By: Norman Timmins --
22 June, 2014
What does a procurement manager worry about every morning on the way to office? State of supply markets, price volatility and perhaps contract negotiations to name just a few.
And what is the one factor that typically lurks underneath the foundation of modern businesses? The answer is Risk.
Risk has typically existed outside of procurement for a long, long time. All along, risk was something that finance department used to worry about.
Procurement managers would typically say, "We are just sourcers, and we are just buying stuff, so why worry about risk?"
However, a big shift is happening wherein procurement managers will have to start worrying about managing risks (current, potential and future) that are lurking across the supply chain.
The need to effectively manage supply-chain risk will assume central importance in procurement decisions. This line of thought, in turn, is beginning to gain wider acceptance across many organizations, particularly as many organization increasingly adopt category management.
As opposed to traditional procurement which involves more of a project management role, category management involves a constant optimization of opportunities -- much like the day to day running of a business.
Category Managers increasingly have to make various business decisions throughout the year therefore needing continuous information regarding their category and their supply chain.
And procurement teams will have to know where the market is heading in order to make those optimal decisions while keeping the risk factors in mind.
If there is disruption, a bankruptcy, or if there is a supplier in the network who has regulatory issues, then it becomes a procurement problem too.Â This is a big shift away from the old world order of simplified project management.
For effective category management, it becomes important to manage the underlying risks in the supply chain.
For example, more than 85% of the Fortune 500 companies have suffered at least one major supply chain event in 2012. A recent survey of 600 CFOs showed that the top factor that could derail future earnings is supply chain disruptions. Also, sustained economic challenges have had a significant impact on the financial health of the suppliers.
Theory sounds fine. I can hear you all say how to translate this theory into practice? Let me give you an example of how this can be implemented.
First step is to assess the risk of the suppliers. The risk assessment should not only be measured in quantitative terms i.e., financial, but also on forward looking qualitative indicators.
The second step would be to map the supply chain of key products and materials to enable effective monitoring of the suppliers. This would help procurement managers to proactively identify potential risks that need to be managed.
Third step would be to set up a disruption alerting system that provides a notification of disruptions involving weather and geopolitics (locational); as well as plant closures, accidents, M&A etc. at the supplier level.
Supply chain mapping and monitoring proves key to risk management by getting the right info to the right person at the right time. Let us see this mapping from the prism of a pharmaceutical company that makes Drug X. In any drug there are active ingredients, excipient and packaging such as box, plastic container, and cotton of certain grade and so forth.
Tier 1 would constitute all direct suppliers; but they don't constitute the entire supply chain. There are suppliers of suppliers, who constitute Tier 2 and there are suppliers of the suppliers of the company's Tier 2 suppliers, who could basically be termed as Tier 3 suppliers.
A disruption usually happens down the supply chain, say at Tier 2 or Tier 3 suppliers and it proves very useful for the organization to keep tabs on these far-flung suppliers so as to prevent any potential disruption.
How easy it is said than done? It may be tough for a company to invest time, energy and money on supply chain mapping. One client said "Norman we already did supply chain mapping over six months with the investment of several engineers, and one thing I know â€˜it is wrong' as I can't keep it updated and we couldn't get by ourselves much beyond our tier 1 suppliers."
Effective supply chain mapping would need expert help. To make the process resource-light as well as efficient, a third party provider can support with dynamically mapping an organization's supply chain.
The third-party team could offer locational alerts relating to political disruptions, natural disasters, and macro-economic health. The team could also focus on supplier related alerts such as site accidents, plant closures, financial disclosures etc.
There is a lot of value to be derived by embarking on supply chain mapping. Organizations will have to decide whether it makes sense to hire a third-party service provider or do it all themselves.
Whatever the case maybe, one thing is certain: it is imperative for organizations to look at supply chain mapping and monitoring.