A recent article in the Supply Chain Management Review on procurement risk management: what it takes to be a leader, which correctly states that risk is part of business, noted that, even though procurement has become a frequent topic in the risk management conversation, few companies are translating their trepidations into formal procurement risk management capabilities. Considering that risks have grown considerably in recent years and that at least 7 in 10 companies will experience a major disruption this year, with almost 9 in 10 experiencing some form of disruption, this is not good. Risk management needs to be front and centre in supply chain planning.
But is that enough? Let’s say you put it front and centre, identify your top ten risks, and outline your risk mitigation and/or recovery plans for each risk. Classic thinking would say you’ve done a great job, but have you? If it’s a natural disaster, you’ve probably done all you can do since it’s an event that no one has any control over. But what if it’s a production line breakdown at a key plant of a sole-source supplier? Have you done everything you can? Maybe there’s nothing you could have done to prevent it, but, chances are, there was something your supplier could have done to prevent it.
And maybe they would have if they had more incentive — which leads me to believe that the leaders identified in the referenced 2009 Accenture Study who insist on risk-sharing clauses and back-to-back contracts might be on to something. If both parties agree to share risks, and the costs associated with such risks, both parties are more likely to be alert to risk signals and to take action before a minor interruption becomes a major disruption. If both parties are serious about risk, it’s the right way to go.