What is Supply Chain Risk Management, Exactly? Stepping Back to Address the Challenge

As usual, Paul Teague recently penned an insightful column on his weekly blog Procurement Leaders, this time covering supplier/supply chain risk management. In it, he tosses out what might seem like a soft question, but is not: "What's a two-word definition of risk management?" Here at Spend Matters, we've written half a dozen research papers that have looked at various elements of supplier/supply chain risk management over the years, as well as antidotes to its maladies (often in the form of both software solutions and supplier intelligence that can provide early warnings to issues). But we haven't spent the time to really consider the basics of risk management -- what it is, whether it's distinct from other processes, etc. Paul suggests, as a foundation, that "most of what procurement executives do is, in some way, risk management."

He's completely correct in nothing that when it comes to spend analysis, for example, what "you're really trying, among other things, [is] to balance the risk of spending too much with one supplier against the risk of not gaining the savings that come from aggregating spend." Or take contract management, which "manages the risk of suppliers not complying with agreed-upon delivery schedules and pricing." In a paper I co-wrote on the subject with Mark Clouse nearly a decade ago at FreeMarkets, we asked the same question: what exactly is "supply risk?" One of the analysts we quoted was George Zsidisin, Assistant Professor of Supply Chain Management at Michigan State University, saying "the potential occurrence of an incident associated with inbound supply from individual supplier failures or the supply market, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety."

Mark and I further suggest, that, in addition to missed customer expectations and safety concerns, there are other more insidious outcomes of supply risk, including: "paying more than market price, carrying excess working capital, losing production time, over-specifying a good or service, taking too long to execute and implement savings, losing bargaining power, selecting less-innovative suppliers." In other words, supply risk is as broad -- or as narrow -- as you want to make it. Regardless, I think Paul and I both agree that supply risk should be as much a part of existing procurement processes as it is a stand-alone area for consideration.

Jason Busch

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