Accenture High Performance in Procurement Risk Management (Lo-res)

8/10/2019 Accenture High Performance in Procurement Risk Management (Lo-res)

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High Performance in

Procurement Risk Management

Research and insights developed in collaborationwith Massachusetts Institute of Technology


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Risk is part of businessa significant,

permanent reality faced by virtuallyevery organization. Without risk,business as we know it might not existeither. To compete, grow and capturebenefit, companies need to takechances; its what businesses do.

Although business risk has existedas long as there has been commerce,the situation is clearly different inthe 21st Century. According to a2009 Accenture Study, seven outof ten companies acknowledge that

business risk has increased due torecent financial stress. Nearly half ofsurvey respondents believe that newregulations (often stemming fromeconomic concerns) have exacerbatedrisk.1Commodity price fluctuationsand inadequate liquidity levels alsoare current concerns whose rootsmay be connected to moderneconomic problems.

The net effect is that risk management

is a white-hot topic. Companiesin most industries are assigningresources to risk management. Andmany are working hard to identifyfunctional risk issues and solutionshazards associated with specificbusiness components such as design& development, supply & demand, andfinance & accounting.2

The mission of this Accenture Pointof View is to discuss research andinsights associated with risk in one

such functional area: We believe thatprocurement has become a major focalpoint for companies risk managementconcerns. Indeed, corporate buyers inalmost all industries have seen riskincidents, factors and consequencesincrease significantly in the pastten years, often for the global,technological and economic reasonsnoted above.

It is Accentures position that the need for a structuredrisk-management capability within (as well as beyond)the procurement organization is significant.

However, Accenture has observed

that few companies translate thisconcern into a formal procurementrisk management capability. Mostdo have risk-management structureswithin their finance organizations,and perhaps it is their belief thatfinances efforts are sufficient tomitigate risk across other companyfunctions. We do not agree. It also isclear that many companies continueto manage risk opportunistically,i.e., on a case-by-case basis withouta structured approach or specificcriteria. We feel that this, too, isinadvisable. In fact, it is Accenturesposition that the need for a structuredrisk-management capability within(as well as beyond) the procurementorganization is significant. Giventodays turbulent supply marketsand volatile, pan-global businessenvironment, corporate buyers need tomake consistently superior decisions.And developing a formal, structured,risk management capability for

procurement is an outstanding way todo just that.


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Is it possible that the recent economic downturnactually spawned some good news? In procurement riskmanagement, that might be the case. According to surveyresults, the global recession made companies significantlymore aware of the need for advanced risk managementpractices. The bar chart below offers significant evidence.Two additional findings also bear mention:

Fifty five percent of responding companies gave moreattention to procurement risk management in 2009 thanthey did in previous years.

Eighty five percent believe that volatility will remain highin the near future, thus implying that formal and sustainedrisk management efforts should be enacted to countermandthat trend.

An Upside to the Downturn?

CPO's focus on procurement risk management

Relationships with key suppliers

Buyer's consideration of risk managementpractices

Management monitoring and understandingof procurement risks

Relationships with internal clients

81%

77%

76%

62%

56%

Percent of survey respondents that extended various procurement risk management practices due to the downturn.


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A Formal Effort to Understand Risk

in Procurement

To validate Accentures view thatrisk management in procurementrequires efforts beyond what mostcompanies are doingand to identifyleading practices, metrics andsolutionsAccenture partnered withProfessor David Simchi-Levi of theMassachusetts Institute of Technology(MIT) in Boston on a Procurement RiskManagement Research Study. Answersto three fundamental questions weresought:

1. To what procurement risks arecompanies most frequently andextensively exposed? For example,are exceptionally high levels of riskmost-tightly associated with supplierreliability, product quality, supplychain disruptions or some other issue?

2. Is risk management a must havecapability? In other words, can a linkbe established between the level ofprocurement performance a companyhas achieved and the depth andsophistication of the risk managementsolutions it has implemented?

3. What do high performers in riskmanagement do differently from othercompanies? What risk managementcapabilities really matter? What

capabilities make the greatestdifference in helping procurementorganizations perform mosteffectively?

