Caveat Emptor: Managing Procurement Risk

As lengthening supply chains become increasingly subject to disruption, procurement risk management must become a core competence with supply management.


Descriptive models can simulate the operation of the supply chain and generate statistics using a series of simulated inputs that are provided to the model. These statistics are then analyzed to facilitate decision-making. In summary, it takes a combination of sophisticated tools and techniques to effectively determine the appropriate response to supply chain risk factors.

Cases in Point

One example of real-world proactive risk management is at ON Semiconductor, a global supplier to multiple electronics markets, including the fast-paced wireless industry. The company proactively manages the risk associated with procuring capacity. The risk management discipline at ON begins with the recognition that decisions made in other functions often impact procurement risk, and therefore methodologies and tools that analyze the integrated supply chain are a sine qua non.

For example, volatility in demand, contractual commitments to outsourced manufacturing partners, lead time for procurement and currently installed capacity together determine the procurement strategy for future quarters. Similarly, the considerations and decision variables for managing risk are distinctly different for the short-term and the long-term. ON uses a sophisticated set of integrated supply chain scenario analysis tools coupled with a rigorous sales and operations planning (S&OP) process to proactively manage risk across different time horizons.

Another company that has developed and institutionalized a sophisticated procurement risk management process is HP. HP, like ON, reflects the philosophy that risk management is not a one-time or infrequent activity. Nor is procurement risk management about sophisticated tools only. Instead, it is a combination of world-class processes and technology that provide the ability to continuously adapt and improve across the dimensions of organizational structure, process, technology and strategy. More information on HP's practices of procurement risk management is available at cscmp.org/downloads/public/resources/HPProcurement.pdf.

The procurement risk management initiatives at ON and HP demonstrate that PRM requires an investment of time and resources to be effective. But as supply chains become longer, increasingly complex and subject to more severe disruption, the question supply management executives must ask themselves is not whether they can afford to adopt a PRM strategy but whether they can afford not to make procurement risk management a top priority.

Acknowledgement: The author would like to gratefully acknowledge Darren Ward's research on some of the case studies and statistics cited in this article.


Anand Iyer About the Author: Anand Iyer is an i2 Fellow. More information at www.i2.com.






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