PL's Forum Chicago Dispatch 1: Quantifying Risk, Supplier Management and Moving Away From PPV

Despite some of the infomercial components of Vel Dhinagaravel's presentation over breakfast this morning (Vel is CEO of Beroe, a market intelligence provider), I thoroughly enjoyed the bulk of the content and found his themes spot on based on the chatter among folks in the conference hallways. In his talk, Vel highlighted how supply risk management remains all too often disconnected from category management inside companies and procurement organizations. Yet, according to Beroe's research, 42% of companies claim supply risk is their number one focus area at the moment. Much as I've talked about this on Spend Matters over the years, Vel argued in his talk that supply risk management extends far beyond the prospect of supplier insolvencies (more on this in a minute). Specific to supplier financial viability, Vel suggests that we must look at a range of factors which far too few organizations are considering today.

These types of forward-looking views into viability include monitoring whether suppliers have lost customers. They also require peering into supplier operational capabilities, including available capacity (and changes in capacity). From a commercial standpoint, it can also be helpful to drill down on whether suppliers are being undercut from competitors from a cost perspective. I would also suggest that other signposts to consider around supplier financial risk -- that go beyond analyzing the balance sheet and income statement -- may also include looking at a supplier's relative cost of capital.

Aside from drilling down further on supplier financial risk, Vel suggested the importance of looking at multi-tier supply risk elements to spot disruptions as early as possible (or prevent them in the first place). Another new take on risk that Vel posits is that we consider the importance of gross risk vs. net risk. Gross risk is absolute risk, but net risk is almost more important. Net risk is based on the quality of our individual supplier relationships, the level of buffer or inventory we may have for a given SK and other factors versus simply how much we spend with a supplier and their overall financial viability.

As a final point around risk, Vel was spot-on in his talk when he mentioned the need to move away from measuring procurement performance in terms of purchase price variance (i.e., savings). Vel suggested that we must take a new type of approach to measuring individual and category level results that considers the following areas: price vs. market, substitution opportunities, input cost and profit margin, supply chain risk, price history and forecast, LCCS comparisons, value chain price drivers (e.g., commodity inputs), supplier financial risk and carbon footprint. Granted the individual weights for this list may vary (and it might not be complete in certain cases), but overall procurement effectiveness based on a measured range of characteristics such as these make intuitive sense from a total cost and risk perspective.

Jason Busch

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