The research team from Accenture andMIT received responses to an onlinesurvey from chief procurement officers(CPOs) at 127 global, industrialcompanies around the world.More than three quarters of thoseorganizations are in Europe or NorthAmerica, with most of the remainderin Asia and Oceana. As shown inFigure 1, five industry groups wereparticularly well represented.

29%

17%

16%

13%

6%

19%

Automotive and industrial equipment

Communication and high technology

Consumer goods and services

Energy and resources

Pharmaceuticals

Other

Figure 1: Chief procurement officers from automotive, industrial equipment and consumer goods

companies were the most prevalent respondents.

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Cisco: A Master of Risk Management

Cisco provides one example of a comprehensive risk management approachthat spans the entire company. With almost all its manufacturing activitiesoutsourced, the firm faces enormous risks: from supplier reliability,through supply chain disruptions, all the way to man-made and naturaldisasters. To address this challenge, Ciscos risk management framework

includes the three components identified in this Accenture Point of View:risk anticipation, risk monitoring and risk mitigation. Ciscos resiliencyscorecard includes four categories: manufacturing resiliency, supplierresiliency, component resiliency and equipment resiliency. Cisco updatesits resiliency scorecard on a quarterly basis and uses it to identify wherealternative sites, dual sourcing approaches or inventory adjustments arerequired. Ciscos supplier risk assessment web-portal combines informationfrom supplier meetings and public information about at-risk suppliers.

Excerpted with permission from the book Operations Rules: DeliveringCustomer Value through Flexible Operations by David Simchi-Levi, MIT

Press, September 2010.

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1. Understanding Risk in Procurement

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As shown in Figure 2, responding CPOs

are most concerned with the level ofdependency their companies have oncritical suppliers.3This may not besurprising, given that critical suppliersrepresent nearly half of respondentstotal spend in direct materials and upto 16 percent of respondents totalnumber of suppliers.

The implication is that, for a particularcategory or niche, many buyingorganizations have been unable or

unwilling to find more than onesupplier that offers an optimal mix ofprice, quality and reliability. Buyersthus are fearful because, for onereason or another, they depend heavilyon one or very few suppliers for aparticular component, ingredient,product, SKU or service. Riskmanagement efforts in this area focuson reducing dependency by tappinga wider swathe of suppliers or byhelping ensure the ongoing solvencyand reliability of those suppliers for

which alternatives cannot be found.

Concerns about price volatility were

shown to be nearly as prevalent asworries about supplier dependence.Survey results indicate that 46 percentof survey respondents spend isexposed to volatility in raw materialsprices and that 27 percent is exposedto currency volatility.

Unlike the supplier dependency issue,price volatility is often outside thesuppliers control. Suppliers certainlyhave the ability to raise and lower

prices in response to volatility;however, as elaborated in Figure3, the research team found thatabout 64 percent of market priceincreases cannot be passed on tofinal customers; corporate buyersor suppliers simply must absorbmost of the new costs. This is whysophisticated risk managementpolicies and programs are soimportant: Besides raising prices,what else can companies do whenthe cost of a commodity is highly

unstable? Can they do a better jobof anticipating (and thus preparingfor) price increases? Should price-escalation clauses in supplier contracts

be revisited? Might some products

be redesigned to limit dependenceon a potentially volatile commodityor component? Can existing finishedgoods near the end of their lifecycle be cannibalized or repurposedto limit the number of new-partpurchases? These are some of the risk-management issues associated withvolatility.

Supplier quality also represents asignificant (third most common)

concernone that speaks directly torisk-management solutions focusedon the buyer-supplier relationship.Fifty percent of survey respondentsexperienced supplier-quality problemsin 2009.

Fifty percent of surveyrespondents experiencedsupplier-quality problemsin 2009.


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Our company's dependency on supplier

Unanticipated price volatility(raw material)

Supplier quality problems

Supply chain disruptions

Unanticipated price volatility(currency exchange rates)

Supplier bankruptcy

Legal/Regulatory

Supplier dependency on our company

65%

63%

55%

53%

48%

44%

30%

29%

Figure 2: Survey recipients were asked, For each procurement risk, indicate the extent to which your company faces that risk.Depicted is the percentage of respondents who indicated a moderate-to-high extent of risk.

