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, information and technology. In this two-part blog series, we’ll consider supply chain risk in the context of procurement’s maturity. We start by looking at supplier risk and the available methods to monitor and mitigate it. Then we’ll examine internal vs. external sources of risk.
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 their unpredictability has led us to think of them collectively as risk. Even when risks never materialize, we still expend energy and resources identifying them, monitoring them and coming up with mitigation plans.
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, focusing primarily on savings and compliance. While this is a straightforward approach that pays huge short-term dividends for the enterprise, it under-represents the full and immediate impact risk can have on our business through 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 just a limited number of categories. External market conditions should be factored into sourcing and supplier evaluation requirements before bids are solicited so that risk is addressed directly from the outset.
Procurement needs to bring two things to light in each category of spend we manage:
- What are the relevant risks?
- What is each supplier doing to manage them today?
This provides us with better visibility into the true dynamics of a category as well as the capabilities of each supplier. It may even shed a new light on total cost. 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 unique and 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.
Many of the steps procurement can take to prevent or minimize the impact of disruption fall outside of our 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 take every step possible to be prepared. One of our more key preparatory roles may include the identification and comparison of alternate sources of supply, doing research and first round qualifications that we can then proactively share with the business.
Risk awareness must 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 rather than in response to changing conditions, we can not assume that putting a relatively low-risk supplier in place covers the enterprise for the term of the contract.
If you want to learn just how much more valuable and effective your company’s P2P process can be, schedule a personalized demonstration of our modular, integrated Procurement Solution on the Determine Cloud Platform, or contact us with your questions anytime.