Future of Procurement – Risk
Recently we had the opportunity to get our VP of network growth, James Marland, in the same room with Andrew Bartolini, who is Managing Partner and Chief Research Officer at Ardent Partners. This resulted in four interesting conversations around the topic, “The future of procurement.” The first conversation revolved around procurement innovation. The second conversation is focused on the increasingly important topic of Risk: the types of risk and how procurement can mitigate against it. You can listen to the entire conversation here:
The rise in supply chain risk
James starts the conversation with an example of a small electronics supplier that was brought up on charges for using child labor. It just so happened that this was a supplier to Samsung. The result was a lot of negative press exposure and brand damage. This is one example of many. Whether it’s working conditions at an Apple supplier, horse meat in IKEA meatballs, or unsafe working conditions in fashion, global supply chains have brought about new challenges.
According to Andrew globalization hasn’t only brought us new markets, cost savings, and a competitive marketplace, it has also added complexity and risk to the supply chain. Andrew:
“Globalization has also added several layers of complexity to organizations that have global suppliers, that do global sourcing. And the key issue there is risk and the visibility that organizations have in their overall supply chains.”
This new level of complexity and lack of visibility impacts risks in different areas of the supply chain. This includes risks like the financial health of your suppliers, social responsibility, legal liabilities, and disruptions due to political or global disasters.
The role of procurement
James adds that managing risk for many procurement organizations has become a greater concern than traditional savings. He also points that these risks cannot be managed by simply emailing a checklist to your suppliers once a year.
Andrew says, “It starts at coming up with a broader supply risk management strategy. I think that many of the challenges that exist for procurement organizations today come from the multitude of potential risks that exist and the cost associated with mitigating each and every one of them. It’s important to identify the risk, but taking on risks is not necessarily a bad thing.”
It is also important to keep in mind that each procurement department faces an unique set of risks based on components and geography which is why Andrew says:
“It is key for procurement organization to have contingency plans in place so that they have done the what if scenarios. What if there is a breakdown because of floods in Thailand, what if there is a breakdown because of the Fukushima nuclear catastrophe.”
Andrew describes how Toyota, with its world class procurement and supply chain organization, foresaw the 2008 financial crisis and flew in everyone to prepare the various scenarios. Their primary focus was on the financial health of their suppliers. The next year they came out as the number one car manufacturer.
Unfortunately, later that year one of their suppliers had a mishap in their software that caused a fairly dramatic recall. You can’t foresee everything, but as Andrew mentions:
“The key is to have identified and prioritized the primary risks and to have plans in place so that you can escalate a response”
Risk and technology
James points to the role that technology can play in reducing risk. Examples include having quick access to supplier alternatives through technologies like Ariba Discovery, and as discussed in the previous podcast, eliminating process complexity.
Finally, there are the promising opportunities of supplier financing, using your cash liquidity as a buyer (for a discount) to get suppliers out of a possible cash squeeze.
“By automating your P2P processes, enabling straight through processing of invoices an AP department or P2P team has the opportunity to go and engage the treasury department to decide if the best use of our cash is to pay the supplier today, or to do it at a later stage”
What are some of the innovative ways you are managing risk? How is that defining your relationship with both your suppliers as well as your stakeholders?
This podcast is part of a series called the Future of Procurement. Join the discussion online and listen to the recording of Andrew on Ardent Partner’s CPO Rising 2015 report on these and other current procurement developments.
Alternatively you can join hundreds of peers at Ariba Live in Munich. Have a look at the current line-up