on progress in respect of planned improvements to the Council’s risk management arrangements. 3.3 The adequacy and effectiveness of the Council’s risk management arrangements will be independently and regularly reviewed by Internal Audit, who will report directly on the results of that work to the Panel. 3.4 Effective risk management arrangements assist the Council in achieving planned outcomes and/or help the Council mitigate the impacts of adverse events. 4. Supporting documentation Appendix 1: Deep dive (October 2022) – Supply Chain Ken Adamson, Head of Audit and Risk
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5. Impacts 5.1 Public Sector Equality Duty and Fairer Scotland Duty Does the report contain information that has an impact as a result of the Public Sector Equality Duty and/or Fairer Scotland Duty? Yes ☐ No ☒ 5.2 Financial impact Does the report contain any financial impacts? Yes ☐ No ☒ 5.3 HR policy impact Does the report contain any HR policy or procedure impacts? Yes ☐ No ☒ 5.4 Legal impact Does the report contain any legal impacts (such as general legal matters, statutory considerations (including employment law considerations), or new legislation)? Yes ☐ No ☒ 5.5 Data protection impact Does the report / project / practice contain or involve the processing of personal data? Yes ☐ No ☒ 5.6 Technology / Digital impact Does the report contain information that has an impact on either technology, digital transformation, service redesign / business change processes, data management, or connectivity / broadband / Wi-Fi? Yes ☐ No ☒ 5.7 Environmental / Carbon impact Does the report / project / practice contain information that has an impact on any environmental or carbon matters? Yes ☐ No ☒ 5.8 Communications impact Does the report contain any information that has an impact on the council’s communications activities? Yes ☐ No ☒ 5.9 Risk impact Is there a risk impact? Yes ☒ No ☐ Included in the corporate risk register. Service specific risks should be included in relevant Service or project risk registers2. Effective risk management arrangements including the identification, assessment, management and oversight of relevant risks will increase the likelihood of the Council achieving its ambitions and plans by more effectively mitigating potential threats to planned outcomes. It also contributes to effective management of risks relating to all service and operational areas.
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Deep Dive Report RIS0000460 Risk Title Supply Chain Owner Ken Adamson (co-ordinator) Risk Context North Lanarkshire council is a unitary authority, the fourth largest in Scotland, and is responsible for the delivery of a wide and diverse range of statutory and discretionary public services. We deliver our services through a mixed economy acting as both a provider, through direct provision of services using our own workforce and assets, and an enabler with services delivered through private providers, the third sector and supported businesses. We spend around £450 million externally each year, across both revenue and capital investment projects. The Council procures a wide and diverse range of supplies, works and services using a variety of contracts, ranging from simple single purchase orders to long-term complex partnership agreements. Some contracts are with a single provider, others are frameworks with multiple providers, all seeking to maximise outcomes and best value from the supplies, works and services that it buys. The environment in which the council operates has seen significant challenge over recent years. The COVID-19 pandemic had a huge impact on the council's procurement activity presenting a number of new and unexpected supply chain challenges. This when combined with the UK's exit from the European Union, and impacts arising from the Russia/Ukraine conflict have only served to exacerbate the position, with challenges to supply chains (availability and costs) expected to be present for many years to come. Generally, inflation is currently at a 40-year high and economic forecasters generally do not expect inflation to return to lower levels in the near future. In terms of the council's experience, current pressures are resulting in increasing prices, delays and/or non-availability of certain items and there is no indication that these pressures will disappear in the short-term. Corporately this risk has the potential to create significant additional financial pressures, to potentially limit what the Council can achieve within available budgets and impact on the Council's ability to deliver key services and progress planned projects (including a number Programme of Work items). A key challenge for Services, however, is the uncertainty around where and when any such supply chain issues may arise, and this is becoming more widespread. CMT continues to have oversight of the developing picture across services, with each service required to assess its current position and associated mitigating actions. The Head of Financial Solutions is also setting out how inflationary pressures will be managed within the Council's short- and medium-term financial management and planning arrangements. This document represents a high-level assessment of the council's position together with key hotspots arising within services. Assessment Due 31 July 2022 Last Assessment Undertaken 20 January 2022