Figure 3: Exposure to raw materials price volatility by industry. The X axis measures the percentage of cost of goods sold

that is typically exposed to price volatility. The Y axis charts the average percentage of price changes that cannot be passedon to final customers.

More than70%

50% to 70%

Less than50%

Oil, Gas and other NaturalResources

Communication

Pharmaceuticals andMedical Products

Media and Entertainment

Less than 3% 3% to 8% More than 8%

Utilities (distribution ofelectricity, gas, water)

Automotive

Industrial Equipment

Chemicals

Retail

Construction

Transportation

Manufacturing

Food

Consumer Goods

Mining and Metals

Electronics and High Tech

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Supply chain disruptions (the fourthmost highly rated concern) may ormay not be a supplier managementissue. But it still may be the mostdifficult to deal with since thecapabilities of suppliers, third parties,business partners and even internalorganizations must all comeunder scrutiny. Macroeconomic,political, social and ecologicalfactorseverything from OPECpetulance to west coast port capacityproblems to Hurricane Katrinaalsocontribute to the potential forsupply disruptions. Bottom line: Riskmanagement solutions focused onminimizing supply disruption must beparticularly varied.

Survey respondents generally knowthat risks affecting procurement haveimpacts that extend far beyond theprocurement organization. However,

that knowledge is not well reflectedin the dispersal of procurement riskmanagement responses and solutionsacross functions. As shown in Figure4, risk management expertise tendsto be centered either in finance (riskmanagements traditional home) or inprocurement. Unfortunately, neithercomprises a complete answer. Onekey to successful risk management inprocurement is to ensure its presenceacross all the organizations withwhich procurement interacts on a

regular basisfrom product designto manufacturing to supply chainmanagement to service and spareparts management.

This is not to say that eachdepartment should develop itsown capability, but rather thatprocurement risk management needsto be constructed and executedmore cross functionally across theenterprise. And it often is advisablefor procurement to take the lead in

driving this change across functions.

Thinking and Acting CrossFunctionally

Unanticipated price volatility(currency exchange rates)

Unanticipated price volatility(raw materials)

Supplier quality problems

Supply chain disruptions

Supplier bankruptcy

Procurement

Product Design

Figure 4: Survey recipients were asked, For each procurement risk, indicate the departments or

functional areas involved in identifying and monitoring that risk.

0% 20% 40% 60% 80% 100%

Manufacturing

Supply Chain

Finance

Other

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Risk Management Issues and Responses

are Often Industry Specific

While many of the conclusions drawn in this Point of Viewapply to companies across sectors, it certainly is true thatrisk varies by industry. Consider the various industriessummarized in the table below and how much differencethere often is in the nature and degree of risk.

Exposure to price volatility and supplier risks by industry.

Pharmaceutical andMedical Products

Chemicals

Food

Mining and Metals

High

Medium

Low

Low Medium High

Manufacturing Industrial Equipment

Consumer Goods

Retail

Automotive

Utilities (distribution ofelectricity, gas, water)

Media andEntertainment

Communication

Construction

Aerospace and Defense

Electronics and HighTech

Transportation

Oil, Gas and otherNatural Resources

Perceivedexposureto price

fluctuations

Perceived exposure to supplier risks

Impact of wheat or milk prices

Impact of oil prices

In 2009, some OEMs

have had >30% of theirsuppliers in bankruptcysituation

Mono-source situations


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2. Risk Management as a Key Driver of

Procurement Performance

Just how important is sophisticated

risk management to companiesachievement of high performancein procurement? It is clear frominformation presented in theprevious section that procurementrisk has a great many faces (supplierdependency, price volatility, supplychain disruption, etc.) and that mostcompanies are exposed to theserealities on a regular basis. In fact,Accenture has determined that riskissues have a greater cost impactandtake up far more timethan mostbuyers efforts to capture savingsthrough negotiation. Given this reality,to what extent is procurement riskmanagement considered a must havecapabilityan investment in improvedperformance?

