Supply Chain Risk Management: More Critical Every Year
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Ardent Partners defines supply, or supply chain risk management as the process of identifying, assessing, prioritizing, monitoring, and mitigating risks to an organization’s supply chain. This multi-part process is challenging enough for organizations with fairly limited global operations and stratified supply chains that are operating in calmer proverbial waters. But, this is the year 2020. And with the clarity that 2020 vision brings, organizations today are operating in a global business environment rife with disruption, risk, and uncertainty (click here to read my earlier installment in the series about the state of the world today and all the headline-making disruption).
According to Ardent Partners research, the procurement functions at 59% of all enterprises have taken over responsibility for enterprise-wide supply chain risk management programs and strategies over the last 10 years. The convergence of supply chain risk management responsibility within the procurement function is attributed to two things: (1) supply chain risk management is frequently and generally regarded as a traditional procurement process, and (2) when a supply chain risk management program is initiated, procurement is best positioned to manage it given its influence and reach across all internal stakeholders and suppliers. These procurement attributes help explain why procurement’s role in supply chain risk management will continue to expand.
As a result of this convergence, more and more CPOs and their procurement teams are the ones tasked with working with AP/Finance, HR, IT, Legal, Regulatory Affairs, and the supplier base to identify, prioritize, monitor, and mitigate a whole host of supply risks for the organization. On that note, let’s take a step back and classify the various kinds of supply/supply chain risk floating (or careening) around the world today. Arguably, there are six basic kinds that CPOs and procurement teams need to monitor and manage:
- Category/Market Risk: These include commodity shortages, labor shortages or strikes, seasonal demand dips or surges, price spikes or deflation, mercurial customer demand.
- Economic/Financial Risk: Market volatility (the financial kind), recession worries, market crashes, changing consumer confidence, (in)solvency, fluctuating tax policies.
- Environmental, Social, and Governance (ESG): Sustainability, corporate social responsibility (CSR), humanitarian risks (e.g., “sweat shops,” modern slavery, human trafficking, child labor), regulatory compliance measures to control these kinds of risks.
- Geopolitical/Political Risk: New regulations (e.g., GDPR), sanctions, tariffs and “trade wars,” treaty withdrawals (e.g., Iran Nuclear Agreement), “Brexit,” US domestic politics, border/territorial disputes (e.g., Russia-Ukraine, India-Pakistan), conflict, piracy, terrorism.
- Man-made/Natural Disasters: Oil spills, hurricanes, earthquakes, tornadoes, tsunamis, nuclear accidents, climate change/global warming and their related effects (rising sea levels, disappearing habitat and species).
- Supplier Risk: Contract non-compliance, poor performance, financial jeopardy, reputational risks, cyber security risks, data collection/sharing practices, diversity and inclusion (D&I).
As an enterprise’s supply base morphs and evolves, so too must the approaches taken to manage the risk found within it. As disruptions take new and, sometimes, unsettling forms, CPOs must ensure that they leverage a broad array of capabilities and strategies to effectively mitigate supply risk. These will vary depending on leadership, the organization, and perhaps the industry vertical. Thus, a supply chain risk management program would generally include the following:
- Taking a 360-degree view in defining enterprise-level supply risk.
- Envisioning, expecting, and then planning for the worst-case scenarios.
- Establishing cross-functional teams to support supply chain risk management programs.
- Identifying and then clearly defining, tracking, and analyzing metrics for supply performance and risk.
- Continually revamping supply risk management programs to mirror shifts in the supply base and marketplace.
- Centralizing supplier information in a centralized system or database.
- Clearly defining ownership for managing supply risk.
- Adopting technology systems to measure supplier performance, capabilities, and other key data.
- Using third-party information services to monitor and assess supply risk.
- Developing ongoing supply chain risk management training programs that include realistic scenarios.
Final Thoughts
The moving target of supply chain risk management is only getting harder to hit in today’s global, hyper-kinetic business world. The bigger an enterprise’s global footprint is in terms of customers, locations, infrastructure, suppliers, and supply chain, the greater the chance that something, somewhere, could go wrong. Moreover, identifying, prioritizing, and mitigating (or accepting) risk without the right people, processes, and technologies in place to collect and analyze supply risk information in a timely manner is all but impossible.
The current supply risk environment is, frankly, chaotic and uncertain. Best-in-Class CPOs have remained more proactive and vigilant in their supply risk management efforts and have reaped rewards from these efforts. Other CPOs and procurement leaders would be wise to follow their example and invest time and resources now to ensure that their organizations are ready and able for when the markets inevitably shift.
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