In a world shaped by volatility, ambiguity and ‘black swan’ shocks, it’s easy for leaders to convince themselves that monitoring a risk is the same as managing it. In practice, this can lead to procurement teams being overwhelmed by a mass of data and endless alerts that they’re unlikely to have time to read, let alone act on.
Until we reach the time that technology can do much, if not all, of this work, procurement chiefs may find they’re better served focusing their risk management efforts on the most important threats.
As Procurement Leaders’ Resilience Cohort learned last week, this is precisely what one member has done. Previously, anyone on the procurement team could request a supplier financial solvency check at any time, for any vendor, for any reason. Far from delivering full transparency, this policy created a bureaucratic hurdle, racked up massive external data costs and rarely shaped commercial decision-making.
As part of a company-wide shift to simplify decision-making and eliminate bureaucracy, the member now focuses its supplier financial risk efforts on three scenarios. First, a loss of supply, limiting continuous financial monitoring to business-critical vendors. Second, onboarding, evaluating potential critical suppliers early so buyers can walk away before signing a contract. Third, cash exposure, triggering checks whenever a vendor requests an advance payment.
The company has adopted a similarly pragmatic approach when it comes to scoring vendor risks, taking the algorithms, risk bands and credit limits used to evaluate customer solvency and adapting them for suppliers.
Having introduced this approach a year ago, the member happily reported they now carry out half as many supplier financial risk evaluations, have reduced external data spend by 66% and, most importantly, they have yet to experience an operational disruption due to an unexpected supplier failure.
Much like Sony Kapoor told guests at Ovation last month, it’s easy to fret over every headline, every data point, every minute piece of information but it isn’t necessarily helpful. Leaders are often told of the importance of separating the signal from the noise, but initiatives such as this show the value in turning down the volume.
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