What is Supply Chain Risk and How Can Spend Analytics Help Solve It?
If you take a moment to consider how interconnected modern businesses are, you’ll find yourself dwarfed by their sheer scope and complexity. Like the size of the earth itself, modern global supply chains are vast, broad, and granular to the point that a human mind can barely comprehend them. They consist of gargantuan numbers—billions spent on Indirect Procurement alone, thousands of suppliers, millions of businesses in a single supply chain, one part crossing ten thousand miles back and forth just to become a single piece in a television or computer.
Along with such unfathomable size and scope, today’s supply chains carry so many possibilities for risk that tracking them all is impossible. And yet this is one of Procurement’s leading responsibilities simply because when risk scenarios become reality, serious financial losses can follow. Just ask any of the businesses that couldn’t get electronic parts during the COVID-19 pandemic.
In light of risk taking the central supply chain stage, many companies have tasked their procurement teams with shoring up supply chains and preventing breakdowns. This is a monumental task that has left many procurement professionals wondering how they can mitigate supply chain risk. The good news is that you can have a significant impact with a relatively small amount of work. Let’s explore what supply chain risk management (SCRM) is and why spend visibility can do much of the heavy lifting for you.
What is supply chain risk?
Simply defined, supply chain risk is the inherent possibility that a company’s vendor chain will fall apart or fail to deliver necessary goods and services. In the past, it mainly revolved around shortages, logistics breakdowns, and poor supplier performance. However, as the global economy has grown more connected and thus more complex, other problems have creeped in.
Now companies have to worry about global and regional conflicts disrupting production and transportation. They also have to plan ahead of unforeseeable events like global or regional pandemics, terrorist attacks, and cyber threats. Another risk factor that has recently reared its head is rapid or large-scale inflation and its impact on economic stability. Finally, businesses also have to consider climate risks, not in the way that they can affect prices, availability, and fulfillment, but in the way that a company’s buying habits contribute to scope 3 carbon emissions, economic development, and equitable business practices.
Clearly, the modern supply chain gives procurement leaders a significant number of concerns to think through, and this is just a surface level list. The sources of risk that companies contend with daily are nearly infinite and ever-growing. Considering this daunting fact, how can spend visibility and spend analytics possibly help procurement teams manage supply chain risk? Here are four examples.
Revealing supply chain gaps
There’s something to be said for minimizing how many vendors a company buys from in the pursuit of cost savings. However, it’s possible to take this exercise too far and create risk in the process. As Ardent Partners discussed in its recent CPO Rising 2023 report, relying on a small number of suppliers during the COVID-19 pandemic was one of the reasons that many companies struggled to operate. Simply put, when companies run categories and subcategories on a select few vendors, they’re setting the stage for shortages when a vendor experiences its own supply chain breakdown.
Using spend analysis software to take stock of vendor relationships is a great way to conduct a simplified supply chain risk assessment and get ahead of this issue early. If a category manager drills down into a subcategory and sees that it only has two established vendors, they’re looking at a problem waiting to happen. Thankfully, awareness is the first step to correction. It’s the teams that don’t have visibility and never know about their supply chain gaps that have a reason to be worried.
Getting ahead of logistics breakdowns
Another supply chain risk to be aware of is gaps in a company’s logistics network. Direct material shortages will shut down manufacturing. Struggles in indirect procurement can be a roadblock to repairs or maintenance. But when companies can’t ship or handle goods, especially their own products, they’re actively facing a financial disaster.
Now the company has products that it’s already paid to manufacture but can’t move along the supply chain. The results can range from spoilage and material waste from a lack of storage space to unfulfilled orders, which can lead to damaged customer relationships and financial penalties. Like with general supply chain gaps though, this is a fairly easy problem to solve. Simply taking stock of logistics and LDL spend helps companies ensure that they have enough vendors to get goods from point A to B.
Fighting non-compliance on both ends
Another common factor in supply chain risk is non-compliance—either from the vendor or from internal buyers. When vendors don’t comply with contract terms, they create unfulfilled purchase orders (POs), shortages, and inflated prices. Maverick spend, on the other hand, takes away Procurement’s control over organizational spending and contributes to whatever issue the contract with the supplier existed to solve.
However, a spend analysis tool will organize spend data in a way that highlights instances of non-compliance. Once they’re visible, the solution is often as simple as addressing the issue with the offending party. When vendors know that category managers are analyzing spend, they’re less likely to engage in gamesmanship, which automatically makes supplier risk management easier without any direct intervention. Likewise, fixing internal maverick buying is usually as simple as letting purchasers know Procurement is watching. In some cases, they may not even realize they’re being non-compliant and a simple email with the relevant contract terms will solve the issue immediately.
Mitigating supply chain risk with visibility
Businesses rarely thrive when operations are unclear. This is true for Procurement—how can the function save money when it can’t see where it’s spending—and it’s also true for everyone who needs to make business purchases. When buyers and procurement stakeholders don’t have standard operating procedures (SOPs) or approved supplier lists, they’re left to fend for themselves and purchase from wherever they feel they’ll get the best results. A host of supply chain risk scenarios will naturally follow.
However, establishing spend visibility across the organization is the fastest way to combat this problem. When Procurement can see its spend profile in one platform, making a holistic catalogue of suppliers is as easy as making a list. Then Procurement can use it to form SOPs, pursue contracts, and create fact-based communication chains with the rest of the business.
Tracking overall spend
To fully combat supply chain risk, Procurement must continually track how much the business is spending. If the function can always answer questions about category, subcategory, and vendor spend totals, it can easily monitor for inflation, supply chain breakdowns, non-compliance, and any other risk factor that will increase spend. In most cases, the effects of a supply chain breakdown will depend on how quickly a team can react. If Procurement is actively watching over spend, it will be well-prepared to pivot should any issue arise.
The global events that dominated news headlines over the previous years have placed supply chain risk at the forefront of Procurement’s focus. Unfortunately, only a few of these situations have ended and new ones seem to emerge on a regular basis. This has created unrest in the supply chain community, as many professionals are still haunted by the breakdowns that the COVID-19 pandemic caused. As a result, many procurement professionals are doing everything they can to shore up their supply chains so they’re never impacted so severely again.
However, risk management in the supply chain doesn’t have to be a daunting task. Establishing visibility and spend analytics capabilities is a simple step that will move teams much closer to their goals, and it isn’t hard to accomplish. If you’re ready to claim a clearer picture of your supply chain and the vendor relationships that make it up, click the button below now to schedule a demo of Spend Intelligence. We’ll show you how easy it is to organize your spend data in a way that makes mitigating supply chain risk easier than ever.