Current events are causing unprecedented supply chain volatility. A structured approach to risk monitoring, coupled with risk expertise, analytics and AI, can radically improve third-party supplier risk management and help procurement teams weather the storms. Here we explain how and why.
Most procurement leaders feel supply chain risk is increasing, and even the briefest glance at recent world events bears this out. From the outbreak and spread of COVID-19, to the ongoing volatile trade and tariff situations with the US, China and beyond, global supply chains are experiencing unprecedented volatility.
Add to this the raft of regular minor and major disruptions across organisations’ supply chains – be it supplier bankruptcy or disruption at a production site – challenges are growing, not subsiding.
Even before this year’s upheavals, CPOs were apprehensive. Nearly two-thirds (61%) of CPOs surveyed by Deloitte in 2019 said supplier risk increased during 2019. Almost the same number (59%) said they felt unprepared to address key risks.
The reason is that most procurement teams do not have an effective risk management system in place. 74% of companies have not, or have only partially segmented suppliers/categories for risk management. And around the same number are unable to react to risks as they do not have a mandate and/or resources to be effective – instead reacting to risks only once they’ve happened.
Uneven and fragmented supplier data is the biggest challenge
Procurement teams have limited and uneven access to data and intelligence across their supplier base. A clear and structured view of that data would enable them to spot risks as they emerge and take appropriate action.
The issue is that the data is scattered across many different systems and sources: from historical supplier performance data, to supplier’s own financial reports and filings, to media reports in supplier’s home countries, to actions taken by governments or market regulators.
Finding relevant information, correlating it, analysing it, and contextualising it is a gargantuan job – and one that’s beyond the available time, resources and tools of many procurement teams.
When there are hundreds of suppliers in the mix, and many different risk factors at play, it’s hard to know where to focus or how to rank risks in terms of impact on the business.
Analytics and AI can help make sense of complexity
It is, however, the kind of job that can be handled very well by a solution which brings disparate data sources, analytics and AI, together with ‘HI’ – Human Intelligence – encompassing deep knowledge about categories, risk factors, and potential impacts.
Smart procurement organisations are already combining AI+HI – analytics and AI-based risk monitoring systems, plus risk specialists – to help them identify risks in near real-time, rank them in order of severity, and take action to mitigate them before they affect the business.
With continuous ingestion of the right data, and regular training of machine learning models, the AI+HI based risk monitoring solution can provide more accurate and actionable insights over time. Such a system will be better able to identify patterns and anticipate future events, delivering the predictive insights that companies need in order to take action before a risk event materialises.
We worked with one US consumer products company, for example, to create a dynamic dashboard that monitors risk across hundreds of key suppliers. It provides near real-time updates on risk factors affecting each one – from financial performance and product strategy, to regulatory changes and environmental sustainability. The company can easily see when something happens that requires attention, and take action if necessary to mitigate the impact.
A structured risk framework comes first
But analytics and AI are only part of the answer. Before analytics can be applied, procurement teams need a structured framework for defining the risk scope and understanding which risks are urgent and need addressing now, and which are just something to keep an eye on.
This means segmenting suppliers into different tiers – identifying those that are critical for business continuity, and those that present less of a risk. It also means categorising the different types of risk that could affect the supplier base, which fall into three broad buckets:
- Supplier-related: including the individual supplier’s business strategy, financial stability, sustainability practices, regulatory compliance initiatives, and their dependence on tier 2 and tier 3 suppliers.
- Category-related: including price escalations, technology disruptions, industry consolidation, raw material availability and regulatory changes.
- Sourcing location-related: including natural disasters, climate change, socio-political events, and new regulations and policies.
Lastly, it means identifying all relevant sources of data and intelligence that, when collated, can provide immediate and meaningful insights into third-party supplier risk as it changes and fluctuates. This entails integrating data from internal systems, syndicated reports, news and social media, suppliers’ own websites, and company financial disclosures.
Knowing how to respond is key to ensuring business continuity and preventing value leakage
Risk identification based on real-time monitoring and assessment might make for good risk management. But it is only half the job.
A great supplier risk management system complements automated risk monitoring and assessment with expert insights and recommendations to drive effective response strategies.
This requires solid knowledge of the business, market dynamics and the potential impact of certain risks. Once a risk has been identified, a business must take appropriate actions to mitigate its impact – such as switching to an alternative supplier, initiating discussions to reduce exposure to price escalations or ensure supply continuity, or simply keeping an eye on the situation.
That’s why The Smart Cube’s AI+HI Supplier Risk Intelligence solution is the most comprehensive answer to your third-party risk management needs. Our AI and analytics based system is augmented by actionable insights and recommendations from our risk specialists and category experts.
For a global food and beverage company, for example, we identified two key ingredient suppliers who were about to change their business model and strategic direction, and advised the client to engage them in discussions to mitigate risk exposure. That early warning meant that potential disruption to ingredients supply was averted before it could affect the business.
As global events continue to be complex, volatile and unpredictable, this kind of early-warning system helps procurement teams weather the storms – and ensure their organisation can keep operating, no matter what happens.
Need a partner for supplier risk intelligence?
Here at The Smart Cube we have a 17-year track record of delivering custom research and analytics to procurement teams at some of the world’s largest companies.
Find out more about how our Supplier Risk Intelligence solution can help you proactively identify, monitor and mitigate third-party supplier risk to ensure business continuity and meet compliance and sustainability goals.