Social and market upheavals across the world today are inundating supply chain and procurement professionals with continuously emerging and increasingly complex risks that they must proactively respond to. These highlight the importance of a holistic and robust supplier risk management as part of supply chain risk processes, which procurement analytics can help with.
Managing constant supply chain disruptions is seen by surveyed procurement leaders as the second biggest challenge in 2022, with identifying and mitigating supplier risks gaining 24% increased focus among leaders and decision-makers — a close second to category management and strategies.
Financial and geopolitical events, too, exacerbated an already disrupted global supply chain. For example, the situation in Ukraine and its position as one the biggest exporters of commodities such as sunflower oil, corn, honey, and wheat will have tremendous negative impact on global food production. Likewise, tensions between China and Taiwan, which possess 63% of the semiconductor market share, added dependence on neon gas supply from Ukraine where 50% of the volume required by semiconductor manufacturers is produced. This presents a significant challenge to global digital infrastructures, while the risks on human capital has drastically increased.
Moreover, environmental, social, and governance (ESG) goals as well as clear expectations from global markets and regulatory entities are becoming stricter in establishing processes for monitoring and assessing risks. These create challenges — and opportunities — for organizations to stay relevant and attractive for investments and talent.
Challenges that procurement organizations face when managing risks
While supply risk management is now on the agenda for majority of companies, they still confront considerable challenges in:
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Low visibility to the business’s exposure to external risks.
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Minimal governance and cross-functional collaboration.
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Lack of embedded risk management process throughout sourcing.
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Inconsistent risk monitoring and preventive mitigation.
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Lack of visibility to multitier risks.
Supplier risk management — if implemented properly — can avoid significant supply disruptions that, when left unabated, can decrease resulting shareholder returns, increase operating costs, and reduce sales growth. Adopting these holistic principles helps lay out a comprehensive and robust risk management structure and secure the company’s safety:
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Business strategic alignment, contribution, and collaboration
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Closer supplier relationship and continuous monitoring
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Partnership with best-of-breed vendors and a solid end-to-end data strategy
Strategic sourcing and the importance of risk management
For supply risk management to be effective and efficient, it must be an integral part of everyday activities of procurement professionals — defining category strategy, running requests for proposal, information, or quotation (RFx), negotiating contracts, and monitoring performance. There is an established and industry-recognized seven-step framework that organizations can adapt to their strategic sourcing, and companies can identify and address key risk elements at each step — from category profiling to monitoring:
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Identify business needs and profile the category.
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Assess the supply market.
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Develop a sourcing strategy.
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Apply due diligence to requests for information and proposals.
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Negotiate with the selected suppliers.
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Execute contracts with diligence.
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Review and continuously improve.
Companies can also have smoother cross-functional collaboration that complements their risk management program by setting up a control center where risk teams use and manage their portfolios effectively.
Integrated procurement analytics: End-to-end approach to risk management
Every step in the sourcing processes requires understanding and assessing several unique risk elements. Risk profiles can significantly differ depending on factors such as the company’s size, industry, supply base, and geography, which is why it’s vital to prioritize and focus on categories and suppliers that can have most impact to the business.
Capabilities in analytics that cover all these risk areas as well as embed risk profiles and the dynamic nature of different risk factors provide a significant advantage to companies by providing timely insights that fit their realities and priorities. Risk factors can be calculated and embedded within a holistic analytics solution that provides automatic visualization and broad access, which, in turn, enable organizations to understand upstream business impact (e.g., effect on product or brand revenues). They also help reveal the interdependencies between downstream elements (e.g., materials, suppliers, locations) to trigger an effective course of action that addresses and mitigates an imminent threat.
Risk managers will need comprehensive solutions that adapt to changes in business realities as well as integrate data from different sources and easily incorporate it with other data from the company. Information that drive insights needs to be trustworthy, process-streamlined, appropriately maintained and governed. This includes information that needs to be consolidated into executive levels to provide visibility and support as well as information at operational levels, where corrective actions or risk avoidance plans need to be executed.
Solutions embedded AI and machine learning (ML) capabilities (which are predictive in nature) not only automate and optimize processes, but also deliver more accurate models for predicting disruptive events that can affect the company’s supplier base. Organizations as well as procurement professionals that have these capabilities can have a competitive advantage as they can be more agile to changes and threats in the market.
Download our white paper, “Procurement Analytics: Forging Business Resilience Through Supplier Risk Management and Revenue Protection”, to get an in-depth look at how an end-to-end approach to risk management — complemented by advanced analytics — can help organizations forge resilience in today’s volatile business environment. Our white paper also shares a real-life case study on how a Fortune 500 company used procurement analytics to digitally transform their business processes and workflows while tracking, analyzing, and minimizing their business risks.
