Why/How Supply Risk Management Programs Leveraging Spend Analysis Tools Can Fail

Far too many companies we speak with mistakenly believe that buying supply chain risk management enrichment data (e.g., supplier financial scores/ratings) as part of a spend analysis deployment is enough to actually reduce risk in their supply base. Aside from the fact that spend analysis platforms do not allow companies to easily take action when it comes to evaluating alternative options and/or developing suppliers in need, there are other more insidious ways that this "partial" solution to supply risk is leading companies to have a false sense of hope that doing something is enough. Consider the following example of how a company might leverage an existing toolset as a foundation to enrich supplier records with risk information in the hopes of gaining early warning of supplier bankruptcies:

Per the terms of the agreement with their technology platform vendor (e.g., spend analysis, BI, etc.), an organization is resold D&B, Equifax or other risk enrichment data that is updated on a quarterly basis with regular refreshes. But the speed with which a supplier's financial and operational situation can rapidly deteriorate outpaces the scheduled content updates, leaving the organization with a false sense of assurance that it is actively monitoring its supply base for various risk factors. In fact -- and this example is based on an actual use case -- an organization able to take action in time based on supply risk early warning through third-party financial data had only 19 days (after a risk indicator first appeared) to either develop an alternative supplier to meet production requirements or prop up their current incumbent with a loan without negative consequences to their business. With a quarterly refresh schedule, the organization would have less than a 25% chance of getting data in time.

In other words, the mere presence of supply chain risk data is, at best, a lucky indicator if the timing of the refresh and a supplier change in status coincides with the update schedule or, at worst, a bogus safety blanket if the organization becomes more lax in monitoring other risk factors because it feels a new sense of security from its risk program. Be warned: spend analysis is great for developing sourcing strategies, tracking supplier compliance, and, in more advanced use cases, tracking and measuring implemented savings. But when it comes to supply risk management, if the combination of spend analysis and third-party enrichment data with less-than frequent (i.e., twice per month) refreshes is your answer alone, then you're probably looking to solve a question that few on the frontlines of your business will care about.

Jason Busch

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