Now more than ever, risk management is a vital part of the procurement function, and hence the CPO’s responsibilities. One main reason is because supply chains are growing longer and are getting more complex. Companies have new exposures in new geographic regions, and the interconnected nature of the global economy makes problems far more likely to arise. Thus, the likelihood of supply chain disruptions has increased. What are the potential costs of failure for your company when it comes to supply chain risks?
According to the 2013 Sustainable Procurement barometer developed by HEC/Ecovadis, risk management remains a critical driver with 80% of companies implementing a “Code of Conduct” and 58% focusing only on high risk suppliers. However, more and more companies realize that Sustainable Procurement is also about monitoring performance, integrating CSR into their RFP processes (79%) or Supplier Relationship Management (SRM) processes for strategic suppliers (72%).
Conventional Thinking is Outdated
Those with a proactive approach have proven themselves to be ahead of the curve and able to prove results not just in savings, but across other key business metrics. Conventional thinking about supply chains and supplier risk is outdated.
Many procurement organizations are challenged by the fact that across the supplier base and along supply chains there is an enormous spectrum of risk to take into account ranging from supplier ethics, finances and labor practices, to natural phenomena such as volcanic ash clouds, floods and tsunamis. Still, it can be difficult to justify the resource input necessary to evaluate the risks effectively.
Additionally, the continuing focus on operational efficiency and cost optimization has been a strategic priority over the last decades, helping corporations lower the costs of manufacturing through outsourcing, offshoring and other practices. Cost reduction efforts however, often outweighed other strategic priorities. Companies that once kept backup inventory and manufacturing facilities in place may have exposed themselves to additional risk, as they concentrated on working ‘leaner’, with fewer redundancies.
How Do You Monitor?
As a result, businesses often remain unaware of specific risks until a particular problem arises that causes supply disruption, brand/reputation damage or similar impacts. In many procurement organizations the supplier gets evaluated on product content, quality, delivery, and sometimes financial stability and similar factors when entering into the relationship. Afterwards, ongoing monitoring takes place. The question is, how do you monitor the sustainability performance of your suppliers and engage them into improvements?
More and more organizations are following key deliverables through the entire supply chain and identifying risks not only among top tier suppliers, but among lower tier suppliers and their subcontractors. With a clearer understanding of the risks facing the organization, and the potential financial, operational and reputational consequences of those risks it is much easier to address the question of how to integrate risk management into business operations and ensure its effectiveness.
Look Across The Supply Chain
Companies tend to look at risk in individual parts. Most risks, including CSR related risks, should be managed across the supply chain network. Because of the systemic nature of supply chain risks, a problem in one area can easily affect the entire supply chain. In order to be able to aggregate risks, sophisticated supply chain management software is increasingly required to measure interdependencies within the entire value chain, and help quantify financially what are the most effective options to manage or mitigate risks.
Author: Alis Sindbjerg Hemmingsen
First published in the Sustainable Supply Views blog from EcoVadis
EcoVadis is the CSR rating platform for supply chains spanning 150 sectors and 99 countries of Global-500 enterprises like Verizon, Coca Cola Enterprises, Johnson & Johnson and 100 others. EcoVadis Scorecards make it easy to understand, track and improve suppliers’ environmental, social and ethical performance. www.ecovadis.com