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Managing Risk Collaboratively

July 31, 2009

Yesterday I hosted a webcast in which Professor Rob Handfield and Vel Dhinagaravel, CEO of Beroe Inc., offered a compelling insight to supply risk and its management. It strikes me that substantive improvements in this important area will occur only when suppliers and customers start to collaborate and build mutuality into their relationships. In this blog I will outline why – and how.

Rob and Vel did a great job highlighting the range of risks and explaining why the financial crisis has brought the topic of supply risk to the top of many organization’s agendas. But they also pointed out the inadequacy of most existing approaches to its management. For example, most companies:

  • Lack visibility beyond a few key suppliers
  • Do not have access to early warning information
  • Rely upon historic data in making supplier selection

A recent study by Aon and State of Flux revealed that only 15% of companies were confident in their knowledge of supplier exposures.  But as I listened to Rob and Vel describing the enormity of the task, this finding came as no surprise; indeed, I rather doubt that any company can be fully confident about the quality of its supply risk management.

One major issue is the need for continuous data gathering. While Procurement may often do a good job at initial supplier validation, it is daunting to continue this process on an on-going basis throughout the relationship. For example, suppliers are constantly winning and losing new customers; they are constantly switching their own sources of supply; they are constantly investing or divesting in new product or service lines.

What seems to be forgotten in all of these discussions is the fact that customers are also suppliers. No organization buys things just for fun – they do it to create the capability to deliver goods or services.  Reliable suppliers therefore have a vested interest in providing  their customers with the data needed to enable risk assessment. Similarly, smart suppliers also want to know how risky their customers are. Failure in a key customer – as shown by the automotive sector – is one of the main reasons for supplier collapse.

If you are not a key supplier or a key customer (in other words, you are readily replaceable) then of course these concerns do not apply – and you must accept that information flows, just like price negotiations, will be relatively one-sided.

Even in those more important relationships, today’s contracting processes tend to be relatively unilateral. While both sides will undertake some form of financial check, the onus otherwise tends to be on the supplier to provide data on insurance, security, disaster recovery, management of pandemics etc. etc. Yet in fact, the data flows must increasingly become mutual; supply partnerships demand that both parties demonstrate their health and their ability to continue meeting obligations.

So in the contract negotiations of the future, I would like to see the development of mutual checklists of information that will be supplied proactively and on an on-going basis. It will be held in confidence and become part of the regular review process between the parties. The goal will be to avoid surprises and enable the reduction of disruptions to either side.

For those companies that do not wish to manage such volumes of data, there are external alternatives, such as the types of service offered by Integrity Interactive, as well as the much wider market analysis offered by Beroe Inc. I will shortly be interviewing executives from Integrity Interactive to explore how their offerings will develop.

Given the importance and the complexity of managing trading relationships in today’s volatile markets, I believe that we will rapidly see much greater balance and maturity in the ways that organizations oversee their continuing alignment. Achieving this efficiently and effectively depends on a readiness by both sides to provide information proactively and to manage risk collaboratively.

  1. Finbarr O Brien permalink

    Speaking from the procurements point of view on the customers side,I agree that managing supplier risk in the current climate is virtually an impossible task, especially in the Global environment.I would suggest that companies accept that ALL suppliers,whether global, regional, or local are at risk and that a companies resources would be better employed ensuring that all critical supply chains have viable second sources rather than identifying who is and who is not at risk.

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