Procurement risk management: What it takes to be a leader
October 14, 2010 - LM Editorial
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.
Subscribe to Logistics Management magazine
entire logistics operation. Start your FREE subscription today!