The research team sought to addressthis question by mapping CPOsinvestments in risk managementcapabilities against the specificlevels of performance achieved by

their procurement organizations.Our hypothesis was that companieswith stronger (though not necessarilymore) investments in procurement

risk management would be more

likely to show up on our litmus testas procurement masters. Companieswith less-focused or less-effective riskmanagement investments would morelikely be labeled low performers. Thisdid prove to be the case.

According to a previous Accenturestudy,4high performers in theprocurement realm (procurementmasters) save about ten times asmuch as it costs them to operatetheir procurement organizations. In

other words, if it costs a company$100 to staff and support an in-house procurement department,an organization that has achievedmaster status will identify and captureannual procurement-related savingsof $1,000. The bell curve for theaforementioned survey identified 16percent masters, 67 percent mid-range performers and 17 percent lowperformers.

Low Performer

18%

ROI< 3 ROI> 8

Master

22%

Figure 5: A procurement performance bell curve (annual savings relative to annual operating costs) reflectscompanies investments in risk management.

Mid-range Performer

60%

The hypothesis wasthat companies withstronger (thoughnot necessarilymore) investmentsin procurement riskmanagement would bemore likely to show up

on our litmus test asprocurement masters.Companies with less-focused or less-effectiverisk managementinvestments wouldmore likely be labeledlow performers. This

did prove to be thecase.

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As shown in Figure 5, a similar bell

curve emerged for our present studyon procurement risk management.First, a composite score (from 0to 100) was calculated to reflectsurvey respondents investmentin procurement risk managementcapabilities. These capabilities wereassociated with one or all of threecategories:

Risk anticipation (e.g., predictiveanalytics or dual sourcing)

Risk identification and monitoring(e.g., supplier scorecards)

Risk mitigation (e.g., mitigation andescalation plans)

These scores then were correlatedto the procurement-related returnson investment achieved by eachrespondent.

Following are some of the specificobservations that helped survey

analysts make a connection betweenrisk-management investmentsand distinctive levels of overallprocurement performance.

4 5 6

0

5

10

15

20

25

30

0 1 2 3

Procurement ROI

Average yearly number of incidents by critical supplier

Figure 6: Procurement performance and level of realized risks.

Procurement performance tracks to

respondents level of realized risk

Figure 6 demonstrates that highlevels of procurement ROI are closelyassociated with fewer risk incidents.This applies to masters, mid-rangeperformers and low performers,but is particularly evident amongthe masters. It is also notable thatcompanies with a high numberof incidents are rarely masters.Companies with low procurementperformance seldom have a high

number of incidents, not becausethey are better at managing risk butbecause they are unaggressive whenit comes to pursuing procurementsavings.

Companies investing in supplier

risk management capabilities often

experience fewer incidents

The key to interpreting this findingis combining it with the insights

depicted in Figure 6: In Figure 6, weshow that fewer risk incidents areassociated with the achievementof higher procurement ROI. In

Figure 7, we demonstrate that, as

companies invest more intentlyin risk management capabilities,the fewer incidents they are likelyto experience. The same basic arcwas found when the research teamgraphed respondents implementedrisk anticipation capabilities, riskmonitoring capabilities and riskmitigation capabilities.

Companies that have not invested

in price risk monitoring capabilities

for raw materials are limited in

their ability to improve procurement

performance

Depicted in Figure 8, this is a raw-material-price-risk-managementexample of the information describedmore generally in Figure 7. It furthersupports the broad conclusion thatprocurement risk investments resultin higher procurement ROI. Thedistinction is that price risk has twodistinct geneses: macro-economic

forces and fluctuations that areinfluenced directly by the supplier.Sophisticated procurement riskmanagement capabilities potentiallyaddress both.

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Masters

Mid-range Performers

Low Performers


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Average yearlynumber of incidentsby critical supplier

0

15 20 25 30 35 40 45 50 55 60 65

1

2

3

4

5

6

Overall supplier risk management capabilities

Figure 7: Level of realized risks compared to investment levels in supplier risk management capabilities.

