Controlling Risk: Improving Supplier Management
News Article -- January 25, 2012
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Premium, CSC's business magazine | Winter 2012 | No. 18
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Subjected to a series of shocks, procurement departments are realising that they may have underestimated certain risks. Today they are reviewing their priorities and trying to implement more robust risk management.
2009: Toyota recalls 9 million vehicles. 2010: Eyjafjallajökull erupts, grounding all air freight. 2011: Japan is rocked to its foundations by a huge tsunami. This terrible series of events strained supply chains and emphasised the limits of the current principles of production planning: just in time (reduction of inventory cost), global sourcing (reduction of purchasing cost), and component standardisation (economies of scale).
Despite the unstoppable rise in transport costs and the closing of labour cost gaps, the violence of these shocks has not resulted in the radical rethinking of current dogma. It must be said that Japanese industry restarted its activity much more quickly than expected, and that on the whole businesses were not as poorly prepared as was feared.
Low inventory levels in fact enabled them to rapidly identify those components that would become scarce, and thus to get to work on the problem immediately with their suppliers. The result is that few companies intend to reduce or stabilise the share of their sourcing from emerging markets (8% according to the HEC Procurement Group). 44% even want to increase this proportion.
A different way of managing risk
These brutal events did however encourage businesses to increasingly take into account the fragility of supply chains when considering the further development of their organisations. According to the last SRM Barometer survey carried out in Europe and the United States by CSC, 62% of procurement directors today list risk management as one of their priorities.
This increased awareness naturally leads to evolution in the practices designed to guarantee security of supply, dual sourcing in particular, but also the creation of supplier relationships based on long-term partnership.
Listed as a priority by 76% of procurement directors this year, the management of these relationships has become even more important as the crisis has revealed that the majority of procurement departments have only a poor knowledge of their secondary supplier network. In future it will thus be necessary to analyse the vulnerability of supplier relationships and take measures to limit it.
For a growing number of procurement directors, monitoring these relationships means financial analysis but also quality evaluation, audits and dashboards that will highlight potential problems, whether in terms of budget, lead times, quality or security of supply.
This move towards criteria that go beyond merely financial indicators has already become the reality in certain businesses. The SRM Barometer confirms the increase in the number of organisations that are rating their suppliers by integrating standard and weighted criteria for sustainable development in 2011: roughly half of all businesses, with a significantly higher proportion in Europe (58%) than in the United States (37%).
Robust systems and collaborative tools
Procurement departments today are trying to respond to this need for increased transparency and responsiveness. The majority believe that the best way to achieve this is by implementing information systems fed with robust data that make it possible to monitor the supplier base and identify suppliers that can take over should another fail. In the years ahead, priority will thus have to be given to the mapping and classification of all data collected, in function of its economic, political, and environmental nature.
The development of collaborative projects is also part of the search for greater transparency and responsiveness. Procurement departments are striving to transform their networks of partners, including suppliers, into participative ecosystems. In this context, collaborative tools offer greater benefits for monitoring procurement performance, by enabling both internal clients and suppliers to work on a single system, and to share methods and tools.
This improved monitoring, although unable to make it possible to switch suppliers from one day to the next, will at least enable precious time to be saved.
Focus
The 3rd SRM Barometer carried out by CSC in cooperation with TNS Sofres puts the spotlight on the new priorities of procurement departments in terms of their objectives and the tools they use to drive performance.
Performance drivers: While risk management is ranked third in the list of priorities this year (64%), in joint first place are continuing with cost reduction plans (76%) and supplier relationship management (also 76%). Since the crisis, SRM (supplier relationship management) has become a major trend for improving the performance of the procurement function. Three areas are considered priorities by procurement directors: increased frequency of meetings (62%), stricter control of financial health (61%) and the reinforcement of collaboration (59%).
Tools: cloud computing, cited relatively little in previous editions of the SRM Barometer, was this year listed as a priority tool for 17% of respondents (25% in the United States and 10% in Europe). This year the development of e-procurement (76%) was pushed out of first place by that of e-sourcing (81%).