Traditional Supply Chain Management has focused on taking a lowest possible risk approach possible when it comes to sourcing. These methods fall short in an age where markets are in a constant state of change, and companies must innovate to stay at the cutting edge.
It is commonplace for many organisations to seek to minimise their own exposure to risk when it comes to the supply chain. Indeed, conventional SCM acknowledges the inherent risk in the supply chain and seeks to reduce it.
Reducing risk is, of course, generally favourable. But procurement professionals should remain cognisant of the value which they give away to achieve it.
A common example of where value is lost in the supply chain is through uncertainty.
Buying organisations are unable to commit volumes over the life of a contract, but chase the best piece prices or seek cost certainty. Conversely, supply side organisations struggle to provide best value if volume uncertainty looms.
Buyers need to ask themselves whether their priority is to achieve the best possible prices or to move risk and uncertainty down their supply chain. If the latter is the case, procurement professionals should seek to quantify the potential value that is sacrificed in doing so.
By undertaking this exercise, corporations will quickly see that real value is created, not by pushing as much risk as possible away from their company, but by ensuring that the firm in the holistic supply chain which is best placed to effectively manage a risk, assumes it.
Identifying and Analysing Risk
The two dimensions of supply chain risk are: the outcome should the risk occur (impact) and the expectation of the risk (probability).
Procurement professionals should apply focus where the potential impacts are high and the probability is significant.
The probability of risks occurring does not have to be exactly measured, and estimating both probability and impact on a simple chart can be an effective method of assessing the need to implement risk mitigation.
The graphs below illustrate how different levels of supply chain risk can be achieved for the same procurement project.
Key supply chain risks in both scenarios have been plotted onto scales to signify their impact and probability of occurrence.
In the first scenario, the buying organisation attempts to push risk down the supply chain. In scenario two, the approach of encouraging the party who is best placed to manage a risk to take that risk on board is followed.
The graphs identify that when risk is managed by the most suitable supply chain partner, the supply chain as a whole carries an intrinsically lower level of risk than when risk is pushed upstream in the supply chain.
With a reduced level of risk, the supply chain will be able to deliver at a lower overall cost than its counterpart, ensuring competitive advantage for all parties involved.
Mitigating Risk
Procurement practitioners should also seek to mitigate what risk exists in the supply chain.
The 4T model (Treat, Transfer, Tolerate, Terminate) is an effective tool to determine the risk management strategy. The tables below apply this to our scenarios to illustrate good examples of risk mitigation.
The tables show that all risks can be mitigated to an extent. However, improving a suboptimal position will always drive less value for procurement professionals than apportioning risk correctly in the supply chain – even if that means taking it on board ourselves.
Comments