Should We Fire Procurement and Supply Chain From Supply Chain Risk Management? (Part 2)

In the first installment of this series, we provided the core of the argument that Accenture's Carlos Alvarenga makes in an HBS blog that breaks apart the definition of supply chain risk and cost. In a previous paper I co-authored with Mark Clouse (now at AT Kearney) nearly a decade ago, Global Supply Management: Strategies for Identifying and Managing Supply Risk, we attempted to compress and define the topic as well, coming up with a somewhat different answer (although relevant, as we'll see when we explore who is best to manage it):

What exactly is "supply risk?" George Zsidisin, Assistant Professor of Supply Chain Management at Michigan State University, recently defined it as: "the potential occurrence of an incident associated with inbound supply from individual supplier failures or the supply market, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety."

In addition to missed customer expectations and safety concerns, though, there are other more insidious outcomes of supply risk including:

  1. Paying more than market price
  2. Carrying excess working capital
  3. Losing production time
  4. Over-specifying a good or service
  5. Taking too long to execute and implement savings
  6. Losing bargaining power
  7. Selecting less-innovative suppliers

Many of these areas we can quantify – especially the most operationally oriented ones. Yet as Alvarenga observes, most of those sitting in procurement and supply chain roles don't necessarily come from the right background to address these issues. Specifically, as he observes:

"supply chain managers are rarely trained in quantitative risk concepts, either during the formal phase of their education or on the job. Risk is an abstract concept and hence often an uncomfortable topic for executives who make their living in the all-too-physical world of procurement, manufacturing and logistics. The same can be said for traditional supply chain risk management consultants and academics, who, after all, share a similar background ... This lack of comfort with both the quantitative aspects of risk and the more sophisticated options available to operational executives is (in some industries literally) dangerous. Indeed, anyone who claims to be managing supply chain risk without understanding subjects like real options, hedging, Value at Risk models, financial simulation, and so on, is more like a security guard than a real risk manager.

Perhaps not so ironically, Alvarenga is making the exact same argument we have made when it comes to commodity risk management – a topic we separate out from supply chain risk management – in numerous presentations and papers this year! Simply put, we have entire the wrong mix of skills in procurement and supply chain groups right now to handle the area. Moreover, simply taking a procurement analyst and sticking them in finance is not coming to solve the problem, either.

To be continued.

- Jason Busch

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