Successful Risk Management Begins with People and Process

How to more effectively manage risk by viewing the supply chain as an integrated corporate function


  • Can the actions of the supply chain team create an event that must be accrued or disclosed?
  • Is the supply chain team aware of disclosure requirements and the impacts of any failures to disclose relevant information?
  • Is the accounting or external reporting team aware of any potential risks that have been acknowledged and accepted in supplier contracts?

Today, many organizations are not aware of – and subsequently don’t address – situations like these because they have not implemented processes to support education and information sharing across departments. The people making supply decisions generally don’t understand the implications across the organization. This lack of process and communication has the potential to create a large organizational and compliance risk.

Moving Towards an Integrated Function

While it’s clear that business complexity and risks have grown, and many companies are desperate for ways to drive increased value from their suppliers, the critical issue for many companies is how to begin to leverage their supply chain strategically. For those struggling to make the transition, there are a few things that can accelerate the process.

 

People First: The first thing an organization should do is recognize that the skills required to generate value and manage risks in today’s business environment are significantly different than those historically hired into the supply chain function. This is not to imply that the traditional sourcing skills are not important, but rather that the new reality requires thought-leadership and creativity, along with a mastery of complex business situations, concepts and points of integration.

As a first step, companies should begin by assessing their current supply chain staff and determining gaps. While each organization is different, this evaluation should include basic accounting skills along with the strategic supply chain skills necessary to drive total value solutions. Based on this assessment, it may be necessary to train existing resources or hire resources that already possess the proper knowledge and capabilities. Regardless of a company’s specific approach to training, a leading practice is to create a continuing education program that can provide a foundation for communicating changes and sharing knowledge across functions.

 

Category Councils: After addressing skill set deficiencies, companies should ensure proper communication and alignment with both internal and external customers. This can be initially achieved by creating category councils, which are teams led by the category managers with representation from each of the impacted (or potentially impacted) functions. These functions are typically aligned with the components of a total value model and include risk management, tax, external reporting, working capital management, legal, operations and sales. While these teams generally meet on a quarterly basis to review status and upcoming activities, their primary function is to identify potential risks, define strategic direction and maintain continuity. As an early activity, this council should identify risks in their category and either create or revise their supply risk plan.

 

Contract Processes: Basic components of the contract management processes should be established. This should include creating contract templates, establishing contract review and approval processes, and ensuring contract standards and templates are aligned with strategic objectives and customer needs. Care should be taken to build templates for each type of product or service, incorporating essential components while also encouraging suppliers to innovate and contribute to one’s success. These templates will become the foundation for long-term partnerships and should therefore be fair and equitable.

Plan for the Future

After a basic structure has been put in place, the focus should turn to the long-term strategic vision and supporting activities.

While continuous process improvement has been embraced by operating units around the world, the concepts have not been widely applied to the supply chain. In order to encourage participation, a process improvement approach should be defined and team members should be challenged to find opportunities. One option for initiating the process may be to map the end-to-end supply chain process, then work with suppliers and the category council to identify and prioritize a set of defined improvement projects.

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