Ready for a quick quiz? Here it is: What’s a two-word definition of risk management?
Before you answer, I should tell you why I’m asking. Risk management has become one of the most talked-about skills in business since the global economy tumbled down, the tsunami washed up on Japanese shores, and winter in the Middle East morphed into the Arab Spring, disrupting political stability - and energy prices - in the area.
You only need to read the press to see the attention risk management is getting, all of it much deserved. Just last week on this website, Procurement Leaders reported on four different aspects of risk, including a US Food and Drug Administration warning of food-supply-chain challenges, a plea by the US for more cooperation in managing global supply chains, a report predicting a rise in global supply chain vulnerabilities, and another report on fraud as a major risk.
Other sources have recently reported on supply chain risks as well. One, the Corporate Executive Board, warned against ignoring supply chain risks. Another reported on supply chain worries at technology companies. And, earlier this month, CFO Magazine in the US wrote of the growing risks to businesses of political turmoil, citing supply-chain-solutions provider Brightpoint’s decision to fold its tent in Russia because of risks posed when its credit insurers pulled their in-country coverage.
One CPO at a metal-working company told me last week that the next breakthroughs in procurement will be in risk management. He, like others, is already partnering more closely with certain key suppliers rather than expanding his supplier network. That’s one of his risk management strategies.
Another executive, Matt Mehalick, director of procurement at Celgene Corp., believes the next breakthrough in procurement will involve the growing use of such technologies as the iPad to gather real-time market intelligence that will help with decision making, presumably to avoid risk.
But despite all the attention it gets, the term risk management itself is getting a little boring. It needs to be put into context. Hence, the quiz.
So, have you written down your two-word definition of risk management? Well, here is mine: ’strategic procurement’. Yes, I think the terms are one and the same.
Most of what procurement executives do is, in some way, risk management. Take spend management, for example. When you analyze your spend, you’re really trying, among other things, to balance the risk of spending too much with one supplier against the risk of not gaining the savings that come from aggregating spend. Strategic sourcing? Much the same. Supplier research and evaluation? You’re trying to avoid the risk of dealing with financially unstable companies. Specifications development? It lessens the risk that parts you buy will fail in the end product. Contract management? It manages the risk of suppliers not complying with agreed-upon delivery schedules and pricing. And so on.
Certainly, I’ve oversimplified things in the above paragraph. Still, risk management and strategic procurement have become two sides of the same coin.
I’ve written before that I think procurement is a good place within a corporation to place responsibility for all corporate risk. That’s not a popular view. Still, even if you disagree that procurement, at its core, is risk management, you have to agree that you can’t have one without the other.
Paul Teague is US contributing editor of Procurement Leaders and a former editor in chief of Purchasing magazine.