David Daffner, Vice President
Organizations are increasingly at risk of supply chain compromise. In fact, the Deloitte Chief Procurement Officer Survey found that more than half of procurement leaders say managing risks is a strong priority. By understanding potential hazards, you can develop effective risk-reduction strategies.
Assessing threats and vulnerabilities
Effectively managing supply chain risks requires a comprehensive view of threats and vulnerabilities. Threats can be adversarial, such as tampering with your manufacturing processes. Or they can be non-adversarial, like natural disasters.
Vulnerabilities may be either internal or external. Let’s take a closer look at each.
More than half (54 percent) of procurement leaders say managing risks is a strong priority.
— Deloitte Chief Procurement Officer Survey
Inspecting internal risks
Internal risks are related to your own operations. Typically, you have some control over them. These include activities like estimating costs, creating schedules, managing proposals and negotiating with vendors. If you do it right, things go smoothly. If you don’t, it can drastically disrupt processes. Human error and the potential for fraud are two major concerns companies should address.
To mitigate internal personnel risk, consider these measures:
Segregate duties: Have multiple employees involved in the process. This reduces the chance that practices might be mismanaged and creates a “checks and balance” system.
Cross-train employees: Ask yourself, “What would happen if [employee name] was unable to come to work or quit?” Too often, a single employee holds the majority of knowledge about a certain process or supplier. Rotating your staff can help disperse the information.
Use an e-tendering system: Converting from a paper-based procurement process to an electronic one gives you increased visibility and reduces procedural mistakes. This improved transparency also decreases the risk of corruption.
Examining external risks
According to the BCI 2018 Business Continuity Report, supply chain risks are becoming more dynamic as organizations are increasingly interconnected through global networks. This wider reach provides more options for reducing costs, sourcing materials and acquiring talent. However, it can also increase vulnerability that can lead to disruptions.
Many companies are ill prepared for the repercussions. The BCI report found that 30 percent of businesses do not analyze disruption risks across their entire supply chain.
So what are the external risks that can interrupt the flow of the supply chain? Procurement Leaders identifies five major areas of concern:
- Price Risk: Inflation and price volatility are two of the biggest areas of risk. One way to combat unexpected increases is to lock in longer contracts with vendors.
- Quality Risk: Six Sigma and similar quality assurance processes can help automate production and decrease the risk of human error. Ask suppliers about their processes — and the steps they have in place to ensure the procedures are working. Conduct regular site visits.
- Delivery Risk: It can be devastating when deliverables arrive late or don’t arrive at all. This is a very difficult area to manage because weather is often the cause. It’s essential to work with highly responsive partners and have a contingency plan in place. And if you have duplicate suppliers, it’s recommended they be located in different areas not likely to be affected by the same natural disaster.
- Legal Risk: If your supplier commits an illegal act, you could be liable. Adopt a zero-tolerance policy and train procurement staff on applicable laws. Let employees know the reporting process they should use if they observe suspicious activity. Have an in-house compliance officer, or contract with an outside expert, to ensure your company abides by government regulations.
- Reputation Risk: Here we’re not talking about a legal infraction, but circumstances that damage your reputation. And even if it was the supplier’s fault, it’s very likely your company will be blamed. Proactive monitoring and enforcement of standards are the keys to protecting your business.
Developing a plan of action
As the old saying goes, “plan for the best, prepare for the worst.” This is particularly true when it comes to your supply chain and procurement. Identify and assess potential risks your company may face. Determine appropriate action should a problem occur. And finally, create an action plan to document your policies and procedures.