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April 5, 2016

The Procurement Maturity Curve – Managing Risk inside and out – Part 1

The Procurement Maturity Curve – Managing Risk inside and out – Part 1

In the past, we’ve taken a close look at how the procurement maturity curve affects its focus. Two recent posts addressed issues concerning the evolving role of procurement savings, compliance and enterprise alignment. In this blog series, we’ll consider risk. First, we look at supplier risk and methods to monitor and mitigate it; then we’ll examine internal vs. external risk sources.

Procurement: Sourcing risk mitigation.

After procurement has dealt with the primary internal spend management needs of the enterprise —savings generation and improving compliance — it’s time to look outward. Although not all external conditions have negative consequences, over time we have come to think of them collectively as risk. If not for their actual impact, then for the potential impact they present.

In order to manage risk, procurement needs a deep understanding of the suppliers we source from, as well as the geographies and markets we (and they) are involved in. Some risks affect us directly and some of them are embedded in multiple layers deep in the supply chain. This added distance makes risks hard to see and even harder to manage. Visibility challenges notwithstanding, if procurement is to play a role in addressing risk we have to significantly expand our perspective and approach.

Move risk awareness up in the process

In a needs-driven procurement process, we would traditionally optimize supply arrangements solely according to internal requirements and constraints, with a focus on savings and compliance. While this is a straightforward approach that pays huge short-term dividends for the enterprise, it underestimates the full impact that risk can have on the supply chain.

Having an exclusively internal focus during the strategic sourcing process assumes the enterprise is at the center of the market, which it almost certainly is not. Only a very few companies have the demand to “make” markets, and even then in a limited number of categories. External markets should be considered in determining procurement requirements before they are finalized, and risk plays a role in this.

Procurement needs to bring two things to light in each category of spend we manage:

  1. What are the relevant risks?
  2. What is each supplier doing to manage them today?

This provides better visibility into the true dynamics of the category as well as the capabilities of each supplier. It may shed a new light on costs as well. If two suppliers provide a comparable product or service, but one is more expensive than the other, it would be natural for procurement to recommend the less expensive option. But if the more expensive supplier takes meaningful risk mitigation steps, it would add another factor in determining your choice of suppliers.

Not taking all factors into account before decisions are made relegates procurement to a purely reactive risk management strategy.

Another consideration is that many of the steps procurement can take to either prevent or minimize the impact of disruption fall outside of procurement’s typical role. We highlight risk in the sourcing process and address it in the supplier management process, but what about all of the times in between?  While not all risks can be foreseen, procurement should actively monitor those that can, and then take all steps possible to be prepared.

Risk awareness needs to be part of the strategic sourcing process, and once the award is made, it needs to remain a high priority activity. Depending on the size, industry and location of the supplier, monitoring risk factors could be a daily or weekly activity. If procurement revisits the risks and apparent impact only on a monthly or quarterly basis, we should not assume that putting a relatively low-risk supplier in place covers the enterprise for the term of the contract.

Madison Logic