While our fearless leaders are forging ahead on a new way to think about quadrants / 2x2s / matrices / [insert consulting-term du jour here] to help procurement practitioners make better decisions in real time — more on that initiative very soon — we figured we’d point to a classic 2x2-style look that the World Economic Forum takes on global risk in 2017:
We’ll come back to the 2x2 in a hot second. First, a bit of context.
In WEF’s 2017 Global Risks Report released mid last week, the organization uses the Global Risks Perception Survey (GRPS), which brings together diverse perspectives from various age groups, countries and sectors — business, academia, civil society, government — and other inputs to distill, refine and show the interconnectedness of its top five risk areas for the forthcoming year.
Top 5 Risk Areas in 2017
In its report, the WEF pinpoints these five areas of risk with global implications:
- Economic growth and reform
- Rebuilding communities
- Managing technological disruption
- Strengthening global cooperation
- Accelerating action on climate change
OK, back to the 2x2.
When scrutinized in accordance with the interesting color-coded list below of all top risks (both in terms those most likely to occur and those with deepest impact) since 2007, there's one key takeaway:
There’s a lot of green. In other words, environmental risk is king. (Even the red-colored "Water Crises" risk is closely tied to environmental factors.)
Of course, global climate change is a massive issue that bleeds into geopolitics and macroeconomics. But whether the change is rapid (or glacial/non-existent, depending on your “beliefs”), it’s inarguable that natural-disaster-led risks are a deep cause for concern in supply chain risk management community.
"The related impacts on increasing natural hazard disruption of supply networks are huge," said Heiko Schwarz, founder and managing director of riskmethods, a supply chain risk management technology firm. "The number of relevant events and amount of natural hazard-related losses increase, mainly because as our best-cost country sourcing efforts increase, the exposure of supply networks to more vulnerable regions and areas where probabilities of severe natural hazards is higher."
Case in point: the semiconductor hub Taiwan, which has extreme exposure to typhoons.
"It's extremely hard for smaller and mid-size companies to get access to geo-coded natural hazard data, not to mention interpret it even if it is available," Schwarz continued.
Procurement Practitioners: How to Tackle That Risk — The ‘101’ Course
So where do procurement and supply chain organizations begin with appropriately tackling these types of risks?
According to Carrie Ericson, vice president of Procurement & Analytic Solutions at A.T. Kearney and co-author of a key report Spend Matters covered last year, 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,” she said.
Disruptive events such as the Japan earthquake’s impact on Toyota’s auto supply chain prove the necessity of having a proper risk management practice in place.
For folks like Ericson, the WEF 2017 risk areas are nothing new — climate change, the rise of artificial intelligence and the increase in geopolitical insecurity were all top risk trends in the joint May 2016 report with Rapid Ratings.
“The risks are getting too high for it to be ignored,” Ericson said.
Procurement Practitioners: How to Tackle That Risk — The ‘401’ Course
Risk management, and what is necessary for ongoing risk management, never gets operationalized, and as new suppliers get added, supply shifts and supply chains change, new risk enters the picture — risks that go undetected unless risk management is embedded in all key procurement activities, including sourcing.
Spend Matters Analysts Pierre Mitchell and Michael Lamoureaux have laid out five important points for practitioners to remember when it comes to sourcing:
- When you are sourcing, you are really changing your supply chain network
- Supplier risk is only one aspect of supply chain risk
- Your sourcing criteria must be ‘protected’ and risk must be factored in
- You need to 'cost the risk' and also get it in the contract
- You must design a monitoring system that is part of onboarding
Check out their explanations behind each point here.
And for the latest update on the top supplier risks in 2017 from Pierre Mitchell and Jason Busch of the Spend Matters analyst team, register for a new upcoming webinar, The Supply Chain Devil’s Dozen: Top 12 Supplier Risks For 2017.
Disclosure: riskmethods is a Spend Matters client.