Spend Performance Management and Supplier Risk
“Enabling Responsible Procurement!”
In today’s volatile business environment, in order for a company to succeed, one of the critical components that have started to emerge is its ability to monitor Supplier Risk and have an active mitigation strategy for such risks. As companies are starting to recover from an economic slump which caused many firms to go bankrupt and disrupted supply chains, their survival depends on having the tools in place that allow them to identify, appraise the impact and devise a strategy to mitigate this risk.
Q1 2009 saw a 64% rise in bankruptcies as compared to the same period in 2008. 2009 was one of the worst years in the history of the economy. The peril experienced by failing companies has been an indisputable wakeup call for those who have survived. It demonstrated how imperative it was for companies – seeking to survive an uncertain future – to begin to track the financial health of potential partners, suppliers and customers. In procurement organizations, where SAP Spend Performance Management adds value, this information is best analyzed in the context of the impact that such suppliers can have on the core business activities of a company, and thus impact the bottom line. With insights into supplier risk, companies now can appraise the risks and convert that insight into action. This is quite powerful as such decisions may not have been possible without the awareness of outside risks to the business.
The screenshot below demonstrates the analysis of Supplier Risk within the context of Spend and Spend relevant measures.
As an example let’s look at a German automotive supplier which has implemented risk management software. The company is seeking to identify supplier risks early on and enable the execution of measures to avoid and reduce risk. The company has a complex supply chain, with 125 plants in 26 countries, and its suppliers have more than 50 percent of the materials contingent for them. As these suppliers have substantial influence on the company’s performance, it is important to identify risks in the supplier portfolio early on. They next need to assess these risks and prevent negative effects on their business activities, such as delivery bottlenecks or delivery failure with appropriate measures.
For a company operating in today’s economy, these risks are real. The current processes they have in place are a fragmented and inefficient. For example, a procurement analyst might take a list of suppliers that she feels is important to the organization’s supply chain and procurement activities and use tools coupled with risk information such as credit, financial, legal and operational health.
As an example in Spend Performance Management let’s look at the following sequence of screenshots:
By viewing the Supplier Detail Report
An analyst can look at the various risk attributes as well as other relevant information for a Supplier
The fundamental weakness of existing methods is that they are not easily repeatable or scalable. A Company needs the ability to identify, analyze and take action on supplier risk information from within a singular application with which they perform Spend Analysis. This gives them the very same key suppliers that they should be analyzing this information in context with. Another strength of the current SPM offering is the ability to define a risk model, in which indicators consisting of both hard facts (e.g., Financial Indicators) and “soft facts” (e.g., Risk Flags that indicate news events related to Operational and Legal issues) as well as additional company information which enable prognoses regarding the probability of occurrence of this risk. The power of the application lies also in its ability to incorporate internal supplier performance indicators to analyze risk trends for early risk detection as well as external and market data on suppliers to support proactive supplier risk visibility. This coupled with the ability to analyze this scenario alongside the supplier Spend amount, Item count, Site count (indicates impact of the risk) provides a glimpse into the degree of damage arising from a potential supplier bankruptcy.
Spend Performance Management can help identify potential lower risk suppliers in a company’s supplier base. For example if we have a particular Item (In this case Ethylmethacrylate) from a potentially High Risk Supplier (Supplier 1201) by using Spend Performance Management we can identify an alternative Supplier (Supplier 3371) who poses a lower risk and with whom an organization can take steps to reduce their exposure to risk.
The approach may sound simple; however there are certain challenges that lie ahead. These challenges once identified and addressed will help drive customer adoption of solutions that help organizations analyze supplier risk in the context of spend. The primary challenge is the quality, relevance and trustworthiness of the risk data. There are several risk information providers and in the fast-paced world of Supplier Risk analysis, information needs to be current and provider business users with the ability to take action based on credible data. Another key challenge that we have recognized and taken steps to solve is the fact that companies have different sources for this risk information. With the ability to define and customize a risk model for multiple providers this has been addressed. Finally there are certain processes for risk mitigation that extend beyond the scope of the SPM application, and there is the need to plan for opportunities on the horizon with which we could position SAP solutions that cover the end to end process of risk identification, analysis and mitigation.