Where can Procurement Do More in the Area of Risk Management (Part 3)?

Please click here for the first and second posts in this series.

Novartis' Sammy Rashad is a procurement practitioner -- actually, now somewhat of a former practitioner, since he has been booted upstairs -- with some of the most seemingly innovative and pragmatic views we've heard about the best means of engaging one's suppliers. In the area of supply risk management, Sammy recently provided five specific strategies (outlined in a post on Procurement Leaders blog) for procurement organizations to deploy to expand the "breath and depth" of its contributions to the practice of supply risk management. Within his list, each step brings "increasing complexity and benefits." The third strategy Sammy provides -- hence the middle tier of complexity and gain -- is to "develop preventive strategies by sharing risks and benefits with vendors."

Here, Sammy gives credit to Matthias Gramolla of EADS, who "recently presented its remarkable work in this area" which "identifies potential risks flowing directly from the sales market, assesses the ones with the largest exposure (based on the highest probability/impact), and introduces risk-sharing strategies combined with incentives such as more flexible delivery schedules, natural hedging, bearing non-recurring costs, etc.?" As anyone who has ever participated in a matrix-based scoring exercise knows -- visualize a two-by-two chart with bubbles that enable a third-degree of visual categorization and reference based on size (and possibly color coded to enable a fourth means of displaying rank of quantitative/qualitative insights) -- the key is to rank order specific factors (e.g., probability/impact) against a universe of potential options through some type of analytical systematized process.

In supply risk, there are so many variables to consider in developing risk/reward-sharing strategies that a bubble-chart approach to analyzing and presenting information can break down fairly rapidly. Rather, we recommend moving to an approach that first considers factors involved in the strategic nature of the relationship (e.g., ease of switching suppliers) and then the many different areas of potential impact through joint development. Key in this regard is a scorecard to understand how a supplier is performing, including relative sophistication and capabilities (not just reducing performance to KPIs such as price, quality/escapes, on-time performance, etc.). The measured "how" can matter just as much in designating where to apply limited resources to risk/reward programs either on a one-off basis (e.g., flexible delivery schedules) or more systematic approaches across a supply base (e.g., demand aggregation of strategic materials).

For further information on supplier management strategies, tools and processes, we recommend the following Spend Matters research briefs on the topic:

Leveraging Supplier Management Platforms for Multiple Goals: Risk Reduction, Supplier Diversity and CSR

Supply Risk Management – Segmenting the Technology and Content Landscape and Choosing the Right Category of Solutions

Beyond Basic Scorecarding – Supplier Performance and Development Approaches to Drive Competitive Cost and Risk Advantages

Supplier Management Market Observations: Recent Trending, Musings on SAP's Core Offering and General Deployment Pitfalls (for all Solutions) to Avoid

Sourcing, Contract Management, and Supplier Management Cloud – Business Users Benefit From Savings Enablement

- Jason Busch

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