14

Masters


Low Performers


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Figure 8: Procurement performance and level of investment in price risk monitoring capabilities.

Masters


Low Performers

Procurement ROI

Overall price risk monitoring capabilities

0

5

10

-10 10 30 50 70 90

20

30

15

25

15


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3. Risk Management Mastery:

What Do High Performers in Risk

Management Do Differently fromother Companies?

Thus far, we have demonstrated that

companies in a variety of industriesconfront myriad procurement-relatedrisks, and that a clear connectioncan be made between companiesinvestment in risk managementcapabilities and the level ofprocurement mastery and ROI theyare able to attain. Two things remainto be determined:

What do procurement masters dodifferently that allows them to achievehigher ROI?

What specific investments doprocurement masters make to supportthose capabilities?

Accentures experience is that one ofprocurement masters most importantattributes may be their use of arisk management frameworkacomprehensive, end-to-end approachto anticipating, monitoring andmitigating risk. As shown in Figure9, this is basically an over-layering

process, whereby three risk-management stages (anticipation,

Procurement mastersare significantly morelikely to addresssupplier and pricevolatility risks whendeveloping theirprocurement strategies

(as opposed to later on).

monitoring and mitigation) are

applied to the key components of aprocurement organization.

1. Procurement Strategy

The research team observed thatprocurement masters are significantlymore likely to address supplier andprice volatility risks when developingtheir procurement strategies (asopposed to later on). Masters also werefound to be two-to-three times more

likely than low performers to integraterisk management into their categorystrategies, develop innovative ways tomonitor risk, and implement practicesand tools to mitigate risk.

A good example is that masters aresignificantly more likely than lowperformers to apply dual-sourcing andrisk-sharing initiatives to anticipatesupplier quality risks (Figure 10). Toanticipate supplier bankruptcy risks,procurement masters were found to be

leaders in dual sourcing and suppliernegotiations. In addition, the most

significant disparity between masters

and low performers was in the areaof risk sharing clauses and back-to-back contracts (formal agreementsstipulating that buyers can share, oreven transfer, the cost of unforeseenproblems across suppliers or sub-suppliers). According to our study,masters are 2.5 times more likelythan low performers to deploy theseclauses/contracts.

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Figure 10: Percentage of companies using various practices or tools to anticipate supplier quality issues.

Risk Anticipation

High Performancein Procurement

Develop strategies to avoid or minimizerisk exposure

Continuously track potential risks andraise alerts

Act quickly and appropriately to minimizerealized risks

Risk Monitoring

Risk Management Framework

Risk Mitigation

Procurement Strategy Sourcing & Category Management

Supplier Relationship Mangagement Requisition to Pay

Process & Technology

Workforce & Organization

Figure 9: A risk management framework applied to procurement.

Dual sourcing 59%

44%

44%

41%

19%

7%

4%

0%

5%

9%

9%

18%

32%

18%

45%

50%

Regular negotiations with suppliers

Risk sharing clauses/back-to-back contracts

Value engineering/reduction of commoditycontent

Insurance

Supply chain financing

Index-based contracts

Hedging/financial tools

17

Masters

Low Performers


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Latest news on the supplier

Risk-management KPIs

Historical pricing

Historical quality of delivery performance

Supplier's corporate information

Figure 12: Data collected through supplier scorecards.

Figure 11: Frequency and context with which companies use supplier market analysis to address riskissues.

11%

15%

41%

78%

56%

0%

37%

67%

14%

18%

41%

15%

10% 20% 30% 40% 50% 60% 70% 80%

To monitor risk of supply chaindisruption

To monitor supplier bankruptcy risk

To monitor supplier quality risk

Masters

Low Performers

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2. Sourcing & Category

Management

Integrating risk management initiativesinto the strategic sourcing process(e.g., during supplier evaluation) canhelp companies achieve procurementmastery and there are many toolsand approaches for addressing/remediating procurement risk in thisarea. These include supplier marketanalysis, current supplier portfolioanalyses, supplier audits, supplier

scorecards, supplier process failuremode & effects analysis (FMEA),historic & forecast pricing analysis,and logistical & transportation riskanalysis. Among these, one of the mostinteresting may be supplier marketanalysis, an activity that is practicedfar more by procurement masters thanby low performers (Figure 11). Supplymarket analysis involves a thoroughassessment of supply market industrydynamics, (supply, demand, industry

structure, industry profitability,supplier capacity utilization, etc. )in order to anticipate commodityprice evolution and potential supplyshortages.

