By Jason Busch, January 8, 2014, Spendmatters.com
This post is based on the FreeMarkets white paper (published in 2003) that I co-authored with Mark Clouse, Global Supply Management: Strategies for Identifying and Managing Supply Risk. I recently dusted off the paper for my own research into supplier relationship management and found an analysis that was nearly every bit as relevant then as now. Enjoy!
The risks that come from supply decisions are significant and on the rise. To mitigate these risks, it’s important to understand where you’re exposed and what the potential implications are. The challenge is not only assessing risk for an individual part or service, but also rolling those up to identify compounded risks—at the category, supplier, program and ultimately, the customer level.
This diagram lays out a five-step process for assessing and managing supply risks:
Supply Risk Assessment Process
I’ll now explore Step 3: mapping the results (see my previous posts on how to assess supply risk probability and impact)
After mapping risk probability and impact come steps 4 and 5 below.
Step 4: Identify root causes. For high-risk materials and services, get a handle on where in the supply management process it’s occurring and what’s driving the risk. For example, if strategy risk is the biggest issue, what’s creating the risk? A lack of supplier or supply market information? Poor spend visibility?
Step 5: Implement mitigation actions and monitor over time. Once the weak spots are identified in step 4, supply managers can take action to fill these gaps, update the risk assessment based upon the mitigation actions, and track them over time as conditions change.
These steps are meant to provide a cursory look into supply risk. But only through a more detailed overall evaluation of supply risk will an organization be able to come up with the right strategies and build a risk model and framework that can help inform overall supply management decisions. In evaluating the options for how to look at identifying and managing supply risk, it’s critical to work with trusted partners and third parties to help benchmark performance and risk levels, and identify key thresholds and levels of risk that an organization is willing to assume. An expert partner can also help better quantify risks to the organization and can help develop highly specific mitigation and management strategies to reduce risk over time.
Curious? Drop Sydney a line (slazarus@spendmatters.com) and we’ll send you out a copy of this dusty old analysis! Some topics are timeless. And supply risk is one of them.