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U.S. Commerce Dept.'s restrictions on ZTE highlights need for 360 degree risk management approach

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by Beroe Inc.
8 March 2016

In collaboration with Rajeev Veluswamy  and Ritoban Sengupta – Senior Research Analysts

The U.S. Commerce Department imposed export restrictions on ZTE Corp over an alleged scheme developed by China’s telecoms equipment maker to re-export controlled items to Iran, contrary to U.S. law.

ZTE makes electronics products, including smartphones and networking gear that relies on components from U.S. vendors. And initial news reports have suggested that the move could potentially affect the business of its U.S. suppliers such as Qualcomm, Intel among others. Also, experts opine that a retaliatory action by China could affect U.S. companies that are looking to expand their business in the country.

This brings us to the question of regulatory uncertainty in general and its impact on procurement decisions in particular.

As businesses become more complex, they face a broad range of risks such as third-party risks, regulatory compliance risks, contract management risks, etc. And companies have begun to use procurement organization’s ability and expertise in managing such risks.

As a result, procurement is gradually entering the fray and subsequently participating in activities such as managing third-party and supplier risk, which traditionally was solely managed by legal department.

More companies are expanding the role of their procurement teams and ensuring that they work closely in tandem with the legal departments in mitigating risks. The compliance departments of major companies are also beefing up their operations. The size of an average compliance department 2 years ago is roughly one-fifth of what it is today.

Different Risk-Management Functions owned by Procurement and Legal Departments

By partnering with legal and compliance teams, procurement organization can play a key role in anticipating such unexpected supplier risk scenarios.

In order to effectively run supplier risk management programs, organizations deploy various automated tools and technologies in areas such as supplier assessments, supplier ratings, workflow management etc.

On the face of it, the services offered by these tools does seem interesting. But has anybody thought about the hidden challenges in deploying these tools? The answer generally is a No.

The foremost challenge is who will provide the necessary information and insight to power these tools? And who will input all relevant, vetted information into these tools? In short, who will “program manage” these functions? Most information that goes into these tools is voluntarily disclosed by the suppliers themselves. And some of them are fed by the companies. But how many suppliers actually comply? The ball park figure is about 50%. The question to be asked is how many of those suppliers who have not given sufficient information are actually critical to the company’s supply chain?

Tools will give you numbers; but you need a person behind the tool to analyze those numbers; you also need a well-informed analyst to analyze the prevailing supply situation to the client’s requirements. And such a hybrid approach combing human intelligence and automated tools has its own benefits as well as challenges.

Benefits Challenges
Multi-tier Supplier TransparencyPossible to successfully identify potential supply risks across all levels of suppliers which significantly impacts the business Focused attention on risky suppliers or supply chain segments reduces the time taken to recover from disruptions Rigor task in terms assessing suppliers at sub-tier level for large organizations where the supplier number runs in thousands
Need for data assimilation and analysisA 360 degree view on supply chain data provides various insights to the supplier risk management program Provides a comprehensive data and opportunity for the organizations to treat suppliers based on their potential to impact the business Most organizations use automated tools for collecting and reviewing data. Integration of these automated tools may not be compatible. Need to combine tools with human intelligence
Tracking supply chain risk rigorouslyOrganizations are positioned better to modify their existing relationship with low-performing suppliers An opportunity for risky suppliers to improve their performance A dedicated team with skills and capabilities suitable for this rigorous task is required
Effective Governance StructureTransparency & Structured approach in the Supplier Risk Management process Additional resources and time needs to be dedicated for best results
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