Should We Fire Procurement and Supply Chain From Supply Chain Risk Management? (Part 1)

Procurement and supply chain are fields that should welcome debate and controversy more often. A topic that warrants not only a deeper level of discussion but potentially a re-org and up-skilling effort as well is supply chain risk management. The Spend Matters PRO Research Library is filled with over two dozen papers, analyses and research briefs on supplier management and risk, so we won't rehash our own thinking here. But we will share a controversial view voiced by Accenture's Carlos Alvarenga in an HBS blog on the topic: Why Quants Should Manage Your Supply Chain Risk.

In the above-linked post, Alvarenga argues that traditional procurement and supply chain skill sets are not up to the supply chain risk management challenge. Specifically, he calls for a new type of quantitatively-driven leader and analyst to enter the corporate supply risk equation and seize the initiative out from under what is all too often a function or role that is failing companies across industries. His thinking may seem controversial at first, but Alvarenga makes a compelling case, beginning with his definition of risk and cost:

Risk in supply chain is not a potential cost -- it is an actual cost, very real and borne by every product and service company, whether they understand it or not ... [risk] is simply the possibility of more than one outcome (of unequal values) to a given future state. The possibility of more than one future outcome can very easily generate a cost in the present. How so? Because the fact that value is not guaranteed in the future lessens value in the present. This reduction in value is present and represents a cost today, not tomorrow. This is a concept fundamental to finance but that, for some reason, has not migrated into supply chain risk management ... Furthermore, that cost can take two forms: accounting and economic. The former refers to costs that are visible and recorded within the company (e.g., higher capital costs, business continuity insurance, dual-tooling in manufacturing) and the latter refers to costs that are not always visible or recorded but exist nonetheless (opportunity costs of not entering a risky market, concentration risk in the supply base, reduced valuations, etc.).

What follows in Part 2 of our commentary on Alvarenga's analysis is an exploration of what type of expert is best positioned to take on the challenge of supply chain risk given this framing. Hint: it's not who is doing it today.

- Jason Busch

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