Managing risk within the sourcing process
Filed Under Blog
We all know the risk management is one of the most important aspects of supply chain. The impact of failing to capture risk and then mitigate it can be uncomfortable at best and kill companies at worst. There are many facets to managing risk effectively as it can come from many areas within the supply chain. One of those key areas is within the sourcing process.
Resultant issues caused by the sourcing process can not only cost organizations the obvious financial penalties but also damage brands (and career prospects!!). If that isn’t bad enough failing to identify risk during sourcing can result in supply chain volatility and disruption across the supply network. As such it’s vital that risk is taken into account during sourcing activities.
While risk management is a fairly simple concept in execution it can be highly complex with many variables to consider. However, the basics of the risk management process is a tried and tested technique with a methodical process that once people have been trained in can be easily deployed.
From my experience, part of the problem is that within the sourcing activity it is not something that should be looked at during the start or the end of the process but should be an ongoing continuous process.
In many businesses, suppliers tend to be vetted once at the point of sourcing and then left alone to their own devices, this can leave the buying organization exposed to issues that arise later on.
The benefit of a procurement risk management process
The key, of course, is having a risk management process that is firmly embedded within the supply chain process suite. Unfortunately, we supply chain professionals tend to focus on the sexy stuff like KPI’s, supplier selection and contracts methodology. Unfortunately, risk sometimes becomes an afterthought.
When looking at sourcing one of the obvious places to embed risk management is at the point of onboarding the supplier. At this stage, it’s vitally important that you have adequate monitoring and sufficient transparency so that stakeholders engaged in the sourcing process are aware of any risks and can cooperate in the mitigation process (this includes the suppliers themselves).
When you do have the right process in place, managing risk doesn’t have to be difficult, as we stated above the risk management process is well established and there are suitable checks that can be made which are specifically appropriate to supply chain.
Risk management requires mitigation effort and of course, not all suppliers are equal in terms of their criticality and for those supplying products that are easily resourced within the marketplace the business might prioritize resources to help manage suppliers which offer more critical expertise or specific niche products.
One of the key problems is that risk management in the sourcing process often gets undertaken at the outset of supplier onboarding and then doesn’t get touched again. However, where a significant length of time has gone by since onboarding, issues may have arisen that if not managed will go unchecked, this can often lead to disastrous consequences on what was thought to be secure sources of supply.
Ongoing business reviews offer the ideal opportunity to solve this problem and offer the right environment to review risks and mitigation activity as part of the ongoing relationship.
Of course, the risks associated with sourcing is just one aspect of supply chain risk and there can be many other facets to consider in areas like production planning, logistics, and operational areas these areas too will require similar capture and mitigation processes.
Have some thoughts on sourcing risks? We’d love to hear your comments in the section below.