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My Profile

Supplier Risk: The Tip Of The Iceberg.

RiskGlobal sourcingSupplier relationship managementInnovationDisasters and UnrestGlobal RiskRisk Mitigation+-

The doomed ship Titanic has more in common with your business than you probably realise.

 

Both are massive entities, run by people with years of experience, moving full steam ahead, in a sea of risk, assuming that they'll be able to see and manoeuvre around any danger that might present itself.

 

The problem, with both your business and the Titanic, is the unseen danger - the risks below the surface.

 

Titanic, as we all know, struck an iceberg, which sliced open the hull beneath the surface of the ocean. If your business isn't careful, something similar could the same could happen to you if you don't keep a careful watch over your supplier risk.

 

Supplier risk is an iceberg. The tip of the iceberg, that visible 10%, is the financial risk. Supplier's financial performance is well documented and publicly available. It's easy to understand their financial position, to monitor their reports and turnover and make an assessment on their viability.

 

Traditionally, this has been the primary way organisations have measured supplier risk but it's not the whole picture. Underneath the surface lies an absolute plethora of ‘other' risks that need to be monitored and measured. If ignored they have the potential to sink your business.

 

There are three main categories of supplier risk - financial, supply chain and corporate social responsibility. Within these there are multiple tiers, across multiple dimensions. It's those multiple levels, as you move further and further down the supply chain, where the bulk of risk sits. When you consider executive changes, geographical risks, political risks, disaster planning, and stress testing, to name just a few factors, you begin to see supplier risk as the enormous subject it is.

 

What some of the more progressive organisations are doing now, is looking at the next 4 or 5 levels of supplier risk. They're doing this via a structured process in order to understand what their true supplier risk profiles are and to be able to measure and monitor them on a quarterly basis. 

 

Procurement should be about managing risk proactively rather than just protecting the suppliers and services that come into your organisation.

 

Currently, however, most organisations aren't doing a sufficient amount of supplier risk management, they're just doing the basics. They are doing what is appropriate to the risk appetite of the organisation. If there's a very strong appetite to manage operational risk, then you'll tend to find that risk is also higher up the agenda for the CPO or procurement director.  It's very high on the agenda in financial services and the oil and gas industry for example, less so in retail and manufacturing.

 

Supplier risk management is reactive at the moment, but I think that will change over the next five to 10 years. It has to.

 

Along with increased appetite for risk, I think there will be a lot more investment in technology over this period.

 

There's been a lot of investment in the area of SRM over the past few years. Going forward, I can see those tools extending dramatically into the risk area. There will be a proliferation of supply risk management tools that come onto the market, which bring together the more basic areas of risk, like financial performance and revenue, with all of these other, deeper areas of risk, creating a dashboard that allows you to see your complete risk position at any point in time.

 

Currently, outside of the oil and gas sector, there isn't really a demand for this type of tool but as risk moves up the procurement agenda, CPOs will reach a point where they'll need this level of in-depth supplier visibility.

 

Effective risk management requires creativity. It means stress-testing your supply chain, assessing your suppliers' suppliers, executing scenario and what-if planning. Unfortunately, it will probably take a few disasters to truly move risk higher up the corporate agenda. But if procurement wants to be seen as a strategic function, they'll need to start addressing the rest of the iceberg.

 

Nick Ford is customer service & delivery director EMEA at Xchanging Procurement

Nick Ford
Posted by Nick Ford

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