Risk Management, or Procurement’s Ongoing Problem Child
Spend Matters welcomes another guest post from Jim Kiser of GEP.
Procurement often finds itself in a tough situation when the company’s business is exposed to significant supply risks – strong savings focus could mean poor service levels for internal customers, and stringent service levels to the internal customers could result in significantly inflated costs. Is there a magic wand that can help procurement achieve these apparently conflicting goals?
Typical supply risks faced by the organizations include but are not limited to poor quality of raw materials; volatile prices; exchange rate volatility; supply disruption; and financial risks. Procurement can definitely influence some of these to add significant value to the organization.
Poor Quality: Poor quality of raw materials delivered could either be a result of the lack of adherence by the supplier or inadequate understanding or definition of the conformance quality and specification requirements. Failure at the suppliers’ end is something that procurement is able to address quite effectively through alternative source development and proactive supplier performance management. However, procurement can ensure adequate understanding of the conformance quality and specifications by the suppliers by playing an active role in defining these. So educate the business users in the differences between the features and benefits. Use functional requirements to define the technical baseline and involve the suppliers in the process of defining these. Demonstrate the dangers of over-engineering of the specifications through thorough sensitivity analysis with the help of the suppliers.
Raw Material Price Volatility: Finance has better tools for managing the price volatility through complex forecasting techniques and hedging. Procurement can play a part in mitigating the price volatility. Ensure the quality of data available for the price forecasting. Conduct thorough value chain analysis to identify the extent of influence that the company can exert. Conduct periodic commodity strategy review to evaluate the feasibility and the benefits of backward integration. The large agrochemical companies use backward integration and cross-linkages with the suppliers-cum-customers as a price volatility risk mitigation strategy.
Supply Disruption: Conducting the value chain risk analysis of the company’s line of business will help identify the bottlenecks in the supply chain with high supply chain disruption risk. Periodic review to minimize the dependence on far-flung supply chains will help reveal the opportunities to mitigate this risk. Last year’s factory fire incidents in Bangladesh served as a cold reminder of the supply disruption risks that the far-flung supply chains entail. Apple’s plans to “reshore” part of its production back to the USA are the company’s way of mitigating the supply disruption risk.
Supplier Financial Risk: Conducting the financial risk assessment for the suppliers of key raw materials is still a passive approach to mitigating the mentioned risk, especially in the case of strategic commodities. Addressing this would help the upstream businesses manage their working capital and inventory requirements more effectively.
Unfortunately, risk management is an area that is in need of constant oversight, management, and measurement. Unless procurement has worked to place risk mitigation in the forefront of executive management or created a system and process that has shown proven success within finance, operations, and supply chain, risk management will continue to be an organizational problem child.
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