Supply chains can be interrupted by natural or man-made disasters, geopolitical issues, and other factors. Procurement professionals must be willing to tackle risks that could affect the organisation adversely. Ineffective risk management can cost the company, so procurement professionals should not avoid it.
Cost of risks to organisations
It is prudent to realise that issues with the supply chain can result in accounting and economic costs. In the former, the costs are visible, such as enhanced capital costs and business continuity insurance. In the latter, while the costs are not visible, they are present and could take the form of reduced valuation or opportunity for not venturing into a risk-laden market.
Once procurement realises that risks translate to cost, it can profoundly affect how they manage risks. Usually, most procurement professionals consider political upheavals and natural disasters when determining risks. But, while high-impact, the probability of such events is low.
Managing risks effectively
Procurement professionals should focus on quantitative risks which, although abstract, are part of procurement and logistics. They have a greater chance of affecting procurement than disasters and political uprisings.
Whether a seasoned or novice procurement professional, it is essential that you understand topics such as financial simulation, hedging, real options, and value at risk models to implement effective risk management.
CPOs and procurement executives should sit down together to determine potential risks, and the steps they can take to mitigate them. When they do this, it will help to minimise risk costs, so there is not a negative impact on the current value of the organisation.
Risk management in procurement is more than pinpointing risks. Instead, it needs concerted thinking, so that the right measures can be implemented to minimise risks and ensure the organisation is not affected.