The 12 Supply Risk Management Disconnects that Destroy Value (Part 1)

“Risk” and “risk management” are terms that are like the ultimate Rorschach test in business: they mean many different things to many people. The same applies to the term “value” — and don’t even bring up “supply management.” Even a specific term like “supply risk” has many interpretations (e.g., it’s much more than supplier risk).

The problem with this is that if people within a company define various terms differently, then how well will they be collectively managing those areas? Likely not well at all.

Risk management is a strange animal. On one hand, it focuses on “things gone wrong” and hones in on defining and mitigating various external risks that create adverse events in a value chain. On the other hand, those adverse events affect stakeholder-relevant performance (i.e., measurable value). Such performance and value delivery is focused on “things gone right” and reward rather than risk.

The key, therefore, is to realize that risk and reward are inextricably linked. If ensuring delivered value (and improving it over time) from the supply chain and from suppliers is what supply management is all about, then that supply value should not only be expected (i.e., expected value like discussed above) but also protected (i.e., protected value ensured through supply risk management). As a side note, have you ever considered that the concept of “expected value” uses the term “value” even though it is applied heavily to the world of risk management (i.e., calculating the expected probabilities and impacts of various risks)?

Anyway, the imperative becomes ensuring that the most important performance metrics (i.e., KPIs) are protected from risk. Yet these individual KPIs are rarely individually and systematically managed for risk, and the lack of risk-adjusted performance management means that you’re going to be exposed and it will catch up with you eventually. The problem isn’t just bouncing around and applying risk management technique X via tool Y to address risk type Z. There are a dozen fundamental disconnects in most firms that prevent risk management being properly resourced, aligned, managed and improved. Only by unpacking them and addressing them through focused practical interventions can you really get to the root cause issues that are likely keeping your supply risk management efforts suboptimized.

In this Spend Matter PRO series, we will explore 12 critical supply risk management disconnects. This brief, Part 1, focuses on the following four areas:

1. Risk Scope and Stakeholders
2. Performance vs. Risk
3. Risk Type vs. Impact
4. Risk vs. Cost (e.g., “cost of risk”)

If you’re a practitioner, you should be able to see which disconnects are the biggest issues for you and make yourself more resilient (i.e., ability to mitigate and recover from risks) and predictably high performing. If you’re a consulting organization, you’ll probably find some pointers to improve any methodologies that you have here. And if you’re solution provider, whether in the supply risk management area, or more broadly, you’ll hopefully get some ideas on how to address more strategic pain points.