July 23, 2022 | Risk Management Blogs
Inflation in the U.S. is expected to remain near its 40-year high in the near term as geopolitical risks, labor shortages and shipping and transportation constraints create a disruptive environment for procurement teams. Supplies of goods from semiconductors to commodities like grain and oil have been impacted.
Is it any wonder that supply risk is the top priority for chief procurement officers (CPOs) in 2022, according to a recent Ardent Partners study?
Amid uncertainties and disruption, ensuring supply security and sustainability is a paramount concern for CPOs. Whether they’re doing enough to mitigate those risks and ensure business continuity is another matter.
According to the survey, 70% have not invested in technology solutions to manage supply risk, leaving them vulnerable.
Compounding the vulnerability caused by a lack of investment in supply risk solutions, many CPOs do not have visibility into which of their suppliers are high risk, and they do not have sufficient capabilities to quantify and rank their suppliers in terms of risk.
Knowing the different kinds of risk that can impact suppliers and, hence, your value chain, is a crucial step in mitigating them.
Broadly speaking, supply risks can be operational, financial, compliance or industry risks.
Operational Risk is any risk caused by flawed or inadequate processes or systems that disrupt business operations. If a network outage hits a supplier’s IT systems and causes delays in workflow, that’s an operational risk.
Financial Risks involve the possibility of losing money, most commonly the possibility that a supplier will not have sufficient cashflow to fulfill its obligations, putting the business in jeopardy.
Compliance Risk is a business’s potential exposure to legal penalties for failing to adhere to industry laws and regulations, as well as internal policies or best practices. Compliance risks could be a result of illegal practices with regard to environmental regulation or workplace health and safety, for example.
Industry Risk refers to any factors that may impact a particular industry and, in turn, the companies in that sector. Overall industry growth, mergers and acquisitions trends and regulatory changes can all affect industry specific risks.
For years, global supply chains traded supply security for lower prices. Now that inflation is spiking as a result of supply constraints and demand increases, what are market leaders doing to address supply risk?
Additional Read: Managing Supplier Risk in Global Supply Chains
When only 30% of procurement departments have invested in procurement technology solutions to identify, quantify and mitigate risks, this is a great starting point to gain visibility and the analytics tools to rank suppliers by risk level. In fact, 48% of survey respondents plan to implement supply risk management technology in the next 12-18 months.
To help enterprises mitigate the different levels of supply risk, technology platforms must be able to handle the large volumes of data from suppliers and segment them into separate tiers of risk in order to manage threats strategically. They must be able to monitor supplier relationships and integrate the risk management lifecycle in a unified platform to enable complete visibility.
In addition to embarking on digital transformation to avoid disruptions, companies are reexamining their reliance on low-cost country sourcing or single source supply models. By diversifying their supplier base and looking at strategies like reshoring or nearshoring to improve supply continuity, enterprises can work to minimize the impacts of future disruptions.
While supplier risk is an important priority for CPOs this year, it’s not the only one. Download GEP’s white paper with Ardent Partners, Procurement Metrics That Matter in 2022, to learn what best-in-class procurement teams are doing to control spend and drive value for their organizations.