Procurement Must Ramp Up Risk Management Efforts, New Report States

Supply risk Ivelin Radkov/Adobe Stock

Procurement organizations are not prioritizing supply chain risk management today, leaving companies unprepared to respond to disruptions, according to a new report from A.T. Kearney and Rapid Ratings.

The joint report, titled “Is Your Luck Running Out? Managing Supply Risk in Uncertain Times,” points to data from a 2014  A.T. Kearney study showing an overall lack of risk management practices among procurement organizations. For instance, about half of companies do not have a plan in place to ensure supply chain continuity and just 34% of companies have a response plan set up to deal with changes in supply and demand for top suppliers. Additionally, just 36% of companies said they are ensuring their suppliers are complying with environmental sustainability policies. The report points out this percentage has not improved much since 2008.

The report also identifies 12 trends expected to have major impacts on supply chains in the future, such climate change, the rise of artificial intelligence and the increase in geopolitical insecurity. As these risks become more prevalent, one would think supply chain managers and procurement organizations are widely adopting best practices to manage and respond to the risks. However, this does not seem to be the case, the report said.

“What’s needed is a layered, pragmatic approach that uses the best available tools to filter out information noise, capture valuable information and create powerful insights long before the luck runs out,” the report stated.

Prioritizing Risk Management: The Challenges

One of the report’s authors, Carrie Ericson, vice president at A.T. Kearney Procurement & Analytic Solutions, said the goal of the report was to raise the level of urgency for supply chain managers to start tackling supply chain risk management. Many of these professionals are aware of the risks facing their supply chains, but managing them properly continues to fall lower on the list of priorities, she said. This is often due to a number of factors like a lack of resources or funding available to invest in the people, process or data needed to manage supply chain risks. The complexity of supply chain risk management, too, is a major barrier for organizations, Ericson added.

Rose Kelly-Falls, another author of the report and senior vice president of Rapid Ratings, also points to a possible lack of ownership in risk management at companies. She said she considers procurement professionals to be risk managers, but that many of those professionals don’t see themselves that way. However, procurement organizations must identify that risks need to be identified and managed in every step of the sourcing lifecycle.

The Solutions

So where do procurement and supply chain organizations begin with appropriately tackling risks? According to Ericson, organizations need to develop a prioritized plan for the complexities they face as well as look for real-world examples of how supply chain risks and disruptions have impacted companies over time.

“Pull a few case studies to show how it could impact the enterprise to get the appropriate attention from leadership to make the right investment,” Ericson said.

Recent events like the Japan earthquake’s impact on Toyota’s auto supply chain are one example she pointed to. Disruptions like these prove the necessity of having a proper risk management practice in place.

“The risks are getting too high for it to be ignored,” Ericson said.

Additional Report Insights

The report also includes Rapid Rating’s data on the financial health of public and private firms around the world — data that organizations can use to possibly gauge the level of risk they face in their supply chains. These financial health ratings, or FHR scores, show U.S. private firms seem to have an edge in terms of minimizing sourcing risk since 2012, the report said.

Social media trends are also incorporated into the report and reveal what supply chain risk topics are most popular among the public on social platforms. Mentions of energy risks as they relate to climate change, how cybercrime and cyber security impact IT and issues of food supply and food scarcity were some of the main topics identified in the report. These different topics, however, also intertwine, adding to the complexity of risk management, the report stated.

Despite the complexities and other challenges companies face in properly tackling supply chain risks, the report emphasized the necessity for companies to properly manage their risks. “Luck will eventually run out,” the report stated. Kelly-Falls said organizations must identify the importance of risk management, as supply chain risk is not going anywhere.

“It’s not going away, and we are trying to keep bringing it to the surface,” she said.

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