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Alis Sindbjerg Hemmingsen | Responsible Procurement Excellence | Tips And Advice | 3 July 2013
25 questions to ask yourself about your procurement risk management
approach
Unsustainable practices can create an unacceptable amount of risk for companies.
Here are 25 questions to ask yourself so that you can combat this problem.
You place caution signs inside of your
buildings to mitigate safety risks but what have you done to protect yourself from procurement
risks?
Risk is omnipresent in business today. But without it, business as we know it might not exist either. To
compete, grow, and capture benefit, companies need to take chances; it's what businesses do. Although
business risk has existed as long as there has been commerce, the situation is clearly different in the 21st
century.
However, few companies translate this concern into a formal procurement risk management capability. Most
do have risk-management structures within their finance organizations, though this is not necessarily sufficient.
Risk should not be measured "opportunistically" (i.e. on a "case by case basis"). There needs to be a structured
risk management capability within the procurement organization. Given today's turbulent supply markets and
volatile global business environment, procurement professionals need to make well thought out and robust
decisions to not only compete but to survive as well.
Procurement has to develop a formal, structured risk management capability which creates visibility into
supplier performance and supply risk issues and enable more supplier collaboration. Through active
management, procurement must mitigate risk and enable agility.
THE 25 MOST RELEVANT QUESTIONS TO ASK
An overview is important
1) You'll want to create an overall risk picture of the risk to your suppliers. Exactly how do you define
suppliers to the business? Do you split your business risk and procurement risk into separate silos or are they
merged?
2) Is your supply chain dynamic? Have you developed flexible operations, a diversified supplier portfolio,
global visibility, and options to scale?
3) Do you know who your partners are and how their operational and financial risk profiles looks like? Which
third party vendors and counterparties are there?
4) If you are counting on supplies from a vendor, what happens if you dont get those raw materials?
5) What risks should be captured? How are they going to be assessed and measured? Do you link your risks
with your company's dark spots and general business objectives or is it purely done to ensure compliance?
Management plays an important role
6) Do you have buy-in from the top of the organization? Have you integrated risk management practices across
all business functions to ensure understanding, commitment, and alignment?
7) Have you embedded risk considerations into all business operations and linked them with important
business processes?
8) Do you consider detectability, detection lead-time, time to recover, and cost to recover? How do you
separate resilience success from failure?
9) Do you have clear risk ownership: a well defined organizational structure with explicit roles and
responsibilities to manage risk? Alternatively, do you have a risk committee? Basically, you should have
resources who review emerging trends, progress and results.
Through active management, procurement must mitigate risk and enable agility.
Focus on processes is critical
10) Is there a process for identifying critical supply categories?
11) Are vendors segmented to identify and prioritize those critical to business continuity?
12) How is the action planning process implemented and monitored? What monitoring activities are in place to
ensure risks are being managed and action plans are followed? Is your action plan funded with appropriate
resources to address the core of the risk issues and implement treatment, not just symptomatic relief?
13) Are there proactive risk aggregation activities to ensure 1) risk interdependencies are taken into account
and are managed? 2) Costs for managing risks are leveraged effectively?
14) Are risk management processes consistent throughout the organization and are they linked with other
important business processes?
15) Is your company communicating your efforts and results on risk management in procurement?
Data is essential (if it is correct)
16) Do you capture enough data to recommend profitable strategies?
17) Does your organization simulate potential scenarios?
Metrics matter
18) Do you have the right analytical tools to identify, measure, and monitor operational risks? These tools
should quantify the impacts of the uncertainty, sharpen the companys view, and correlate to management
initiatives.
19) Do you know which kind of supply chain risks you are able to manage well?
If not done properly, reporting can be a waste
20) Are your reports focused and relevant? Do they deliver key information in a timely way?
21) What data do you need to capture to produce those reports?
22) Once the data is captured, what types of analytics are necessary to predict and identify risks?
23) Does your reporting include metrics on current risk management efforts, changes in the risk environment,
and indicate when intervention is required?
24) Is the reporting visible to the top management?
25) Is the reporting structured so it creates visibility on key risk and mitigation strategies and perhaps an
overall risk management strategy?
What do high performers in procurement risk management do?
Are more likely to address supplier and price volatility risks when developing their procurement and category
strategies
Are more likely to develop innovative ways to monitor risks and implement practices and tools to mitigate risk
Are more likely to integrate risk management initiatives into the strategic sourcing process (example: supplier
evaluation)
Have deep supplier relationships. They collaborate with suppliers to rapidly detect risk and neutralize risk-
related issues before those issues become incidents
SO HOW CAN YOU WORK WITH YOUR RISK ACTIVELY?
You can develop strategies to avoid or minimize risk exposure (risk anticipation) by:
Integrating procurement risk management into each category strategy (differentiation by category)
Use dual sourcing and regular negotiations with suppliers to anticipate supply risks related to quality and
supplychain disruptions
Look at alternative materials (re-engineering)
You can continuously track potential risks and raise alerts (risk monitoring) by:
Identifying and assessing the level of risk at key stages of the strategic sourcing process
Identify, assess, and continuously monitor key risks with critical suppliers at each step of the supply chain
Adapt monitoring approaches to categories of suppliers and to different geographies and cultures
Use external data sources for continuous monitoring of the supply markets, suppliers' financial health, etc.
Collaborate with selected critical suppliers and agree on how they can create "early warning systems"
You can act quickly and appropriately to minimize realized risks (risk mitigation) by:
Developing a process to measure impacts of incidents/alerts and continuously improve risk management
practices
Integrate the organization in case of incidents in mitigation plans (who makes, who decides)
Put emphasis on the development of mitigation plans for critical suppliers
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