The risk of ignoring risk

Business magnate Warren Buffet once said, ‘risk comes from not knowing what you’re doing.’ In today’s volatile economy, this comment rings true as ever. In the context of procurement, risk management is generally thought of as a buyer initiative. But as recent high-profile bankruptcy filings have brought to light, it is imperative that suppliers also monitor and manage their risk to prevent disruptions that could negatively impact their business.

The risks presented by the bankruptcy of a key customer can ripple across a multi-tier supply chain and beyond just demand and revenue, affect job creation and economic development globally. Take the example of suppliers of board games in Illinois.

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Many contract with manufacturers in China to produce them. With the holiday shopping season fast approaching, these manufacturers may have ramped up hiring to accommodate increased demand. But in anticipation of the worst, the primary supplier may revise their forecast and cut demand. In turn, their supplier will cut production and staff. Localities will see fewer jobs and feel the pinch of less tax revenue generated by the sales and exports.

There’s no doubt that what you can’t see can hurt you. But in today’s connected, digital economy, visibility and transparency have never been easier to obtain – even across complex, global supply chains. So not knowing that a supplier or customer is on the brink of collapse or that a hurricane may cause power losses and port closures is no longer a valid excuse.

Hope for the best, prepare for the worst

When it comes to managing today’s global supply chains, companies must anticipate risks and develop plans to execute on them before they negatively impact business. And technology exists which makes this possible.

For instance, social networks have revolutionised the way we shop, share and consume. Likewise, business networks have made it just as easy and transparent to conduct business with a partner on the other side of the world as with one across the street.

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But networks are about more than just connecting companies, people and processes. Their real power lies in what goes on inside them – all the interactions, transactions and commentary – and the massive amounts of unstructured data which they generate.

With business networks, buyers and suppliers alike can gain a whole new level of transparency into the capabilities, performance, and social and environmentally responsible practices of their trading partners – and their partners.

Applying big data to risk management

The latest technology advancements can analyse data from millions of sources on an ongoing basis and provide a 360° view of a buyer or supplier’s health and automatically deliver alerts on risk by company, geography, and even commodity. Using this information, companies can make timely, contextual decisions to effectively manage their risk and move their businesses forward.

They can be alerted to potential future risks in the sub-tier supply chain by triangulating a myriad of real-time inputs such as change in payment status, loss of a key customer or decline in sales, change in leadership, commodity price or supply fluctuations crossed-referenced with historical results when such patterns exist.

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Buyers can supplement these alerts with recommended responses such as alternative suppliers based on community-generated ratings and buying patterns of other like-buyers on the business network. And suppliers can use them to find new outsource partners to keep their production costs down and even tap into opportunities for new business with other companies on the network to grow their market share and revenues.

The growing pace of business, rapid economic changes, and increased regulatory requirements call for supplier risk management to become a natural part of the procurement process to avoid damage to revenue or reputation. But with the right tools, companies can effectively manage and overcome them. Knowledge is power. And through business networks and the technology underlying them, buyers and suppliers can effectively harness it to not only see the future, but shape it to their advantage.

 

Sourced by Tony Harris, general manager, SAP Ariba

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Nick Ismail

Nick Ismail is the editor for Information Age. He has a particular interest in smart technologies, AI and cyber security.

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