A majority of C-suite executives fail to recognize the pivotal role that procurement can play in effective risk management. 

While risk can take on many forms, in the world of procurement, there are a few different components to risk. First, procurement teams need to understand the risk in the different tiers of their supply chain — this includes understanding the direct supplier risk (financial, quality, innovation, etc.) as well as the potential reputational risk in using the supplier. According to a report from Interos, this needs to be repeated as far down the differing tiers of the supply chain as possible, as most issues in supply chains happen deeper than the first level. 

In doing so, organizations will have a clearer assessment of the suppliers they are working with and whether those suppliers align with their own company policies and values such as meeting demands or ensuring regulatory compliance. 

As organizations think about supply chain risk and, in particular, supply risk, they can better anticipate risk by having visibility, transparency and collaboration both with suppliers and internal stakeholders on business needs and capacity. Knowing the suppliers, sharing expectations, and having processes and technology that allow for supplier management enables organizations to better mitigate risks and build resilient supply chains without the need to massively increase inventories. 

Be Objective and Broaden The “What If” Scenarios 

Managing risk throughout every level of the supply chain is a complex challenge. Migration to digital technology has only exacerbated this. Previously, the breadth of “what if” scenarios that businesses planned for hadn’t been a cause for concern. They’ve been agile enough to respond to certain challenges like inflation or new competitors because they built mitigation strategies.  

But today, following three years of upheaval, the breadth of these plans has broadened significantly. A 2023 Harvard Business Review story puts this into context, highlighting how business leaders have turned to scenario planning to identify future risks. Through this method, businesses analyze revenues or margins across locations globally, allowing leadership teams to design flexible long-term plans against a defined set of alternative external events and outcomes — typically labeled in a “base case/best case/worst case” fashion. However, this approach only accounts for foreseeable risks.  

When a shock outside of their vision appears — a pandemic or a war, for example — this form of scenario planning might be insufficient. The reality is that current challenges are no longer just small changes to the status quo, they’re unique occurrences that have created a permanent state of “plan B.”  

Simply put, procurement teams should be at the center of scenario planning, which should now be broader than ever. For instance, let’s take managing catastrophic risk like natural disasters. When a natural disaster is detected, it is necessary for procurement teams to quickly identify which suppliers could be impacted, to what extent, and what alternatives exist to keep operations running smoothly. But this is only a small piece of the picture. Procurement teams should also consider scenarios beyond tier 1 and 2 suppliers, and consider the possible scenarios for sub-tier suppliers that can be at risk of disruption. By considering a wider variety of situations, procurement teams will be more resilient when facing the shocks that may result, delivering increased value throughout all levels of the supply chain.  

Additionally, procurement teams that introduce automation and AI in their day-to-day tasks will help to streamline procurement processes. By removing mundane, manual interventions, organizations can elevate more strategic activities, such as risk management, while accelerating decision-making and approvals. For instance, leveraging AI-powered supplier risk-management capabilities can enable business users to spend more time assessing potential risks, building dynamic risk profiles for their suppliers to help them determine third-party risk, and make smarter decisions faster. When leveraging AI, organizations can also profile markets to help them better understand where the opportunities may be in risk mitigation. 

Tackle Any Transparency Issues 

In the supply chain ecosystem, transparency is the silver bullet for risk reduction. Each tier of procurement has the potential to expose a critical gap and organizations need to be deeply familiar with each one. Deloitte’s 2023 Global Chief Procurement Officer Survey found that just 2% of firms said they had “high visibility” beyond tier one of their supplier networks. That is a glaring issue, especially considering that most supply chain issues have origins further down the supply chain.  

While bottlenecks have recovered from the stand-stills that made headlines during the pandemic, supply chain volatility is expected to continue. According to the Interos report mentioned earlier, "The average organization suffers four supply chain disruptions requiring significant mitigating action annually." Despite this, organizations also state they only assess just over half of their critical suppliers for risk — and 90% of them wouldn’t be aware of a disruption in any or all tiers within 48 hours. It’s clear that visibility into the supply chain isn’t at the level where it needs to be.  

Supplier relationship management platforms allow companies to optimize their procurement function by forecasting purchasing behavior and to shorten cycles, so they have a real-time understanding of where things are moving smoothly and where they’re falling short. 

By investing in tools that can forecast demand and drive transparency, companies can better prepare for and respond to these disruptions.  

Refresh Key Relationships 

Ultimately, procurement is about connecting with the right people. Organizations tend to prioritize business outcomes, but after the past few years of turmoil, it’s high time for them to put the emphasis on relationships instead. Today, successful business relationships are more than a contract. The more you trust your suppliers, the more they’ll trust you in return — resulting in a more effective and strategic partnership. In fact, according to research from the University of Tennessee, relationship strength is significantly related to supply chain performance, and trust and commitment are key indicators of the strength of a relationship. 

Procurement teams are increasingly looking to technology not only to transform their relationships with suppliers themselves but also the way they measure and manage them. However, this technology has not been deployed across all parts of supplier management. Instead, it is most frequently used for on-boarding and to house supplier data, rather than tracking performance, relationships, and risk. 

A report from Everest Group shows that 85% of respondents use spreadsheets or nothing to handle supplier relationships, and 77% say the same for measuring performance. Relying on spreadsheets to build fruitful partnerships may not be ideal. But 78% of respondents also say that they’re collaborating more with suppliers today than three years ago and 50% have increased their level of information sharing.  

New supplier relationship management tools make this much easier than logging figures to spreadsheets — managing supplier information, lifecycle, and risk in one place. The efficient processes can help cut down procurement expenses, allowing companies to work with their supplier network in real-time and develop the relationships needed for long-term success.   

In today’s volatile economic environment, procurement has the power to pave the way for an improved bottom line in the years ahead. But that’s only possible by taking a proactive approach that leverages technology to reduce risk at every level of the supply chain.  

Gordon Donovan is global vice president research, procurement & external workforce at SAP.