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Risk Description There is a risk that the council is unable to anticipate and/or respond appropriately to disruption and/or volatility in the supply/availability/cost of a range of goods, services and materials needed to deliver services and progress its wider strategic ambitions. Due To Increased challenges associated with ensuring the availability, reliability and affordability/pricing of the supply of goods and services. The increased likelihood of this risk arising has largely been attributed to: - • The effects of the pandemic, Brexit and other geo-political factors on local and global supply chains; • Tighter labour markets and pressures on associated production and distribution arrangements; • Lack of mature contract supplier management (CSM) arrangements; • Inability to fully understand critical supply issues at each stage in the chain; • Lack of fully mature and embedded project management arrangements; • Lack of fully mature and embedded risk management arrangements, both of which would allow early identification, consideration and escalation of the risks and issues arising and their impact together with appropriate prioritisation of any relevant actions. Impact • Preventing and/or delaying the Council in delivering expected services (or impacting on the ability to deliver expected quality) and in progressing its wider ambitions; • Increased costs which will largely have to be managed within existing budgets which are not expected to increase in line with inflationary pressures; • Delays on projects and programme of works and challenges in delivering the DigitalNL and capital programmes as planned; • Requirement to change previously approved plans and projects, assessing what will progress and what may need to be ceased and associated negative impact on reputation from failure to deliver what was previously committed to. • Main service impacts are currently being experienced on the corporate and housing capital programmes and in Adult Health & Social Care and Children, Families & Justice, Assets & Procurement, Housing Property & Projects and Business Solutions. These could result in significant increases in costs associated with capital projects and delays in delivering equipment and adaptations to adults, young people and children with disabilities; impacts on the supply by external providers in AH&SC, CF&J; difficulties in certain contracted services being provided to NLC. Organisation Structure North Lanarkshire Corporate Corporate Priorities • Improve economic opportunities and outcomes • Improve North Lanarkshire’s resource base
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Inherent Assessment ASM0002408 Likelihood - 5 Impact - 5 High - 25 Likelihood Reason Whilst the likelihood of the risk crystallising varies significantly across the Council depending on the nature of the Services delivered and the extent to which we rely on externally procured goods and services to sustain service delivery, overall the risk is assessed as ‘High’ as most Services rely on the adequate and affordable supply of externally procured goods and services. Impact Reason As with likelihood above, the impacts will vary across the Council but the identified risks have the potential to impact significantly across a wide range of Council Services and to impact on the Council’s financial sustainability and the ability of the Council to deliver against key projects and corporate ambitions as laid out in the Plan for North Lanarkshire and the associated Programme of Work. Controls and Actions Owner Status Target/Due Date CON0001879 - Regular Service Impact Assessments for each area including actions taken and/or planned with periodic reviews. Ken Adamson (co- ordinator) In Progress Ongoing CON0001880 - Regular monitoring and reporting of position to CMT. Ken Adamson In Progress Ongoing ACT0001004 - CON0001880 - Service specific review and analysis to be incorporated into all CSM processes, in order to identify any significant changes in the supply chain. Chris Gannon Raised 30 September 2022 CON0001881 - Approval process for revised rates/contract variations that arise outwith expected annual contract price reviews - CMT has already approved arrangements to allow the Council to consider and approve revised rates where cost pressures arising from the pandemic/Brexit have the potential to impact on the commercial viability of existing contractual arrangements. To date, only a relatively small number of such cases have been authorised. Owners are jointly James McKinstry and Archie Aitken. James McKinstry Complete Complete ACT0000918 - CON0001881 - Services to be reminded of process involved where approval needs to be sought for increasing contractually agreed rates. Communicate the approvals process via Procurement network and CPWG. Chris Gannon Raised 20 December 2022 CON0001882 - Procurement guidance requires Services to ensure supplier quality and conduct procurement due diligence. Chris Gannon In Progress Ongoing
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ACT0000840 - CON0001882 - Services to actively consider changing product requirements, where appropriate, to replace or reduce the need for ‘at risk' goods or materials. Chris Gannon Raised Complete ACT0000841 - CON0001882 - Where appropriate, practical and cost effective, services are to consider identifying, purchasing and increasing stocks of 'at risk' or potentially 'at risk' materials. Ken Adamson Raised Complete CON0001883 - Services are encouraged to consider diversifying suppliers to minimise risk and increase current and future options (included within Contract Strategy section 5 Procurement/Contract Options Appraisal). Chris Gannon In Progress Ongoing ACT0000839 - CON0001883 - Services are encouraged to consider seeking alternative sources of relevant goods or services deemed 'at risk'. Drafting note to be inserted into Contract Strategy to serve this purpose and prompt author to consider alternatives. Chris Gannon Underway 31 March 2022 CON0001884 - Including partners in risk planning and bringing them closer to NLC operations; Ken Adamson Implemented CON0001885 - Taking appropriate mitigating actions and contingency planning where residual risk exposure remains high. Ken Adamson In Progress ACT0000842 - CON0001885 - Across relevant services develop and implement a process as part of planning and work scheduling that reprioritises, switches or delays work to reduce demand for 'at risk' goods or materials until such time as they are more widely available. Ken Adamson Raised 31 March 2022 ACT0000917 - CON0001885 - Services to review contingency plans to ensure appropriate response and capture additional actions necessary to respond to insufficient supply of keys goods or services. Lauren Anthony Raised 8 April 2022 CON0001887 - Where necessary and practical, services to consider amending work schedules and plans where associated material shortages exist or are anticipated. Ken Adamson In Progress CON0002064 - Services manage financial implications through financial monitoring & budgeting processes. Financial Solutions Implemented CON0002065 - Council's Contract Supplier Management (CSM) arrangements are in place (until March 2023) however not as mature as we would like and link to development actions within the Procurement Improvement Plan (CPIP). Chris Gannon In Progress
