A risk expert looks at Procurement & Supply Chain practice – and isn’t impressed

We introduced the (fairly) new risk solution from Brian Farrington Limited (BFL)  recently, and over the weekend I was writing a follow up piece, which we’ll publish later this week.  Coincidentally, Mark Perera (one of the founders of Procurement Leaders) then pointed out this article from the Harvard Business Review blog via Twitter on Saturday – and it’s well worth reading.

It’s from Carlos Alvarenga, who  leads the Operations Finance and Risk practice at Accenture. In it, he points out some common flaws in the way that procurement and supply chain managers look at risk. He starts by pointing out that “Risk in supply chain is not a potential cost — it is an actual cost, very real and borne by every product and service company, whether they understand it or not”.

So risk management is simply the reduction of the cost of risk. But then he says, we look typically at “low probability, high impact events, such as the natural disasters or political uprisings”, rather than the costs that are “present every day that managers come to work. And yet almost no discussion of supply chain risk management deals with the reduction of these present costs in a systematic, quantitative way”.

And that’s one of the points that Stephen Ashcroft of BFL  made to me when we discussed  their solution. As we reported then:

Ashcroft pointed out another classic which really hit home to me, as I suspect I’ve been guilty of it in the past. He talked about procurement functions that have a risk register which includes “hurricane in West Africa” as a risk, but doesn’t include “we don’t know about all the contracts our organisation has in place”.

Back to Alverenga, who then lays into our profession (in a justified and analytical manner, I should say):

A problem is that supply chain managers are rarely trained in quantitative risk concepts, either during the formal phase of their education or on the job”.

And there is often too big a gap between the corporate risk management teams and the CPO or Chief Supply Chain Officer – so, as he powerfully says:

The operational executives, for their part, when confronted by a subject that typically neither they nor their teams completely grasp, all too often come up with little more than a contingency plan and then sit back and hope nothing goes wrong — meanwhile, excessive risk costs continue to reduce the company's present value.

So, he suggests, we need more finance PhDs and actuaries in procurement and supply chain teams. (I want to know what’s wrong with mathematicians and statisticians, as that’s my background?)

And “we have to transform the discipline of supply chain risk management from a reactive planning exercise to a day-to-day operational function”.

Powerful stuff, and a huge amount for many of us to think about in one short article – do read it.


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Voices (2)

  1. stephen ashcroft:

    An excellent article from Alverenga; that more fully articulates what we have been pursuing; seeking to address “procurement risk”. For those that are asking, please drop me a note (s.ashcroft@brianfarrington.com) and I will send you the Procurisk briefing paper for your review.

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