Focusing Procurement on Supply Management/Making the Case for Finance to Own Supply Risk (Part 2)

Click here for the first post in this series.

I don't discount the notion of focusing on supply risk management as a top business priority. I think we must. Yet at Spend Matters, we've observed that roughly 80% of companies that embark on supply risk management initiatives begin with looking at monitoring and forecasting supplier financial health -- rather than broader supplier management risk considerations (such as performance risk, labor risk, brand risk, geographic risk). And in many cases today, where companies are dedicating resources to the financial side of supplier risk, we see the ownership of this risk element often resting with finance organizations.

Sometimes finance recruits from procurement to run the supply risk management function (it did when it comes to the employer of the person who chairs the ISM risk working group, of which I'm a part). But regardless of where the talent comes from, the ultimately ownership of determining supplier financial health rests with this new organization or individual reporting into up the finance chain of command.

This makes perfect sense. Finance monitors the risk of contracts on the sales-side of our business, including whether credited should be granted (or not) to customers. The skill set required for managing and forecasting supplier financial risk is not entirely different. Moreover, when this role rests within finance, the opportunity exists for both groups to begin to collectively take advantage of information on both sides of the business coin, especially in the cases where a customer is also a supplier.

By allowing finance to take ownership of supplier financial risk it can free procurement up to focus on true supplier management areas, some of which no doubt fall under a broader definition of supply chain risk.

Now, just a quick show of hands in the room:

Who here believes that a smart person operating in the finance organization (or a small team), provided they have the right sets of content and technology to support their analysis, can leverage financial and operation metrics to better model, manage and predict supplier financial viability.

A good number, I see.

Now, please raise your hands if you trust others outside of procurement and operations to:

  • Manage total cost of procured goods effectively including commodity volatility
  • Ensure that suppliers are held to a growing set of CSR standards (labor, environmental practices, supply chain traceability, etc.)
  • Maintain continuity of supply in a global sourcing context without adding months of additional inventory
  • Monitor, report on and improve supplier performance

Ladies and gentlemen, let's let procurement do what it does best and allow finance to take ownership of something that it's already good at. Doing so will let us be the customer for a change!

Heck, they're offering to take a problem off our hands. Let's welcome the participation and hope that over time, we can begin to get them interested in other supply chain risk elements as well. This will support our efforts to build a supply management -- and supplier management -- function that treats managing unit cost and purchase price variance as merely an outgrowth of everything else we're up to.

Jason Busch

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