Respondents use of supplier

scorecards also is noteworthy. Whiledistinctions among high, mid-rangeand low performers were not dramaticin this area, it is remarkable that 67percent of respondents identifiedscorecards as a key capability. It alsoshould be mentioned that mastersseem less likely to maintain scorecardson all suppliers; masters are likelyto focus on critical suppliers only. Inaddition, masters were found to be50 percent more likely to update theirscorecard information on at least amonthly basis. Figure 12 identifies thekind of data that respondents collectmost often via their scorecards.

3. Supplier Relationship

Management

When it comes to procurement, riskmanagement masters also tend to besupplier relationship masters. Not onlydo they form deeper, more symbiotic

connections, they also collaborate withsuppliers to rapidly detect risk (e.g.,through early warning systems) andneutralize risk-related issues beforethose issues become incidents. As risk

management masters, they also adapt

their supply relationships to variousgeographies and cultures.

To mitigate price volatility risks,survey respondents appear mostprone to use negotiations and index-based contracts when forging andmaintaining supplier relationships.Despite their prevalence, these toolsare used less by masters than by theremainder of the survey population.The reason could be that these twostrategies either are not considered

permanent solutions or not valuable asrisk-abatement approaches. As notedearlier in Figure 10, other practicesidentified by respondents as key totheir price-volatility-managementefforts include:

Value engineering and reduction ofcommodity content (practiced by 33percent of masters and 23 percent oflow performers).

Hedging and other financial tools(practiced by 26 percent of mastersand 41 percent of low performers).

0%

Defining the critical levelthat makes the risk anincident/alert

Developing mitigationplans in case of incident/alert

Listing decision makers incase of incident/alert

Measuring impact ofincident/alert

10%

20%

30%

40%

50%

60%

70%

Figure 13: Percentage of surveyed companies that document risk management to a highextent in their category strategy documents.

19

Masters

Low Performers


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Risk sharing clauses (practiced by 22

percent of masters and 14 percent oflow performers)

Dual sourcing (practiced by 22percent of masters and 36 percent oflow performers)

Survey results also show thatprocurement masters invest more indeveloping and following up on theirmitigation plans. In each of the fourareas noted in Figure 13, masters holda roughly 20 percent edge over low

performers.

4. Workforce &

Organization

Research findings show that mostcompanies do not assign procurementprofessionals to full-time risk-management work. However, there aredistinct differences among masters,mid-range performers and lowperformers when it comes to centrallyled coordination across regions:Procurement masters are far more

likely than low performers

(75 percent versus 32 percent) tohave developed a regionally dispersedbut centrally led procurement riskmanagement network. Procurementmasters also are more likely thanlow performers to have definedbeforehand, and by function, whoshall take part in mitigation planswhen an incident occurs (48 percent

vs. 27 percent).

5. Technology

The range of risk management toolsavailable to procurement organizationsis vasttoo broad for any organizationto not be discriminating about whatapplications provide the greatestvalue. In fact, the ability to makesmart decisions about what tools andtechnologies best support their risk-management efforts could be whatbest distinguishes high performersfrom the rest of the survey pack.

Perhaps compensating for their moreprudent technology-investmentapproaches, masters were shown to

Masters were shown tofocus more intently on

the use of externallyacquired and manageddata.

focus more intently on the use of

externally acquired and managed data(Figure 14). Particularly noteworthyare the extent to which this groupemphasizes externally acquiredinformation to help assess suppliersfinancial situations, perform marketanalyses, gauge supplier performance,and make tax and legal decisions.

Figure 14: Percentage of responding companies that leverage external data, applications and sources.

