Monday, 28 April 2014

Risk Management in the Supply Chain: Part 1 - People

Authored by Paras Sood

After attending the latest Real World Sourcing Series event on Risk Management in the Supply Chain, where Guy Allen gave a comprehensive overview of the pertinent issues in supply chain risk and how they could be managed within an organization... I wondered how this affects us all in our day-to-day lives as procurement and supply management professionals, especially in terms of the people involved, the processes followed under the emerging governance of technology.

 If you were unable to attend the event, you can download the presentation slides here

Part 1: Are people the biggest risk in the supply chain?

Whether you're a procurement professional tasked with mitigating risk in the supply chain, or a key stakeholder likely to feel the impact of a particular risk, humans are the most important factor to consider in any meaningful risk equation. As procurement bods, we are constantly exposed to legal, financial, technological, cultural, social, safety-oriented, environmental or reputational risks at any point in time, which is arguably a risk in its own right! So what can the procurement professional do to manage all these risks effectively? Here are some common areas to consider:
  • Goal-setting: Before examining risk in your supply chain, people need to know why they should bother managing risks in the first place; therefore, supply chain risk needs to be aligned with your organization’s strategic objectives, which will largely depend on the sector / market you operate in.
  • Thinking ahead: As part of the risk management process (discussed more in part 2), risk planning and identification is fundamental to limiting the likelihood of future exposure. The first step here could be as simple as creating scoring criteria against types of risk (outlined above) in your supply chain / category and weighting these areas in terms of their strategic importance.
  •  Impact Assessment: This draws upon themes from Guy’s presentation considering the potential impact / likelihood of risks occurring. Without understanding the impact, we can become precious about meaningless risks whilst neglecting the most important ones. For example, how important is the risk of increased expenditure as opposed to late supply of particular goods / service. Each commodity will have its own challenges.
  • Prudence: Without the risk of oversimplifying (!) what can be a very complex area, sometimes risk profiling can become overly complex when simple common sense would suffice! It’s easy to over-engineer your risk analysis at the expense of trusting what may already be obvious.
  • Risk Tolerance: Each organization tends to have its own tolerance to risk. This tolerance can relate to the ‘degree’ of risk you are willing to accept (using confidence intervals), but can also include the tolerance to an identified ‘risk’ becoming an ‘issue’. The latter is the ultimate goal of risk management, whilst the former can be inherently subjective incorporating multiple factors. In the supply chain, I believe that tolerance to risk is largely linked to what Guy Allen referred to as ‘reputational’ risk – where failure to manage particular risks impacts end-customer, shareholder or market perceptions.
  • Mistakes: This can be an extension of tolerance, but mistakes are inherent and inevitable in the supply chain, hence the need for contractual protection and contingency planning. However, the ‘mistake tolerance’ barometer of an organisation is largely based on culture; for instance, if senior executives have a zero tolerance policy to reputational damage, it’s likely that the procurement team will need more prudence. Supply chains that encourage entrepreneurship and innovation are inherently more accepting of risk in order to let ideas flow.
There are many more facets to consider when assessing the human element of procurement and supply chain risk, but in general, people, behaviours and culture often predetermine the risk management approach taken by supply chain executives.

In part 2 we’ll be taking a look at the processes involved in Risk Management in the Supply Chain. 

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