Focus on Supply Risk Management Can Aid Supplier Relationships, State of Flux Reports

Positioning supplier relationship management (SRM) programs as a way to ensure broader supply risk management is an untapped opportunity for businesses looking to address sustainability challenges, according to a recent State of Flux report.

As we’ve reported on the “Sustainable SRM: Nurturing Growth in a New Climate” report from State of Flux, sustainability is becoming a greater consideration when it comes to supplier relationships, due to increasing demand from consumers for ethical products and pressure from governments and investors to consider environmental factors in production. The report highlights a number of challenges facing organizations as they integrate sustainability into their procurement goals, including buy-in up and down the organization, proper segmentation of suppliers and others.

While setting up a proper governance structure, getting buy-in throughout the entire organization and deepening relationships with suppliers takes time, companies can also assess their level of SRM, determine how they manage risk, evaluate their staff’s skills and resources, and ensure their technology is working for them.

State of Risk Management

The report surveyed 517 respondent from 303 companies located around the world and representing 25 industry sectors. Researchers divided organizations into three categories: “leaders” that are at the cutting edge of SRM, “fast followers” that are maturing quickly, and “followers” that either have “limited ambition” for their SRM or are ambitious but are at the start of their SRM journey.

While leaders have integrated sustainability risk management into their SRM and 79% of fast followers say they also manage sustainability risk, 60% of the followers in the respondent group say they don’t, and the followers make up 75% of the sample. Similarly, 100% of leaders said they had the necessary skills and resources to manage risk, but just 29% of followers said they did.

The ratio is reversed when it comes to which organizations train for risk management. Zero percent of leaders said they had no training for staff on risk management, whereas 15% of followers said they were not training at all. Similarly, there is limited training at less-mature organizations when it comes to having the technical skills to work with suppliers on sustainability risk. Nearly 30% of followers said they had no training.

“Having a management model in place to ensure compliance with minimum standards is not the same as risk management,” the report states. “Sustainability risk management needs to be far more dynamic and consider the constantly changing risk profile of supply chains.”

Some of the risks cited in the report are reputational risk as well as regulatory risk and compliance.

What Can Be Done?

Training is essential and should be a long-term goal for any company, the report says. A case study in the report demonstrates how an organization can improve in this area.

The report highlights Sellafield Limited, a $2.6 billion budget organization responsible for the safe removal of nuclear waste. Risk management is obviously high on the list of priorities for Sellfield, but as the report notes, it wasn’t until recently that its SRM truly focused on risk.

It did everything an organization should do, including receiving board approval, engaging suppliers and surveying internal stakeholders. But the company also did more. It immediately segmented its suppliers into four areas and identified four key relationships within each segment. It set up meetings with those key suppliers and planned a two-day workshop with training for their internal team and members of their supplier’s team.

“Each relationship has a different value proposition,” said Alan Hartley, Sellafield’s head of procurement and supply chain delivery, in the report. “It is about the two parties coming together to explore the art of the possible and how we will develop the relationship together. Then you get real clarity about where the value and innovative opportunities are in each area.”

Sellafield plans to expand this program with its other suppliers.

Lack of Technology Adds to Problem

Technology remains a barrier for organizations as they mature their SRM. As we noted in our initial coverage, 71% of organizations found the enterprise systems they use to manage their supplier lifecycle disparate and not integrated, and only 7% were totally satisfied with their technology solutions.

Part of the problem is a disconnect between some of the cloud solutions being adopted and the ERPs used. As the report states, there needs to be a shift for procurement to begin thinking of how technology can help it achieve its goals, not simply organize information: “Many organizations focus on functionality when reviewing SRM technology, rather than how technology can help drive change and ultimately consistency of supplier management across the whole organization.”