IACCM Dispatch — Why We Fail to Effectively Manage Supply Risk

In contrast to the many other procurement and supply chain organizations and conferences that I've been a part of, IACCM takes a rather philosophical approach to unearthing the underlying reasons for why specific contracting strategies come up short -- rather than simply analyzing successful (or unsuccessful) case studies after the fact and reporting on out-of-context benchmarks and KPIs. Consider the area of supply risk management. When I often write about this topic on these virtual pages, I jump straight to examples from the headlines or offer up advice on how companies can reduce or mitigate supply risk through technology. But IACCM is more concerned with how companies create unnecessary risk to begin with. At the start of the program in London last week, the 200 or so people in attendance (representing some 14 countries) learned about some of IACCM’s latest insights into risk and contracting. Part of the challenge, Tim Cummins and his fellow IACCM members argued, is that companies are overly concerned with the wrong issues.

Consider that "55% of respondents to an IACCM survey on risk suggested that 'adherence to the corporate compliance process' should take precedence over the needs of the market." What's wrong with focusing on corporate compliance? Nothing, in and of itself. But supply agreements that gloss over fundamental market elements -- as so many do -- such as the ownership or allocation of risk when it comes to fluctuating currency, commodity and transportation prices or corrective action incentives and approaches when something goes wrong (e.g., escapes/PPM increases, partial fill rates, late deliveries, etc.) are those most likely to come back and bite the procurement organization's behind.

As one speaker noted, many organizations completely ignore the importance of positive milestones in contracting. Such behavior is "anathema to how procurement typically thinks of structuring a negotiation or contract". But it doesn't have to be if procurement organizations think through the best ways to structure agreements that factor in not just large, low-probability risks (e.g., breaches and remedies) but the smaller, numerous ones that are bound to impact the relationship down the road. One of the solutions that IACCM proposes to better manage contracting risk is to include multiple functions and disciplines (e.g, legal, procurement, operations, internal audit, IT, HR) when structuring agreements. And that's because those outside of procurement and legal have varying stakes in the success (or failure) of a supplier relationship are more likely to speak up about the specific risks they face rather than to simply apply a standard procurement or legal-driven contract template.

- Jason Busch

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