Procurement is rapidly evolving into a strategic function entirely powered by data-derived insights. Access to high quality, actionable data determines not only how valuable procurement is to corporate profitability, but also the extent to which they can measurably contribute to increased market share and competitive advantage.
Our focus in this article is supply chain risk, based on a conversation with Heiko Schwarz, Founder and Chief Revenue Officer at riskmethods. We took this opportunity to gather his insights into the complex web of data, automation, and human skills that are required to proactively monitor and manage risk worldwide from one central location.
As he pointed out, the ultimate goal for all companies is to create a risk culture, one where everyone considers risk management part of their responsibilities, escalating concerns and data in equal measure.
Fortunately for large enterprises, their size and organizational structure position them for success in the fight against supply chain risks – if they know how to leverage those advantages. They have the staffing and capabilities required to build a risk management center of excellence by providing education and distributing responsibility. They also have the flexibility to allow risk to play a role alongside price, quality, and compliance in a way that smaller companies often cannot afford to support.
No matter how much potential exists, companies still have to take deliberate action to ensure they have access to sufficient data and automation and apply both with strategic intent.
When Technology and People Fight Side by Side
Technology has been critical to the expansion of global supply chain risk management programs. Between the ‘always on’ capabilities of tech and the real-time alerts providing on-the-ground detail to decision makers, automation has been a key enabler. But automation is not a solution in and of itself. In order to provide centralized visibility into extended supply chains, vast amounts of data have to be available in near real time.
There are innumerable types and sources of data needed to fight risk, and not all of them exist expressly for that purpose. From shipment container locations to the temperature inside an individual package, weather data to social media ‘chatter,’ the volume of data that must be compiled, structured, and processed to manage risk is mind boggling - and maintaining a comprehensive view of a supply chain’s disruption probability requires them all.
Even digital transformation of risk management is multi-faceted. As data is gathered, the analytical challenge becomes significantly more complex. AI-enabled solutions have the necessary ‘brainpower’ to process all of that data and make it actionable, but the resulting alerts and recommendations will do the organization no good if they are issued in isolation. Insight into potential and actual disruptions has to be available where spend management decisions are made: spend analysis, strategic sourcing, contract management, and supplier performance management. By integrating systems, procurement has the opportunity to also integrate risk management with spend management, generating the best ROI by far.
But the criticality of technology doesn’t lessen the human challenge. The power of people is required in the process of designating disruptions as response-worthy (or not) and in formulating an appropriate, coordinated response. Human interpretation preserves strategic nuance and context on behalf of the business; people covert the insight from technology into business continuity and competitive advantage.
Procurement often talks about risk management, but they predominantly mean supplier risk management. Even if we use the expanded language of “supply chain risk management,” we must look past suppliers if the objective is to broadly attack risk management, the effects of which extend beyond the supply chain. This means that more volumes of data, more powerful analytics, and educated professionals will always be in demand.
Two Slides of the Risk Management Coin
It is interesting that procurement’s notion of risk management is more siloed than they intend, because even risk management can mean more than one thing in terms of approach. Or, as Schwarz puts it, two sides of the risk management coin.
Side 1: Data and Alerts for Rapid Risk Response
When a disruption occurs, no matter the cause or the location, the sooner decision making teams are alerted, the more options they have for response. This approach requires large volumes of data to be centralized and processed, run against pre-defined parameters and tolerance levels by automated systems before being pushed out as notifications to human decision makers. This is a significant data and technology challenge, and it has been the focus of most supply chain and procurement teams for the last decade.
Side 2: Advanced Analytics for a Resilient Supply Network
Rather than bracing for the impact of disruptions, mature enterprises have more recently become focused on building a risk resistant supply chain. “Having the insights that allow the business to be better prepared to set their operations back up after a disruption or avoiding the surprises that might take them down is a very different conversation,” Schwarz said. “It is far more holistic and delivers more value to the business than just being great at firefighting.” Taking a proactive approach such as Schwarz describes requires just as much data as the first side of the risk management coin, but it also demands more sophisticated analytics and alignment with the business. Identifying and addressing risks before they occur is a next level challenge, but one that all large enterprises should be moving towards with resolve.
See on-demand presentation how riskmethods and Sievo help response and recovery in Covid-19 crisis.
What Really Matters
We are all experienced enough to be naturally wary of risk, but since risk-free business is not an option, decision makers have to make trade-offs based on what really matters to the business. Preventing operational and supply chain disruption are just the beginning. Once risk management is integrated with other technologies and processes, this information can inform any number of other business decisions.
For example, interpretation of risk data and trends can be applied to category management and supplier performance management, effectively ‘leveling up’ existing practices with a more robust understanding of competitive players and market forces. This is yet another way that risk data becomes strategic insight, enabling the business through actionable intelligence.
Perhaps the greatest ‘big picture’ challenge of all is defining the ‘sweet spot’ for risk tolerance, a conversation that should be driven by specific financial and performance targets. For instance:
- Which supply chain or product line is in question? Each will have different profitability levels and disruption probabilities that determine the room for risk v. opportunism.
- What will the EBITDA impact of each potential disruption be, depending on how long it lasts? Up to a certain point of impact, it may actually be strategic to accept risk in return for an appropriate reward.
- How different (or similar) is the exposure in direct and indirect spend categories? Direct materials disruption obviously stop the operation, but MRO supplies can have the same effect. They cannot be overlooked.
Turning the strategic management of risk into an opportunity for procurement requires them to think expansively and speak the language of the C-suite. The fact that data and systems far beyond procurement are required for effective risk management almost demands an ecosystem play. And, of course, most large enterprises already face challenges with master data management. Risk data comes from different sources and offers value in different parts of the procurement process but must be addressed on both sides of the coin.
About Deep-dive into Procurement Data Ecosystems with Kelly Barner.
This article series was written by Kelly Barner, top procurement influencer and owner of Buyers Meeting Point.
All companies require data in order to function, but in today’s hyper-connected world, large enterprises have specific additional needs around technology-enabled scalability and standardization that smaller organizations may be able to get by without or supplement with manual alternatives. These multi-faceted data challenges exist within and outside of their procurement operations.
In order to explore and articulate the multi-faceted data requirements of large enterprises, we reached out to several leading companies to gain unique insight into the criticality of linking internal data and third-party data via robust procurement analytics capabilities. The result is a thoughtful article series that explores fresh ways procurement leaders can turn data from a challenge to an opportunity.
Dive deeper into procurement data in the new guide featuring Kelly Barner’s interviews with visionary procurement software leaders from EcoVadis, Basware, riskmethods, Supplier.io and Sievo.