Do You Know the Difference Between Strategic Sourcing and Category Management?….Risk Management

Based on the tremendous response we have been getting on this series, I thought we would continue the discussion as long as the interest continues to justify it.  One of the domains in our maturity model that generated a lot of discussion at the last PERT (Procurement Executives Round Table) workshop on Category Management  was Risk Management.  We just recently covered this topic in our Executive Webinar Series with Saint Louis University as well (recording available if interested).  Let me make a couple of important points before discussing this domain in detail.  First, the attitude towards Risk Management (“RM”) must change and RM should be looked at as a competitive advantage for those that are better at it.  Second, just the presence of RM processes, etc. is not sufficient; the Adoption of RM (acting on what the process tells us) is far more important.

When we assess clients on RM, the Value Creating (Category Management)  level has the following characteristics:

• “Black swan” modeling to link remote events that could severely compound & affect the organization: Black swans are a freak occurrence and your RM capability should be tested for those.  Many are characterizing the recent US election as such an event and the resulting changes will have a significant impact on all of our strategies.  PLEASE SEE PERT  ANNOUNCEMENT FOR SIGNIFICANCE OF THIS   
• Frequent modeling of second & third order effects of marketplace events: The simplest explanation of this is how Tier 2 or Tier 3 suppliers impact you. If your Tier 1 supplier is totally dependent on a risky raw material supplier, you may want to ensure availability by procuring the material from your Tier 2 supplier for your Tier 1. 
• Risk redundancy is regularly tested when switching suppliers, specifications & sources of supply: Utilize these occurrences to also exercise and test your RM processes.  You may also want to run hypothetical scenarios, where feasible, to test resiliency of your Risk Management processes
• Company routinely outperforms peer group under various supply & marketplace shocks and is considered a competitive advantage: This is probably the most underappreciated and underutilized attribute.  Your customer’s sourcing and supply chain organization is evaluating you against your competitors while making supplier selection – just like you do.  You should be leading front and center with your RM prowess and educating your sales/marketing organization to take advantage of this.  Become a part of the sales process and go on sales calls – SERIOUSLY!!  Conversely, insist on the same model with your suppliers – ask them to bring your counterparts to sales calls.
• Surety of supply is part of the corporate risk management plan: This will ensure that the criticality of your role is elevated and recognized.  It is surprising how many organizations do not do this – especially in the area of services.  If you are dependent on Engineering resources being primarily supplied by providers and engineers are critical to your success, not having a Strategic Work Force Plan that addresses surety of supply is disastrous.
• Procurement is leading risk management across the enterprise: An opportunity to become a strategic advisor and consultant to the rest of your company. Export your RM capability to other functions and watch your value proposition become more and more visible and critical.  Many of the other functions are not addressing this issue – guaranteed.

Treating RM as a critical strategic process that has a bigger impact on delivering shareholder value than most of your tactical processes is the first step.  Of course, effective RM also requires a set of competencies that are far more weighted towards Strategic competencies because as we discussed above, getting the organization to act (adopt) is more critical than the most sophisticated risk analysis.  And as you know by now, we are of the opinion that Strategic competencies will allow your organization to deliver adoption and therefore value.