"Supply Risk" is not Just "Sourcing" Risk

At the start of Ariba's Supply Watch Road Show the week before last, John Starr, an old time FMKT colleauge of mine and currently a VP at Ariba, spent a few minutes talking through category related supply risk. I thought his perspective -- while probably a new topic for much of the audience -- oversimplified supply risk by making it too sourcing centric. John cited four areas of risk at the start of his presentation: strategy risk, demand risk, implementation risk and performance risk. When Mark Clouse and I originally wrote FreeMarkets whitepaper on this subject in 2002, we also included "market risk" in addition to these four areas as well -- and we expanded definitions of the other areas to include operational factors.

In my view, John did a good job walking through how the wrong strategy can create additional sourcing risks, but he skimmed over a number of the total cost and operations risk factors that procurement professionals should be thinking about (even though most are not). What about, for example, the need to balance reduced working capital demands (i.e., lower inventory levels) with the additional lead-times associated with sourcing from more distant suppliers? Or how about rolling up category-related spend from sub-tier suppliers to truly understand overall commodity exposure and demand requirements (as Boeing has done).

In my view, it's critical to consider the operations, sales and finance implications of supply risk -- in addition to sourcing driven issues. This is not a knock on John's talk -- he only devoted a few minutes to the subject, after all -- but it's important for all of us in procurement roles to think about how supply risk is much bigger than just "sourcing" risk. Yes, sourcing-related risks matter. But actively managing supply risk requires so much more than just checking the box in a sourcing process.

Jason Busch

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