This blogpost is explaining risk management and provides examples of risks a procurement professional may meet when managing a Supply Chain and the suppliers involved.

Explaining risk management – definition

Risk management in the supply chain and procurement refers to the process of identifying, assessing, and mitigating risks that can affect the supply chain’s efficiency, reliability, and performance. It involves a systematic approach to managing uncertainties related to suppliers, market dynamics, logistics, compliance, and other factors that could impact the procurement process and overall supply chain operations.

Supply Chain Risk Management Process (SCRMP)

One widely adopted risk management method is the Supply Chain Risk Management Process (SCRMP), which encompasses several key steps:

• Risk Identification: This initial phase involves recognizing potential risks that could disrupt the supply chain. These risks could be internal (within the organization) or external (outside the organization).
• Risk Assessment: Once risks are identified, the next step is to evaluate their potential impact and likelihood. Tools like risk matrices or risk heat maps can be utilized to prioritize risks based on their severity and probability.
• Risk Mitigation Planning: After assessing risks, developing strategies to mitigate them is crucial. This involves creating action plans that can include diversifying suppliers, increasing inventory levels for critical components, or implementing more robust quality control measures.
• Implementation of Mitigation Strategies: This phase involves putting the risk mitigation plans into action. It requires coordination across various departments and, often, with external partners.
• Monitoring and Review: The risk environment is always changing, so continuous monitoring of the risk landscape and the effectiveness of mitigation strategies is essential. This ongoing process ensures that the organization can adapt to new risks and refine its approach over time.

Examples of Risks Encountered by Professional Buyers:

• Supplier Risks: These include the risk of supplier insolvency, quality issues, or delays in delivery. Mitigation strategies might involve conducting thorough supplier assessments, establishing strong contracts, or developing alternative supplier relationships.
• Market Risks: Fluctuations in commodity prices, exchange rates, or changes in regulations can impact procurement costs and supply chain operations. Hedging strategies, fixed-price contracts, or regulatory compliance monitoring can help manage these risks.
• Logistical Risks: These can arise from disruptions in transportation, customs delays, or warehousing issues, potentially impacting the timely delivery of goods. Diversifying logistics partners and routes, and maintaining buffer stocks, are common mitigation measures.
• Technological Risks: Cybersecurity threats or failures in IT systems can disrupt procurement processes and information flow. Implementing robust cybersecurity measures and IT system redundancies can help protect against these risks.
• Natural and Political Risks: Natural disasters, political unrest, or trade restrictions can severely disrupt supply chains. Having contingency plans, such as alternative supply chain routes or local sourcing options, can mitigate these risks.

Integrating Risk Management into the Sourcing and Category Management Processes

Risk management is a critical component of sourcing- and category management within procurement. It provides a framework for identifying, assessing, and mitigating risks throughout the lifecycle of supplier relationships and the management of procurement categories. Here’s how risk management integrates into these processes:

Sourcing Process:

• Pre-Sourcing Risk Identification: Before initiating the sourcing process, it’s essential to identify potential risks associated with the market, suppliers, and internal organizational needs. This could include supplier financial stability, geopolitical factors, market volatility, or compliance risks.
• The course contain an introduction to digitized supplier onboarding, benefits / risks avoided and best practices.Supplier Evaluation and Selection: Risk assessment is integrated into the evaluation criteria for selecting suppliers. This often involves a comprehensive review of the suppliers’ financial health, operational capabilities, compliance with regulations, and their ability to manage disruptions. Tools such as SCRMP or SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can be applied to systematically evaluate and compare potential suppliers based on risk factors. In the course Digitization of Supplier Onboarding one can learn about consistent risk mitigation and the visibility needed for easy audits.
• Contract Negotiation and Management: During contract negotiations, risk management involves defining terms that mitigate identified risks, such as service level agreements (SLAs), penalties for non-compliance, and clauses that allow for flexibility in response to changing risk scenarios. It also includes setting up monitoring mechanisms to ensure supplier compliance and performance against agreed risk management strategies.

Ongoing risk management is essential after the supplier is onboarded. Regular reviews, audits, and performance assessments help identify new risks and ensure that the supplier adheres to the agreed-upon risk mitigation plans. This phase may involve adjusting strategies in response to new risks or changes in the business environment. Ongoing risk management is described in the courses Know your Suppliers (Basic level course providing you an understanding of process for collecting information about your supply base and assuring the possibility to mitigate the identified risks).

