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April 12, 2016

The Procurement Maturity Curve – Managing Risk inside and out – Part 2

In Part 1 of this series we looked at how procurement can improve its risk mitigation role by getting involved earlier in the process, and staying involved. In Part 2 we’re going to compare and contrast the internal/external sources of risk, along with how to keep it in check.

Look at risk from the outside in.

When procurement looks at each category of spend as being directly influenced by materials markets and varying levels of influence in the supply chain, the priorities of our traditionally savings-driven activities change. Rather than focusing on the needs and wants of the enterprise and then finding the best-qualified solution in the market, procurement can take a more proactive tack.

That is, help internal decision makers see the full range of available options — independent of their current requirements. The solution put in place can then be optimized for immediate as well as longer-term advantages. This allows internal requirements to be appropriately changed in response to the best solutions available on the market.

In some cases — and despite the very best of intentions — companies sometimes create their own risk from within. It might be by making specifications so narrow that it is impossible to find backup sources of supply. Alternately, if our suppliers regard us as “high maintenance” they are less likely to give us advance warning or additional assistance in the face of disruption.

Each category of spend should be evaluated for the risk profile it bears both inside and outside of the company.

It may be hard for companies to look in the mirror when it comes to managing risk. Suggesting that requirements be subject to comparison to the market as a whole, however, does not mean that they should be entirely determined by supplier offerings. As long as there are multiple suppliers competing in a category, there will always be a range of options available for evaluation. The point is to make sure each offering is as strong as it can be by considering all constraints, whether internal or external.

Understand risk and be ready to respond.

Opportunities aside, risk most often materializes in the form of supply chain disruptions. Disruptions can cause supplies to be temporarily unavailable or drive costs prohibitively upward. Procurement is uniquely well positioned to monitor external sources of risk and quantify their internal effects. We can take steps to establish mitigation plans and take the lead in executing those plans should conditions change.

It is critical that procurement not think of risk mitigation activities as separate from our other spend management responsibilities. Sourcing, spend analysis, supplier management and contract management should all reflect a keen awareness of risk, especially once procurement has demonstrated the ability to carry these processes out to good effect under internally driven objectives.

When procurement recognizes that the enterprise is part of a much larger system of players and forces, and accepts the role we can play in managing those dynamics, our work becomes far more complex. Fortunately, this complexity comes with a corresponding increase in potential for competitive advantage.

Be sure to check out our entire blog series on The Procurement Maturity Curve covering savings, compliance and more. Along with many other procurement blog posts and resources, don’t miss Improving Supplier Management in the Age of Big Data.

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