Supply Risk Management: Exploring Market Risk
This post is based on the following FreeMarkets white paper (published in 2003) co-authored by Jason Busch and Mark Clouse, Global Supply Management: Strategies for Identifying and Managing Supply Risk. We recently dusted off the paper for our own research into supplier relationship management and found an analysis that was nearly every bit as relevant then as now. As context for this post, “market risk” is one of five drivers of supply risk we identified in this paper originally. The others are strategy risk (reference here and here), demand risk, implementation risk, and performance risk. Enjoy!
Once you’ve decided on an overall supply strategy and taken into account demand expectations for a specific category, it’s important to start examining the risk associated with project execution. Even if a company sets the right supply management strategy for a given commodity, it’s still possible to have a poor market result from factors like negotiation format, having enough suppliers participating, and technology or security concerns. Lastly, market timing—taking into account the balance of supply and demand—is an issue supply managers also need to consider. Setting a contract one month instead of the next might result in drastically different outcomes.
There are several drivers of market risk, including:
- Inadequate supplier research, preparation, and management: Organizations that dive head-first into collaborating and working with global suppliers without understanding the impact of introducing competition and global supply in a market often create unnecessary risk in the form of over-paying. Also, our experience shows that actively preparing and managing suppliers prior to a negotiation has a significant impact on the number of suppliers who participate, the number of bids they each submit, ultimately the success of the project. Managing incumbent suppliers is especially critical.
- Language issues and barriers: While most global suppliers understand competition and capitalism, a substantial number are not proficient in English or other Western languages. Especially in low-cost regions, the language hurdle can cause companies to extend, or worse yet, avoid these opportunities altogether.
- Inaccurate or incomplete RFQ data: Many organizations fail to gather the right specification and item information necessary to create apples-to-apples markets. Clearly, this presents an extreme market risk. Suppliers cannot effectively bid on loose—or even different—specifications for the same item. They must be presented with clear, accurate, and highly detailed information.
- Lack of infrastructure: From rural America to industrial China, organizations should never take technical infrastructure for granted. While telecommunications companies have made great strides, reliable global high-speed Internet connectivity is still not a given, especially in developing nations. There is also a chance that suppliers will not have the right infrastructure (e.g. updated computers) internally to access the Internet, even if it is available to them. Both of these factors can contribute to market risk.
- Lack of experience: There are clearly many pitfalls in executing complex supply management projects. These can be learned over time, anticipated, and managed.
Curious? Drop Sydney a line (firstname.lastname@example.org) and we’ll send you out a copy of this dusty old analysis! Some topics are timeless. And supply risk is one of them.
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