Supply Risk: How Supplier Management Becomes a Risk Management Success Factor
Procurement processes, particularly the optimal management of the supplier base, are increasingly critical to the success of enterprise-wide risk management activities.
Looking at the rankings in the Risk in Focus 2023 report, which annually gathers the views of Chief Audit Executives from major European countries to identify the most critical risk areas for organizations, it is quickly apparent that suppliers play an essential role in business continuity, but also in sustainability, regulatory compliance, and cybersecurity.
The increasing complexity of global supply chains challenges procurement offices to find the proper measures to counter risks before they turn into more serious threats. Still, at the same time, it represents an opportunity to reinvent internal supplier management processes, finding the right balance between human factors and innovation, thanks to digital solutions that optimize results transparency and collaboration, such as Online Procurement.
How to Protect the Enterprise from Procurement Risk: The Role of Supplier Management
Optimal management of procurement risk begins with supplier management. CPOs and Purchasing Directors should work on both awareness, i.e., knowing the risk factors, their priority, and their estimated impact on business assets, involving the C-Suite, and readiness, i.e., playing in advance with an action plan that responds to different risks using classic risk management methodologies (eliminate, reduce, transfer and retain, depending on the type and urgency for the business).
The only way to do this is to start with data: a data-driven approach is the foundation of any risk management technique you choose.
In summary, a risk management plan aimed at increasing supplier reliability should include these five steps:
- Identify supplier risks through a quantitative risk assessment analysis (profile, geographic location, strategic importance, category, financial condition, compliance, contractual performance, etc.).
- Calculate the prioritization and impact of the identified risks.
- Establish an internal process that defines roles and tasks, involving risk managers and risk owners.
- Create an action plan with concrete measures to address the risks
- Ongoing monitoring and improvement/recalibration of risk mitigation measures
Mitigate supplier risk for 360-degree procurement control
Risk Management and ESG
The path to sustainable sourcing is through suppliers: calculating the ESG rating, the score that expresses the quality of performance in the three areas of sustainability – environmental, social, and governance – is the starting point for fine-tuning a more responsible sourcing strategy.
By partnering with suppliers with the highest sustainability ratings, the company can effectively protect itself from fines, penalties, and reputational damage resulting from non-compliance, while ensuring business continuity.
