SMI 01 | Risk Management

Political Turmoil Threatens

Global Supply Chains

Recent Survey on Risk Management in Procurement

The global economy is currently looking strained. Increasing protectionism and Brexit in particular represent serious risks for companies with international supply chains.

54 percent of companies surveyed see continuing protectionism as a risk. In addition, 45 percent of managers fear that Brexit will negatively affect their business. That is a spectacular increase compared to last year (17 and 19 percent respectively). However, this increased attention is not surprising. In particular, the date for Brexit is an increasingly more concrete risk and companies must adapt accordingly.

Preventing Supply Bottlenecks is a Top Priority

Material supply is the procurement risk that is giving companies the biggest headache – 65 percent of respondents named supply risks as their current highest priority in procurement. Concerns surrounding price stability have increased significantly: in the previous year, 35 percent of procurement leaders surveyed saw this as a risk. This figure rose to 48 percent this year, coming second only to materials supply risks.

Questions to Gradually Achieve Holistic Risk Management:

Risk-Identfication

Do you have an overview of potential risks for your supply chain and your company?

Risk-Assessment

Do you assess risks for suppliers, product groups, and supplier markets in terms of severity of impact and probability of occurrence?

Risk-Management

Have specific measures been assigned to the risks identified?

Risk-Monitoring

Do you review your set of measures at regular intervals and do you readjust your risk-reduction strategy to reflect the situation?

Definition of Measures without Systematic Risk Identification

To hedge against these procurement risks, respondents rely on various means. It is striking though that more than three quarters of the companies surveyed (78 percent) do define specific measures, but only 56 percent predetermine which risks they actually want to combat. This may create a discrepancy because it is at least questionable whether the countermeasures taken without prior analysis actually have the desired effect.

Obviously, the situation in procurement markets has been tense due to the strong economic situation over recent years and because of trade barriers. It remains to be seen whether the current economic downturn will calm things down in the market and whether raw material demand and pricing will change.

What Measures are Useful?

An individual strategy is needed depending on the business, industry, supply chain and company size: start-ups, for example, will demonstrate a higher risk appetite than owner-managed or incorporated companies, and define various measures accordingly.

Study Results

In practice, supplier evaluations (81 percent), long-term framework contracts (69 percent), and dual-sourcing strategies (68 percent) are used to manage risks. Compared to the previous year, it is particularly striking that the current political and economic landscape has a negative effect on the willingness to enter into long-term contracts; in the previous year this figure was 77 percent, while the results of the current survey show only 69 percent. In response, an increasing number of companies have built up reserve stocks; 43 percent now have this type of safety net, compared to 35 percent previously. More professional levers, such as predefined emergency plans (24 percent) and support programs for suppliers (22 percent), are only rarely used. These measures are used by less than a quarter of survey participants. Companies should urgently expand their portfolio of measures in this direction to mitigate long-term risk. The more complex a company’s supply chain is, the more important it is to establish strategic approaches to minimize risk.

Dual-Sourcing-Strategy

A dual-sourcing strategy for manufacturing parts, for example, can be combined effectively with automated reserve stock control. Incorporating an additional, digital early warning tool can provide a crucial advantage. In a crisis, predefined emergency plans can be used: procurement bottlenecks are bypassed using secondary sourcing, stocks from reserves provide a time buffer, and the early warning system detects any shortage, ideally before it actually occurs, helping to take countermeasures early.

Financial Hedging

Another measure, currently being considered by 22 percent of the survey participants, is mitigating price risks using financial hedging. Compared to the previous year’s figure of 12 percent, the share of companies that rely on this strategy has almost doubled. In future, companies should focus even more on this type of financial instrument to provide comprehensive protection for overall costs. Basic price and exchange rate risks can be outsourced to banks in line with the proverb “forewarned is forearmed”.

Do you systematically identify and assess risks?

56%: Yes
38%: No
6%: Unable to respond

Do you define measures to counter procurement risks?

78%: Yes
15%: No
7%: Unable to respond

Risk Management Requires a Continuous Process

If a company has defined individually tailored countermeasures, strategic monitoring procedures must also be implemented. This is because risks and their relevance can change. A holistic risk management process therefore needs to be in place across departments and repeated at regular intervals in order to provide an integrated assessment. With such comprehensive interaction, risks can be identified early and remedied more quickly in an emergency.

Author

Philipp Mall

is a Managing Director at INVERTO in Cologne. As Head of the Competence Center for Procurement Management, he is an expert in procurement organization and controlling, risk management, and digitalization. He is responsible for the annual risk management survey.

contact@inverto.com

About the Risk Management Survey

For this survey, INVERTO interviewed nearly 100 procurement leaders from companies in various industries about how they manage risk. The questions centered on general risks to the business, specific procurement risks, and dealing with them. INVERTO has carried out the survey annually since 2013, enabling us to understand developments in risk assessment in the long term.

For further information on the survey results, please click here.