A study by a leading management consulting firm found that senior executives at seven out of 10 Global 2000 companies feel that business risks have “significantly increased” over the past 10 years. Globalization, outsourcing, low-cost country sourcing, expanding regulation and the economic climate have all contributed to this accelerated volatility and risk.
As a result, the definition of risk management is also evolving and expanding to incorporate an array of operational, legal and financial objectives. Consistently, chief among these objectives is supplier risk management. That’s because, although it varies by industry and company, on average, suppliers account for 50% or more of the value of a company’s end-products or services. That means at least 50% of your risk lies with your suppliers.
Arguably, the stakes for understanding and mitigating supplier risk have never been greater. And surveys show CEOs and CFOs are taking a growing interest in managing that risk.
Effectively managing supplier risk requires the coordinated efforts in compliance, performance management, risk measurement and risk resilience—across the global supply base. To be effective, risk needs to be addressed throughout the supplier lifecycle, including ensuring (a) the right suppliers are being utilized, (b) those suppliers are compliant with policies and regulations, (c) that suppliers are delivering to the terms of their agreements, (d) potential risk scenarios are analyzed, and (e) that strategies to react to an event are mapped out in advance.
There are plenty of examples of risk exposure and the consequences of those risks, but most risks can be traced back to these basic supplier management processes. And each of these processes offers opportunities to prevent unwanted risk.
Historically, companies most commonly used manual processes and spreadsheets to manage supplier risks. Those further ahead pulled data from ERP or other systems to support this process. Today, companies with more developed supplier risk management programs use e-sourcing and contract processes, and the data from those solutions, to further support their programs.
However, only about half of Global 2000 companies have implemented a contract management solution, only one out of five companies use supplier scorecard tools, and only about one in six companies apply sourcing solutions specifically to their risk management programs. Fewer still use dedicated supplier lifecycle management solutions.
What is limiting these companies from undertaking a more holistic approach, especially in light of the benefits to be gained? With a large and increasingly global supply base, and supplier data scattered across disparate and diverse systems, most companies are overwhelmed with supplier information management—and applying this information to supplier risk management. The typical Global 2000 company has more than 20,000 suppliers in its network, so collecting, analyzing and applying information across processes and systems can be a herculean task.
But the reward is great. By taking a more holistic approach to supplier information management, companies gain broader visibility into potential supplier risks; increase their ability to mitigate risks before they develop by leveraging intelligence and risk modeling; and can more effectively establish plans to react quickly and flexibly in the event of a supplier disruption.
The first step on the road to building a more holistic system is ensuring that supplier information is syndicated to operational systems. This enables compliance to be proactively reviewed and enforced. Supplier information should also be syndicated to performance management systems, which allows companies to better measure whether the supplier is meeting standards of performance. Finally, internal and external sources of data ideally should all come together to provide a single, comprehensive view into the supplier.
Such supplier transparency is often seen as a secondary priority, but it is precisely this cross-system insight that enables an organization to maximize supplier risk management efforts.
Of course, integrated processes and solutions will not be instituted overnight and will not prevent all risk scenarios, but ultimately they significantly elevate the organization’s resilience to risk.
Technology solutions that can effectively and comprehensively consolidate supplier data across a global organization are fast becoming a core area of technology investment for procurement organizations. A leading IT research firm calls this emerging area supplier information management and expects investments in it to grow three times faster than any other procurement technology through 2015.
IBM’s Institute for Business Value (IBV) uncovered similar insight from its 2013 Chief Procurement Officer (CPO) Study, one of the largest known surveys of global procurement organizations. In that study, CPOs said they consider supplier information management as the top priority for technology investment in 2014.
Another emerging area of focus in supplier risk management is predictive analytics. Predictive analytics help organizations predict, with confidence, what will happen in the future so that they can make smarter decisions and improve business outcomes. The applications of this technology seem limitless, from risk modeling to enabling companies to project trends, from demand management to analyzing volatility within the supply chain.
In this increasingly complex and global business environment, you may never be able to take risk completely off the table, but you can go a long way towards mitigating it by combing supplier information management with predictive analytics.
Matt McGovern is market segment manager with IBM Procurement Solutions. He is responsible for product marketing of IBM's Emptoris Source to Contract solutions, a suite of supply and contract management solutions which are employed by more than 350 Fortune 1000 and Global 2000 companies.