Subscribe to our free, weekly email newsletter!


Procurement risk management:  What it takes to be a leader

Risk is part of business. It’s a significant, permanent reality faced by virtually every organization. Without risk, business as we know it might not exist. To compete, grow, and capture benefit, companies need to take chances. It’s what businesses do.
By Mark Pearson
October 14, 2010

Risk is part of business. It’s a significant, permanent reality faced by virtually every organization. Without risk, business as we know it might not exist. To compete, grow, and capture benefit, companies need to take chances. It’s what businesses do.

Still, the risk environment is different in the 21st century. According to a 2009 Accenture Study, seven out of 10 companies acknowledge that business risk has grown due to financial stresses, and corporate buyers in almost all industries have seen risk incidents, factors, and consequences increase significantly.

In recent years, procurement has become a frequent topic in the risk management conversation. Given the variety and impact of procurement risks (see graphic), it’s not surprising that such concerns are increasing. However, Accenture has observed that few companies are translating their trepidations into formal procurement risk management capabilities. To find out why—and to launch a dialog about what companies might do differently—we undertook a procurement risk management research study. The effort’s primary mission was to discover what high performers (leaders) in procurement risk management do differently than other companies.

First, we found that compared to survey respondents as a whole, procurement’s high performers are more apt to address supplier and price volatility risks when developing their procurement strategies—as opposed to later on. Leaders also excelled at integrating risk management into their category strategies, developing innovative ways to monitor risk, and implementing practices and tools to mitigate risk.
A good example is that leaders frequently apply dual-sourcing and risk-sharing initiatives to anticipate supplier quality risks. To anticipate supplier bankruptcy risks, they also do a great deal of dual sourcing and supplier negotiations.

In addition, a significant disparity was found in the area of risk-sharing clauses and back-to-back contracts—formal agreements stipulating that buyers can share, or even transfer, the cost of unforeseen problems across suppliers or sub-suppliers. Leaders are far more likely than the survey population as a whole to deploy these clauses/contracts.
A second area of note is sourcing. Survey results confirmed that integrating risk management initiatives with a company’s strategic sourcing process (e.g., during supplier evaluation) can help companies procure more effectively.

There are many tools and approaches for controlling procurement risk in this area, including supplier market analyses; current supplier portfolio analyses; supplier audits; supplier scorecards; supplier process failure mode and effects analyses; historic and forecast pricing analyses; and logistical and transportation risk analyses.

Among these, one of the most interesting may be supplier market analysis, an activity that is frequently practiced by procurement leaders. Supply market analysis involves a thorough assessment of supply market industry dynamics, (supply, demand, industry structure, industry profitability, supplier capacity utilization, etc.) in order to anticipate commodity price evolution and potential supply shortages.
Third, procurement risk-management leaders tend to be supplier relationship masters. Not only do they form deep, symbiotic connections with vendors, they work together to rapidly detect risk (e.g., through early warning systems) and neutralize risk-related issues before those issues become incidents. High performers also adapt their supply relationships to specific geographies and cultures.
And fourth, Accenture determined that procurement leaders often benefit from the use of a “risk management framework.” Many such structures are feasible; but what is most important is a comprehensive, end-to-end approach for anticipating, monitoring, and mitigating risk and then applying those activities to the key parts of a procurement organization (e.g., strategy, sourcing and category management, requisition to pay, supplier relationship management and so forth).

This clear segmentation of risk-related processes (anticipate, monitor, mitigate) allows companies to develop formal plans and responses that help whittle down procurement risk’s otherwise daunting impacts. At the anticipation stage, for example, leaders align risk programs with category strategies, make use of risk-sharing clauses, excel at predictive analytics, and apply value engineering concepts to look at alternative materials.

At the monitoring stage, they work closely with select suppliers, design formal supplier relationship management programs, make maximum use of external data sources, and identify and assess the level of risk at key stages of the strategic sourcing process. For mitigation, leaders stand out in the formation of decision processes (e.g., who makes and follows through on a mitigation decision) and the use of formal metrics and measurements.

Chances are good that procurement risks will only continue to grow. However, companies that excel at procurement risk management will, in all likelihood, continue to grow as well.

About the Author

Mark Pearson

Mark Pearson is the managing director of the Accenture’s Supply Chain Management practice. He has worked in supply chain for more than 20 years and has extensive international experience, particularly in Europe, Asia and Russia. Based in Munich, Mark can be reached at .(JavaScript must be enabled to view this email address).


Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

Logistics Management Group News Editor Jeff Berman had an opportunity to interview Derek Leathers, President and Chief Operating Officer of Werner Enterprises, at this month's NASSTRAC Shippers Conference and Transportation Expo in Orlando. They discussed various aspects of the truckload market, including prices, fuel, and regulations.

During this webcast our presenters will apply the findings of the 23rd Annual Trends & Issues in Transportation and Logistics Study to the world of shipper-carrier decision making. They'll examine the primary aspects that will influence the future direction for shipper-carrier decision-making.

For February, the month for which most recent data is available, the SCI dropped to -1.0 from January’s 2.6, with FTR explaining that the short term positive impact from one-time adjustments for rapidly dropping diesel prices and the suspension of the 2013 motor carriers hours-of-service expires later this year.

Seasonally-adjusted (SA) for-hire truck tonnage in March was up 1.1 percent on the heels of a revised 2.8 percent (from 3.1 percent) February decline, with the SA index at 133.5 (2000=100). This is off 0.3 percent from the all-time high for the SA of 135.8 from January 2015 and is up 5 percent annually.

Intermodal volume was up 8.1 percent annually at 280,016 containers and trailers. This outpaced the week ending April 11 at 270,463 and the week ending April 4 at 271,127. AAR said this tally marks the second highest weekly output it has ever recorded as well as the first time container and trailer traffic was higher than carloads for a one-week period.

Comments

Post a comment
Commenting is not available in this channel entry.


© Copyright 2015 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA