Justifying Supplier Management Programs: Risk Management Rises to the Top

I’ve started to dig into the recent SRM report from State of Flux – it was published earlier this month – and as usual, it’s an outstanding piece of research, all 166 pages of it. I’m going to spend quite a bit of time later this month and next looking at various aspects of the study in more detail, but the finding that jumped out to me upon first read was the same that caught the attention of the editors: namely, that risk management has become “the most important business-driver promoting an investment in SRM.”

NB: State of Flux defines supplier relationship management (SRM) in the same manner in which we define supplier management inclusive of such areas as risk, supplier development, diversity, and CSR (it is most certainly not SRM in the manner in which SAP or PeopleSoft would define it around eProcurement).

It’s important to place the relative value and rise of risk management as a primary procurement goal in context of other motivators of SRM programs as well. In this regard, State of Flux observes that “while cost reduction and cost avoidance remain priorities, customer of choice business drivers such as the need to secure the best supplier resource and account management focus have also become more important.”

The rise of risk management as the top SRM priority marks a shift in market thinking in which we were very much out in front – probably too far ahead of the game for our own coverage/research good. Indeed, Spend Matters has written extensively on supply risk management practices for many years. But my own coverage of the topic on these virtual pages predates the launch of this blog long before 2004.

A couple of years before launching this site, I penned a paper with FreeMarkets colleague Mark Clouse (now one of the procurement practice leaders at AT Kearney) titled Global Supply Management: Strategies for Identifying and Managing Supply Risk.

Somewhat ironically, our broad definition of supply risk at the time did not spend too much time focusing on the potential of supplier insolvencies. We noted, for example, that some of the outcomes of supply risk included:

  • 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 subsequent coverage of this report from State of Flux, I’ll share additional findings, as well as flash back to some of the ideas that Mark and I were talking about over a decade ago – and how many of the practices we suggested have finally begun to become mainstream in more advanced procurement organizations.

See additional Spend Matters research coverage below:

Sustainability in Procurement: Prevent the Next “Bangladesh Factory Fire” From Happening Again

Planning a Long-Term Response to the Bangladesh Factory Fire

Sustainability in Procurement: Why Do Sweatshop Scandals Occur?

How Do You Handle Underperforming Suppliers?

Supplier Management Market Landscape: Detailed Slide Download!

Supplier Management Data: 90+ Fields Finance and A/P Want Info On

Supplier Management Data Collection: 75+ Company Level Fields

Of Supplier Management…and Horsemeat

Beyond Bird Flu 2.0 – Inoculate Your Supply Base Against Supply Chain Risk

The Policy Supply Chain: Conflict Minerals and Preparing for Mandated Ethical Sourcing

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