COVID-19 and the growing focus on supply chain risk
Black swan events have caused immense damage in the last few years. In 2019, losses due to catastrophic events like these reached USD 150 billion, as per McKinsey. 89% of the companies have seen a supplier disruption event in the last five years, says Gartner. What's shocking is that most of them lack the seriousness to deal with the disruption. 65% of the chief procurement officers have limited and no visibility into tier 2/3 level supplier, as per Deloitte’s CPO survey. There’s a lot of catching up to do.
The ongoing pandemic has pushed sourcing and procurement (S&P) leaders to relook at supplier risk a lot gravely than they have ever done. There are six significant imperatives for the S&P leaders in these uncertain times:
- Agility in activating alternative supplier planning.
- Capturing risk arising from Tier 2/3 suppliers.
- Negotiating best prices with suppliers.
- Fixing gaps in existing supplier risk assessment approaches.
- Improving visibility into potential supplier risk failures.
- Ensuring business continuity in their operations.
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The traditional ways of managing supplier risk
The majority of the organizations use a supplier risk assessment framework to measure the risk exposures. There are usually five broad categories that cover the variables used to calculate the risk index. And, these categories are financial, operational, environmental, social, and regulatory landscape. There are many leading and lagging indicators aligned to each of these categories. Organizations assign weightage to each of these indicators as they calculate their risk exposure. Many of these methods are manually managed or are dependent on external advisors. E.g., a quarterly review by an external auditor, asking external agencies for supplier data reports and analysis, manually looking around for risks a supplier is exposed to through annual reports, asking teams for supplier quality data, and many other ways. There are limitations around scaling-up and enterprise-wide collaboration while adopting these methods. These age-old ways of supplier risk assessments have significant flaws:
- They focus mostly on the first line of supply network. Every 2 out of 3 procurement leader has no
- Procuring the right set of primary supplier data is always a challenge.
- The risk assessment models are not comprehensive enough.
- Most of these assessments are reactive.
- These assessments are periodic and not real-time. Forget predictive.
- It doesn’t work in case the organization has suppliers running into hundreds and thousands.
The perils of ineffective supplier risk management
The after-effects of a weak supplier risk assessment go beyond commercial repercussions. Here are the top five risks that organizations get exposed to if they have an ineffective supplier risk management:
53% of the organizations follow a reactive approach to managing supplier risk disruptions, says a Gartner research report. So, what should they do now?