Supplier Risk – the New Paradigm of Strategic Procurement
29th October 2014 | Caroline Booth
In this article, Caroline Booth discusses why supplier risk is the new paradigm in procurement
When Albert Einstein was at Princeton, he set some second year students an exam. When the students read the exam sheet, one amongst them raised her arm and said that the questions were the same as those Professor Einstein had posed the previous year. To which she received the reply, ‘Yes, but this year the answers are different.’
This type of paradigm shift has happened twice during my career in procurement and supply chain. The first was when I was working in Shell in the 1990’s and Shell and many of its peers woke up to the fact that procurement, when done well, could deliver competitive advantage. While this had been recognized in manufacturing much earlier in the century, it took several decades to ripple through other industries. So for many of us, procurement had languished as a ‘must do, administrative, financial probity’ type of activity for a long time and then, all of a sudden, it was recognized as a lever of significant value – exciting times!
When I wrote my first book in 2009, I concentrated on this first paradigm. At heart, ‘Strategic Procurement’ expounds the message for senior people in any organization that third party spend and key suppliers are both levers of value and fundamental to delivering their customer value proposition.
The second shift is happening now, and the new paradigm is that strategic procurement has a key role to play in safeguarding organizations from supplier related risk. To some extent, the hubris around the first paradigm could be seen as the origins of the second. Recognizing outsourcing as a lever of value and a way to streamline their own operations, organizations have enthusiastically engaged suppliers to take on their non-core activities and component manufacture. Overlay this longstanding trend with globalization, just-in-time philosophies and the fact that our suppliers outsource to other suppliers. All of which means that many organizations now face not so much a supply chain but a supply spaghetti – the ramifications of which only become apparent when stress tested by unexpected events.
Ironically the early signs of this were becoming visible at the same time that my book was hitting the shelves in 2010. This was the year of the Japanese Tsunami, the Thai floods and the Gulf of Mexico oil spill. These three events had devastating humanitarian and environmental impacts. They also showed many companies’ supply spaghetti failing at the first hurdle – and having profound consequences for their owners. Then came the cyber crimes of the past couple of years, both the denial of service attacks that impact organizations seemingly unrelated to the target, and others that just seek out the weakest security link. All in all I think you will understand why, when I wrote the second edition, I added three separate chapters on supplier related risk and the role that procurement has in its mitigation.
I am also at heart, an optimist. I don’t believe that the second paradigm negates the first. All successful companies are, and will continue to be, reliant on suppliers to support their business ambitions and I still believe wholeheartedly in the mantra that ‘supply chains compete, not companies’. Therefore, instead of superseding one paradigm with the other, successful organizations need a procurement capability that can address both. For procurement professionals, this means exciting times. After all, who doesn’t want to do it all?
Read more in the new edition of Caroline Booth’s book, Strategic Procurement. The 2nd edition of Strategic Procurement has been thoroughly updated to reflect these important developments in the world of procurement. Strategic Procurement explores the critical value of procurement to business and its potential to deliver significant top and bottom line impact by harnessing the value of key suppliers and third-party spend. Drawing upon the author’s international career in industry and consulting, the book includes real-life case studies taken directly from her work in procurement for leading organisations.
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