By Douglas Macdonald, IBM Procurement Portfolio Product Marketing Leader
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Peter Bernstein, in his acclaimed book, “Against the Odds: The Remarkable Story of Risk” takes a comprehensive look into man's efforts to understand and mitigate risks across history. Bernstein concludes that understanding risk underlies success in most every endeavor from game theory to bridge-building and, of course, supply management.
Arguably, the stakes for understanding risk in supply management have never been greater. Globalization and the economic climate have greatly accelerated volatility and risk.
At a Chief Procurement Officer (CPO) roundtable held at the IBM Smarter Commerce Global Summit, senior procurement executives from leading global companies pegged managing supplier risk as one of their top challenges, and noted that risk had significantly increased over the past decade. On average, companies experience at least one notable risk incident per supplier per year.
This places increased pressure on supply management professionals to improve their supplier risk management programs, and gear them not just to avoid supply disruptions and problems, but also to improve supplier intelligence, collaboration and performance.
The definition of supplier risk management is evolving and expanding to include practices that protect the business from an array of supplier and partner-related events. The definition now often encompasses numerous operational, legal and financial objectives. Because the impact of supplier risk management goes far beyond sustainable supply, Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) are also taking a greater interest in reducing supply risk.
To meet the new standards of successful supplier risk management, companies must take a more holistic approach to identifying and mitigating risks – and elevate the people, processes and technologies involved in this process. Best-in-class supply management organizations typically use a comprehensive, technology-enabled framework to effectively manage and reduce their risks. Such a program usually incorporates:
Risk Identification: Identifying the sources of risk using technology and information services. Examples include:
Identifying components sourced from either suppliers that are at financial risk or are concentrated in a specific geographic region that is more vulnerable to political conflicts or currency fluctuations. And identifying components of production that are either sole sourced or come from very specialized suppliers, thus increasing the company’s dependence on them.
Risk Prioritization: Performing “what-if” analysis and quantifying the impact of supply risk for that component. Armed with such analysis, companies can prioritize actions on those components and commodities that have the greatest potential impact on the business.
Risk Mitigation: Going beyond mere risk identification to actively manage and mitigate those risks. When risks are clearly identified and prioritized, best-in-class companies take action on the higher priority sources of risk.
Historically, companies most commonly used manual processes and spreadsheets to manage supplier risk. Those further ahead pulled data from Enterprise Resource Planning (ERP) or other systems to support this process. Today, companies with more developed supply management programs use e-sourcing and contract solutions, and the data from those solutions, to further support their programs. According to market data, however, only about half of Global 2000 companies have implemented a contract management solution, only one out of five companies use supplier scorecard tools, and only about one in six companies apply sourcing solutions specifically to their risk management programs. Fewer still use dedicated supplier risk or supplier lifecycle management solutions.
What is limiting these companies from undertaking this holistic approach, especially in light of the benefits to be gained? With the typical Global 2000 company concerned with more than 20,000 suppliers, the essential challenge of supplier risk management is the collection, control and application of information.
With a large and increasingly global supply base, and supplier data scattered across disparate and diverse systems, most companies are overwhelmed with supplier information management – and applying this information to supplier processes and strategies.
Best-in-class organizations have a defined supplier risk management technology road map that ensures the organization is empowered with the intelligence needed to make informed business decisions – and to anticipate, mitigate and manage risks on a global scale.
Best-in-class organizations also tend to see risk management differently. They understand that risk management is not just a part of doing business, but that actively managing and mitigating risks can produce operational improvements and boost the bottom-line.
This may explain why supplier intelligence is one of the fastest growing areas of technology spending. Analysts estimate that investments in supplier intelligence technology will grow 3 times faster than that for any other procurement technologies through at least 2015.
With a single, accurate and robust supplier intelligence platform, companies gain broad visibility into potential supplier risks; the ability to mitigate risks before they develop by leveraging intelligence and risk modeling; and the establishment of plans to react quickly and flexibly in the event of a supplier disruption to reduce its impact. They are also better able to address other related objectives, including supplier compliance to supplier performance management.