Don’t Wait For A Tsunami To Combat Supplier Risk 

18-Aug-14 17:21

In this guest post, Procurement Leaders invites GEP’s Pramod Sethumadhavan to look at under-examined areas of supply chain risk and suggest steps to developing a coherent strategy, building on the previous GEP guest post’s examination of flaws in sourcing strategies.

I find it ironic that many organizations today look at supply chain risk from a unilateral perspective. The impact of natural disasters have repeatedly raised questions on organizations’ preparedness to tackle supply chain disruptions. Companies today look for geographical presence and spread of their key suppliers to ensure business continuity. But is that all a company should do to mitigate risk?

With the complex supply chain networks that companies are leveraging, there is risk even without a major global event – there is risk in maintaining status quo and in inaction! Take for instance, the 2013 Rana Plaza tragedy in Bangladesh. It was not the outcome of natural disaster but of losing visibility into supplier’s operations. As experienced by some of the large UK retail giants in the aftermath of the incident, companies are now held accountable for what goes wrong in the lower tiers of their supply chains too. Unfortunately, very few companies are proactive in hedging against supplier risk.

It is clear that managing risk cannot take a one-dimensional approach. Some might argue, that there are too many unknowns to effectively manage risk. Based on how you see it, I think that would be oversimplifying or overcomplicating the idea of risk management. Can we not start with the ‘knowns’?

With mature procurement organizations and robust supplier relationship management, most companies today have a wealth of information – both internal as well as external. In my view, like any other important business aspect, supplier risk management needs to be defined by answering questions across three areas – strategy, people and tools.

Defining supplier risk strategy: Ensuring business continuity is definitely an important goal. But what if the business objectives go beyond that? What if the business objective is to reduce your carbon footprint? What if you look to your supplier for continuous improvements through product reengineering? Are the risks the same in each of these cases? What are the evaluation parameters? What is the frequency of evaluation? What are the contingency plans or corrective actions? Is your strategy driven by high spend areas or by potential impact due to non-conformance or non-availability? Understanding the answers to these questions is a vital step.

Identifying the right set of people: Who owns supplier risk management in your organization? In my experience, many companies don’t have a straightforward answer. Rather than being a formalized activity, risk management is a shared responsibility between finance, legal, audit and other functions. Risk management loses steam and focus without champions to lead it. So, who are the right people to lead it?

Leveraging tools and processes: In majority of the companies, tools required to drive information gathering and risk mitigation are already implemented. The question is: are your processes built to leverage the tool, or are they built because of the tool? How creatively are you leveraging the information gathered? Instead of reinventing the wheel, focus on how the tools and processes can help you?

Given the multi-dimensional impact, it is a no brainer: effectively managed supplier risk can lead to competitive advantages for companies. The good news is – managing supplier risk is not rocket science and much of what is required (people, tools, etc) is already available within the organization. It is more about asking the right questions and getting started, sooner than later!