Why risk needs to be top of mind for procurement leaders

Managing risk is not a priority for procurement. That's according to a new report by the consulting firm A.T. Kearney and research and analytics company Rapid Ratings International. The report describes procurement's role in supply chain risk management, potential risks that could affect the supply chain, and ways procurement can better manage risk.

Procurement leaders who participated in the study say they understand that risk exists, yet they admit they are not doing all they can to ensure supply continuity should an event occur that causes a disruption. They say it's because they don't have the time or the budget to address these issues.

Procurement leaders also are not measured on their performance at mitigating risk. It's difficult to monitor, and CFOs and other finance leaders surveyed in 2015 by Research Now say there isn't much value in tracking procurement leaders on the metric.

When asked, procurement leaders say they will turn their attention to risk management in three years.

Obviously, that's not a good idea. The report, "Is Your Luck Running Out?" warns that "getting by with a strategy of 'hoping our luck holds out' leaves procurement vulnerable in today's tenuous geopolitical and economic environment, where many public and private companies are in precarious financial positions."

Now's the time for procurement leaders to begin paying attention to risk and put a plan in pace to mitigate it. When an earthquake, tsunami, and eventual disaster at a nuclear plant occurred in Japan five years ago, automotive and technology companies that did not have strategies to ensure continuity of supply experienced longer delivery leadtimes and shortages of key chemicals, electronics, and other components. Economic losses were estimated to be in the billions of dollars.

Some procurement leaders manage risk by segmenting the company's spend by supplier, investing resources on contingency plans for suppliers deemed critical or strategic. A.T. Kearney and Rapid Ratings suggest procurement go a step further in managing risk by segmenting spend by category and building plans for ensuring supply continuity into category management strategies. This is because a supplier of a critical part that could shut down a facility may not stand out on its own if it's not a very significant part of spend.

In the report, A.T. Kearney and Rapid Ratings suggest procurement leaders and category managers do this before they even select the supplier. Initial phases of strategic sourcing processes are the best time for procurement to analyze the marketplace and evaluate potential suppliers with an eye toward possible risks such as a history of delivery delays, quality issues, and financial distress. Latter phases that call for procurement to put in place systems that routinely monitor supplier performance also go a long way toward helping the company mitigate risk and ensure continuity of supply.

Taking this approach may even help with managing risk further along the supply chain, with tier 2 and tier 3 suppliers. If you have sound policies and procedures in place with your tier 1 suppliers, ensure they cascade these down to their suppliers, who will then do the same with their suppliers through processes that track performance during business review meetings.

The key, the report concludes, is data. That is, the data that category managers gather during the strategic sourcing process on the market and on supplier performance can provide procurement leaders with the insight they need to make decisions that help to head off any potential risks to the supply chain. And, when the unlikely occurs, it's this data that will provide the basis for procurement leaders to take action to ensure any disruption to supply is minimal.