Supplier financial situation

Market analysis

Price indices for commodities

Supplier performance

Tax and legal recommendations

Recommendations for how to use risk-management tools

Service companies (credit rating service, etc.)

Research companies

Industry associations

Masters

Low Performers

Consulting companies

20

59%

41%

59%

9%

14%

9%

55%

32%

23%

9%

74%

63%

48%

41%

33%

7%

67%

52%

30%

30%


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Key Conclusions

So what conclusions can we drawfrom the facts gleaned by the surveyeffort? With regard to the current

procurement-risk environment, theresearch team determined that:

Procurement organizations havetraditionally under-estimated theeffect of risk on their performance.However, the economic downturn hashelped them realize how dramaticallyprocurement risk can affect them.

Many companies remain ill-equippedto cope fully with procurement-relatedrisk. The most common and potentially

dangerous procurement-risk areasrelate to supplier reliability andprice volatility. This exposure variessignificantly across industries.

It is increasingly critical thatcompanies fully assess supplier risks(including financial and logistical

concerns) and construct formalmitigation plans.

Buyers must recognize thatanticipating and rapidly reacting tomarket forces are more useful thanconcentrating on (non) relationshipsfounded solely on lowest price.However, both aspects remain key.

Team members further concurthat excelling at risk managementcontributes significantly to

a companys achievement ofprocurement masterythe abilityto maximize the savings that aprocurement organization generatesrelative to its costs. For example, a keycharacteristic of procurement mastersis their adoption of a cross-functionalapproach: acknowledging and acting

on the fact that procurement touchesalmost every corporate function andthus must be equally inclusive in its

approaches to risk management.

Procurement risk masters also tendto be particularly proficient at usingspecially developed risk-focusedtools and services. Perhaps the bestexample is predictive analytics:Masters continuously monitor rawmaterial price developments, forecastthem and use technology to enablefast scenario planning. Basically, theseorganizations are better equipped thanmost to foresee a particular hurdles

effect on their cost structure and therelative profitability associated witha specific component, system or endproduct.

Figure 15: High performers in procurement risk management often organize their capabilities in terms of

risk anticipation, risk monitoring and risk mitigation.

Identify and assess the level of risk atkey stages of the strategic sourcingprocess

Identify, assess and continuouslymonitor key risks with criticalsuppliers at each step of the supplychain

Adapt monitoring approaches tocategories of suppliers and to differentgeographies and cultures

Use external data sources forcontinuous monitoring of the supplymarkets, supplier's financial health,etc.

Apply SRM practices-close integrationand collaboration with selectedcritical suppliers and agree on "earlywarning systems"

Monitoring Capabilities Mitigation Capabilities

Develop a process to measure impactsof incidents/alerts and continuouslyimprove risk management practices

Integrate the organization in caseof incident in mitigation plans (whomakes, who decides)

Emphasize development of mitigationplans for critical suppliers

Carefully integrate procurement riskmanagement into each categorystrategy (differentiation by category)

Use dual sourcing and regularnegotiations with suppliers toanticipate supply risks related toquality and supply chain disruptions

Use risk sharing clauses/back-to-backcontracts

Apply value engineering concepts tolook at alternative materials

Use predictive analytics to analyze rawmaterial regarding pricing and forecast

& build scenarios on the effect oncompany's own cost structure

Anticipation Capabilities

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As shown in Figure 15, masters inprocurement risk management oftenorganize their capabilities in terms ofrisk anticipation, risk monitoring andrisk mitigation. This clear segmentationof risk-related processes allows themto develop the formal plans andresponses that help whittle down

procurement risks otherwise-dauntingimpacts. At the Anticipation stage, forexample, masters align risk programswith category strategies, make useof risk-sharing clauses and excel atpredictive analytics. At the Monitoringstage, they work more closely withselect suppliers, design formal supplierrelationship management programsand (compared to low performers)make exceptional use of external datasources. And for Mitigation, masters

stand out in the formation of decisionprocesses and the use of formalmetrics and measurements.

Lastly (and unsurprisingly) mastersare collaborators: They work withcritical suppliers to predict, detect andneutralize risk-related issues beforethose issues become incidents. Andwhen incidents do occur, masters havepredefined action plans.