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ACT0000916 - CON0002065 - Services enter dialogue with relevant key contractors/suppliers to ascertain current and potential threats/risks and to understand what contractors/suppliers are doing to mitigate these. This is incorporated within the Contract Strategy section 3 (Research & Development. - review the content of the Contract Strategy with the group?) Chris Gannon Raised Complete ACT0000920 - CON0002065 - CSM needs to be part of contracts, setting out exactly what meetings should contain from 1st April. (Procurement improvement plan). This is already incorporated into the CSM guidelines - see the performance review meeting/agenda/minutes/action template, that is currently online. For discussion. Chris Gannon Raised 8 April 2022 ACT0000921 - CON0002065 - Review how services resource CSM and ensure skills/training are fit for purpose. - Training matrix is underway Chris Gannon Raised 8 April 2022 CON0002066 - Corporate Risk Management arrangements when used properly should enable Services to identify and evaluate key supply chain risks, and these could be used to establish the overall council position and key hotspots. Ken Adamson Implemented ACT0000915 - CON0002066 - Essential that services use risk registers to identify and monitor key risks such as this and enable them to call out highest areas of risk and allow for escalation as appropriate to CMT. This would allow an emerging picture to be created. Discussions held through RMCWG. Lauren Anthony Complete CON0002067 - Corporate Project Management arrangements allow for identification of risks within projects and setting of acceptable parameters of cost deviation enabling escalation of key problem areas. Lauren Anthony In Progress ACT0001005 - CON0002067 - Review of Corporate Project Management Methodology and associated training is underway - ensure Supply chain risks are highlighted and brought into the process. Susan Lawrie Underway 30 September 2022 CON0002068 - Service self evaluation/assurance statements Ken Adamson In Progress ACT0000919 - CON0002068 - Consider how services evaluate their CSM arrangements and how they satisfy themselves this area is working - if they do. Chris Gannon Raised 8 April 2022 CON0002329 - Regular Market Intelligence reports purchased by Corporate Procurement (IBIS world). Chris Gannon In Progress ACT0000922 - CON0002329 - Corporate Procurement to share market intelligence reports via CPWG and Procurement network to increase service awareness of market changes to help inform services. Chris Gannon Raised 30 September 2022
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CON0002374 - Financial Solutions to set out how associated inflationary pressures will be managed both in relation to existing financial budgets and medium-term financial plans as part of the Council’s financial management arrangements. Elaine Kemp In Progress Ongoing ACT0001036 - CON0002374 - At the time of setting the 2022/23 budget the impact of inflation pressures on council contracts and costs was yet unknown however an estimated provision was set aside to recognise increased costs would be likely. Budget Setting for 2022/23 provides additional resource to recognise likely cost pressures associated with inflation. Elaine Kemp Complete Ongoing ACT0001037 - CON0002374 - The closure of the 2021/22 accounts saw additional monies set aside within Earmarked Reserves to assist in managing the impact of inflation pressures on a one-off basis until the impact could be fully understood. One off resources to be set aside from council reserves to assist with the in-year impact of inflationary pressures on council contracts and costs. Elaine Kemp Complete Ongoing ACT0001038 - CON0002374 - The MTFP for 2023/24 now incorporates a recurring cost pressure to recognise the most up to date forecasts for RPI and CPI. Council’s Medium Term Financial Plan provides for anticipated recurring inflationary costs on council contracts and costs. Elaine Kemp Underway 31 October 2022 ACT0001039 - CON0002374 - Regular Financial Outlook papers provide updates on the anticipated impact from anticipated inflationary pressures on council contracts and costs. Elaine Kemp Underway 28 February 2023 Residual Assessment ASM0002408 Likelihood - 4 Impact - 4 High - 16 Likelihood Reason Whilst Services are responding to current circumstances in line with expectations and to the best of their abilities, it is recognised that the Council has limited ability to control or mitigate the wider inflationary pressures associated with this risk or increase the level of resources available to respond to pressures arising. This when combined with the relative lack of maturity of some of our contract/supplier management processes, risk and project management arrangements and the nature of some of the key drivers of this risk has significantly limited our ability to anticipate and react in advance of current market volatilities. Impact Reason While the Council has been able to mitigate some of the expected impacts, the supply chain risk and associated inflationary pressures has, and will continue to impact on the Council’s finances and on the ability of the Council to deliver the range and quality of services and/or to progress many planned projects and ambitions in line with previous expectations.