Category Management Process:

• Category Risk Profiling: Each procurement category is analyzed to identify unique risks related to market dynamics, technological changes, regulatory requirements, and supply chain vulnerabilities. This profiling helps in understanding the risk exposure of the category and prioritizing risk management efforts.
• Strategy Development: The category strategy incorporates risk management by identifying objectives and actions that reduce risk exposure. This could involve diversification of the supplier base, investment in technology to enhance supply chain visibility, or development of strategic partnerships with key suppliers to ensure supply continuity.
• Supplier Relationship Management (SRM): Within category management, SRM focuses on building relationships with key suppliers to collaboratively manage risks. This involves regular communication, joint risk assessment exercises, and collaborative development of risk mitigation strategies.
• Performance and Risk Monitoring: Continuous monitoring of category performance and emerging risks is vital. This includes tracking key risk indicators (KRIs) and adjusting the category strategy as necessary to respond to new risks or changes in the risk landscape.

Learning from the implementation of risk management strategies within categories and sourcing activities feeds back into the overall procurement strategy. It involves analyzing the effectiveness of risk management actions and using these insights to refine future strategies. Learn more about Category Management in EFFSO’s basic level course.

Three keys to successful Risk management

When explaining risk management, method is one thing but we cannot forget, there are other parameters enabling quality result. Let’s delve a bit deeper into these three key areas to highlight their importance and application:

1. Knowing the Supplier Market and the Products Sourced to the Supply Chain

Understanding the supplier market and the specifics of sourced products is foundational to identifying potential risks. This knowledge encompasses several dimensions:

• Market Dynamics: Awareness of the supplier market dynamics, including competition, market trends, and supply-demand imbalances, is crucial. This helps in predicting potential supply shortages, price volatility, or emerging suppliers.
• Supplier Capabilities and Health: Deep knowledge of your suppliers, including their financial stability, manufacturing capabilities, and reliance on sub-suppliers, allows for a realistic assessment of risks related to supplier failure or disruptions.
• Product Specificity: Knowing the technical specifications, regulatory requirements, and criticality of the products sourced ensures that risks related to product quality, compliance, and availability are properly managed.

2. Seeing Risks on Both a Detailed Level and on a Macro Level

The ability to analyze risks from both micro and macro perspectives is vital for comprehensive risk management:

• Detailed (Micro) Level: This involves looking at the specifics of individual suppliers, contracts, and products. It includes assessing risks such as the failure of a supplier to meet quality standards or the impact of a local natural disaster on a supplier’s operations.
• Macro Level: This broader view considers external factors that could impact the supply chain, including geopolitical events, global economic trends, and industry-wide regulatory changes. It requires staying informed about global events and understanding their potential impact on the supply chain.

3. Understanding the Possibilities to Mitigate Risks

Effective risk mitigation depends on understanding the range of strategies available and their applicability to different scenarios:

• Diversification: Reducing dependency on a single supplier or geography can mitigate risks associated with supplier failure or regional disruptions.
• Contracts and SLAs: Negotiating contracts that include risk-sharing provisions, penalties for non-compliance, and clauses that allow for flexibility in response to changing circumstances.
• Alternative Sourcing Strategies: Developing alternative sourcing strategies, such as dual sourcing, local sourcing, or stockpiling critical components, can provide fallback options.
• Collaboration and Partnerships: Working closely with suppliers to jointly manage risks, including collaborative planning for risk mitigation and recovery.
• Technology and Innovation: Leveraging technology for better risk monitoring and management, such as supply chain visibility tools, predictive analytics, and blockchain for traceability.

Summary – explaining risk management.

When explaining risk management in supply chain and procurement, key is to convey the importance of proactively identifying and addressing potential threats to ensure the continuity and efficiency of supply chain operations. By implementing a structured risk management process and maintaining agility, procurement professionals can safeguard their organizations against the unpredictable nature of global supply chains.

Integrating risk management into the sourcing and category management processes enables organizations to proactively address potential disruptions, ensure supply continuity, and achieve competitive advantage. By systematically identifying, assessing, and mitigating risks, procurement professionals can ensure more resilient and responsive supply chains.

Success in risk management requires a holistic approach that combines a deep understanding of the supply chain, strategic thinking to anticipate and assess risks from multiple perspectives, and the creativity to develop and implement effective mitigation strategies. By focusing on these three key areas, procurement professionals can build resilient supply chains capable of withstanding disruptions and maintaining operational continuity.

I hope you have got value out of the blogpost Explaining risk management in procurement /// Fredrik

Note: Illustration to “Explaining risk management in procurement” is created by Chat-GPT on February 23, 2024.

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