While it has always been a vital business process, the last few years have demonstrated the true importance of having robust supplier risk management. Initially, the COVID-19 pandemic caused major disruptions to supply chains, as well as turbulent market conditions, leading to global supply chains grinding to a halt and established business across a diverse range of sectors suddenly disappearing.
Although global supply chains have somewhat stabilised in the aftermath of the pandemic, geopolitical unrest – namely the ongoing Russia-Ukrainian war, the wider conflict in the Middle East, and the US-China chip dispute – is creating new challenges and posing fresh risks for procurement professionals, once again underlying the value of proactive supplier risk management.
It goes without saying that proactive supplier risk management is a vital input for building supply chain resiliency. Nevertheless, across the procurement industry, a limited number of firms are harnessing supplier risk management’s full potential.
Facing significant supplier risk management problems
There are undoubtedly major concerns with the current supplier risk management practices organisations are utilising. One of the main reasons why the majority of procurement teams aren’t approaching and managing supplier risk consistently is because the appropriate volume of resources has yet to be allocated to the vital business function.
Organisations don’t have clear authorisation for supplier risk management, making it challenging to gain the resources required to effectively manage it. In most cases, this is due to the firm in question not having a chief risk or compliance officer in place. This means risk has no seat at board level – the place where awareness needs highlighting most. Awareness also varies significantly between teams, resulting in irregularities concerning the approach taken to risk.
What’s more, businesses currently have extremely limited risk coverage. Many organisations don’t track the financial risk of their suppliers or the ESG and sustainability risk, leaving them vulnerable to possible reputational damage. In fact, somewhat surprisingly, in some circumstances companies don’t actively monitor material price or supply risks at all. With the additional caveat that risk intelligence in most organisations is based on point-in-time assessments, continuous visibility is missing from the picture, especially for strategic suppliers. This leads to most firms being unable to identify risks prior to their occurrence.
Nevertheless, highlighting a risk is only half the challenge. Once this has been done, procurement experts must take the right remediating actions at the right time. This necessitates dependable and actionable intelligence. A limited number of firms have access to supplemental risk deep dives which can assist them in contextualising their own data and insights. In addition to this, within these companies, internal stakeholders select remediation strategies largely founded on what they can see with their own eyes and their personal goals. Again, this limits the consistency and strategic impact of how risk is overseen.
Elsewhere, while most businesses already have a lot of risk data they need, this tends to be located in diverse and siloed systems. This means procurement teams are unable to access the data, and, as such, don’t have a holistic view of risk. Without that visibility, procurement professionals cannot effectively manage risk for different vendors. The result of this is a procurement team in which individual professionals approach risk utilising different methods, and make decisions in an inconsistent manner, exposing themselves to supplier risk.
The combination of these issues is making it incredibly problematic for procurement professionals when it comes to managing the plethora of supplier risks facing them in today’s world. However, procurement leaders can overcome and solve these problems. To ensure effective supplier risk management transformation, there are a handful of pillars procurement teams put in place.
Ensuring effective supplier risk management transformation
Firstly, to manage supplier risk effectively, procurement teams need to investigate and track holistic and relevant risk factors. Some risks, such as financial ones, are already relatively widely monitored. For instance, should a supplier have poor finances or be plagued by financial uncertainty, that represents a clear and obvious risk to its ability to meet the long-term needs of customers, jeopardising future operations.
Nevertheless, other risk factors ought to be tracked too. Unsurprisingly, an ever-growing number of procurement teams are beginning to monitor ESG risk. By continuously observing the ESG impact of a third party’s operations, organisations can identify any issues that may have a negative impact on their brand and reputation, or their ability to adhere to increasingly strict ESG regulations.
Irrespective of how widely firms listen for risk, it’s vital their efforts are continuous. As risk is dynamic rather than static, snapshots of conditions cannot be relied on in the long-term. Only by continuously listening to risk can businesses consistently respond to issues in an efficient and effective manner.
Proactively identifying risk is extremely valuable – but the battle doesn’t stop there. Following the identification of a risk, procurement teams need to take the right remediating actions at the right time. That necessitates access to specialist support, as well as reliable and on-demand intelligence relating to identified risks. For example, if procurement professionals discover that a commodity is expected to see increased demand soon, they’ll require access to bespoke intelligence that helps them clearly identify several factors. This includes the impact it will have on price and availability in both the short and long-term, as well as alternative suppliers, regions, or even commodities that could mitigate the effects of rising demand.
On-demand access to intelligence enables procurement teams to respond to risks in an appropriate manner. However, intelligence on its own is not enough to mitigate risks effectively. Working alongside a partner which provides as required access to specialists helps procurement professionals make complex supplier choices. What’s more, having access to impartial, supplier-agnostic experts assists procurement teams in thinking outside of their established ways of working. From this, organisations can not only alleviate the impacts of potential risks, but in fact turn these into opportunities for value creation.
Once the right actions to take in response to a risk are identified, businesses need to implement a framework to ensure suitable action is taken. Having a corrective action planner ensures activities and responses are visible throughout the company. With insight into what they need to do, and when, all members of the procurement team can respond to risks swiftly and consistently. In most scenarios, risk remediation is an activity that needs completing by multiple people working together. A corrective action planner operates as a singular source of truth for all essential and previous remediation actions, so as to ensure every person in the procurement team and beyond is in agreement with one another and emboldened to collaborate seamlessly.
For organisations, changing the way in which they manage supplier risk is far from an easy process. Nevertheless, in order to transform their supplier risk management into an efficient and effective practice, businesses must implement wide market listening, well-defined remediation actions, and timely and actionable intelligence. This ensures procurement teams can take the appropriate mitigating actions, at the right time.
