In Part 1 of this series we looked at how procurement can expand our impact on risk by getting involved earlier in the process and by staying involved longer. In Part 2 we’re going to compare and contrast internal and external sources of risk and how to keep them in check.
Look at risk from the outside in.
Taking a savings-driven approach to spend management usually (although not always) assumes that internal constraints supersede external ones. When we expand our point of view and take into account the variability of suppliers’ influence on their supply chain, savings looks like a parallel objective to risk management. Rather than focusing on the needs and wants of the enterprise and then finding the best-qualified solution in the market to meet them, procurement can take a more proactive tack – one that balances internal needs with external conditions.
Procurement can help decision makers evaluate an expanded full range of available options — independent from and yet inclusive 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 risk from within. They might establish specifications so narrow that it is impossible to find backup sources of supply. Alternately, if our suppliers regard the company as “high maintenance” they are less likely to give advance warning or additional assistance in the face of disruption.
It may be hard for companies to look in the mirror when it comes to managing risk. Benchmarking requirements against the market as a whole, does not mean unique or custom specifications won’t be supported – they just have to have an acceptable ROI. 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, internal and external.
Understand risk and be ready to respond.
Opportunities aside, risk most often materializes in the form of supply chain disruptions. They can cause supplies to be temporarily unavailable or drive costs prohibitively upward. Procurement is uniquely positioned to monitor external sources of risk and quantify their likely internal effects. We can take steps to establish mitigation plans and lead the company 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.
Each category of spend should be evaluated for the risk profile it bears both inside and outside of the company. 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 value creation and competitive advantage.
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.