In net, an increasingly straight linecan be drawn from 1) excellence inrisk management to 2) procurementmastery to 3) high performance (acompanys ability to consistentlyoutpace competitors with respect toprofitability and growth). Procurementrisks will only continue to grow.However, companies that excel atprocurement risk management will, inall likelihood, continue to grow also.

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About the Authors

Per Segerberg is a Senior Executive inAccenture's Supply Chain Management

Service Line. He has 23 years of experienceas a management consultant and currentlyleads the Sourcing & Procurement practicein the Nordics. He has extensive experiencein operational excellence programs andspecializes in procurement transformationprograms, including global procurementorganizational design, global sourcing,supplier development and workforcetransformation. He has worked across avariety of industries, including automotive,commercial vehicle, industrial equipment,high tech and electronics. He also hasresponsibility for developing AccenturesHigh Performance in Procurement offeringand assets. Based in Gothenburg, Sweden,he can be reached [email protected].

David Simchi-Levi is a Professor ofEngineering Systems at Massachusetts

Institute of Technology. His researchfocuses on developing and implementingrobust and efficient techniques for logisticsand manufacturing systems. He haspublished widely in professional journalson both practical and theoretical aspectsof logistics and supply chain management,as well as co-authored award-winningbooks: Designing and Managing the SupplyChain(McGraw-Hill, 2007), The Logic ofLogistics (Springer 2005), andManagingthe Supply Chain: The Definitive Guide forthe Supply Chain Professional(McGraw-Hill, 2004). His newest book, OperationsRules: Delivering Customer Value throughFlexible Operations, will be published byMIT Press in September 2010

Aurlien Rothstein is a Senior Manager inAccenture's Supply Chain Management

Service Line. He has extensive experiencein the areas of global sourcing andprocurement, including strategicsourcing, supplier development, sourcingtransformation and performancemanagement. He has worked across avariety of industries, including automotive,industrial equipment, high tech andconsumer goods. He has also contributedto the development of Accentures globalsourcing offering and assets. Based inParis, he can be reached [email protected]


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Footnotes

About Accenture

The Accenture Supply Chain

Management service line works

with clients across a broad range of

industries to develop and execute

operational strategies that enable

profitable growth in new and existingmarkets. Committed to helping clients

achieve high performance through

supply chain mastery, we combine

global industry expertise and skills in

supply chain strategy, sourcing and

procurement, supply chain planning,

manufacturing and design, fulfillment,

and service management to help

organizations transform their supply

chain capabilities.

Accenture is a global managementconsulting, technology servicesand outsourcing company, withmore than 190,000 people servingclients in more than 120 countries.

Combining unparalleled experience,comprehensive capabilitiesacross all industries and businessfunctions, and extensive researchon the worlds most successfulcompanies, Accenture collaborateswith clients to help them becomehigh-performance businessesand governments. The companygenerated net revenues ofUS$21.58 billion for the fiscal year

ended Aug. 31, 2009. Its homepage is www.accenture.com.

We collaborate with clients to

implement innovative consulting

and outsourcing solutions that align

operating models to support business

strategies, optimize global operations,

enable profitable product launches,

and enhance the skills and capabilities

of the supply chain workforce.For more information, visit

www.accenture.com/supplychain.

1Managing Risk for High Performance

in Extraordinary Times, 2009 by

Accenture.

2Still, the aforementioned report

(Managing Risk for High Performance

in Extraordinary Times) noted that

risk management is often absent

from mainstream decision-making

processes. For no major process

(strategic planning, performancemanagement, M&A, budgeting and

forecasting, etc.) was risk management

positioned as a major consideration.

3Accenture defines critical supplier

as a supplier that requires specific

monitoring to avoid any significant

impact on companys performance in

case of incident.

4High performance through

procurement: Accenture research andinsights into procurement performance

mastery, 2007 by Accenture

The authors would like to extend a

special note of thanks to Maya Olsha

for all of her contributions to this

research initiative.

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Accenture High Performance in Procurement Risk Management (Lo-res)

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