Functional Risk


RISK IDENTIFIED

 

Source of Influencers

Internal
Poorly conceived or executed procurement strategies, and poor P2P process control or systems will impact your supply, and can make strategies such as JIT for critical parts very high risk. Pricing or negotiation strategy that demands lowest cost helps to drive value out of your purchase.

External
Suppliers accepting low prices, expecting more from suppliers than they have been contracted for because of over-promising/over-commitment from your supplier (also possibly due to assumptions internally).


 

Organisational Consequences

Operational
Process errors can result in delay, errors, and quality problems; frustrations can lead to staff-churn, and inevitably the better performers will be the first to leave.

Financial
Extra payments to expedite shipments, cost to rectify mistakes, cancellation of orders, and penalty-charges are all potential financial consequences.

Reputational
The supplier community will be aware of your organisations payment record and process frailties; consumers may also be interested to discover how quickly you, for example, pay small businesses.


 

Sustainability Consequences

Social
Do you pay enough? A low sell-price encourages suppliers to save wherever possible, and leaves insufficient margin to invest in improving working conditions.

Environmental
Low sell-price drives suppliers to poor environmental practice, e.g. doesn't pay for permits for proper disposal of waste.

Economic
Business at risk because competitors have better stock availability and delivery reliability; a stall in manufacturing output can lead to loss of revenues, loss of customer confidence, with potential effect on business longevity.


Risk and Resilience

 

RECOMMENDATIONS

 

  • Ensure you have fully mapped out each stage of your P2P process by following through a typical purchase from demand generation through to payment completion
  • Map your approval process against your organisations overall authorisation rules
  • Identify the ‘owners’ of each stage and potential weak points
  • Develop a range of key performance indicators (KPI’s) that cover each stage with target achievements for each one. Produce a regular report against each of these KPI’s
  • If you only have manual processes, take steps to understand the benefits that a software-based option would bring
  • Work with your IT specialists to develop a business case for further investment in a software-based P2P system
  • Benchmark against other organisations that are seen as exemplars in this area
  • Use areas such as improved controls, goals of senior management that are not currently being met, fraud protection, increased knowledge, issues identified as deficient as a result of your process mapping, reducing cost per transaction, reduced effort,  as reasons to invest
  • If you already have a software solution, work with your IT specialists to understand its full capabilities against your current deployment, and whether or not there are better features in newer versions
  • Work with your accounts payable team to establish an accurate assessment of the current percentage of suppliers that submit invoices containing accurate PO’s (use a target of >95% as a guide to best-practice)
  • Identify any areas of your organisation, or any suppliers that are contributing to lower than 95% attainment
  • Consider informing your suppliers that no invoice will be paid without a valid purchase order
  • Review your internal communications regarding your P2P process and in particular, the need for a valid PO prior to supplier commitment
  • Work with your accounts payable team to establish an accurate assessment of your payment profile
  • Fully understand any reason why payment may be delayed and instigate remedial action
  • Ensure you have established agreed payment terms with all your key suppliers and work with your accounts payable team to adhere to them
  • Review your process for recording accurate delivery information from your key suppliers
  • Ensure your goods receiving process does not build in delays that skew the actual received date
  • Use all available resources to produce useable data that accurately reflects supplier deliveries against required/promised dates
  • Review delivery failures with the relevant supplier as part of your regular buyer-supplier review activity
  • Initiate a regular (at least annually) review of actual supplier deliveries from time of ordering noting deviations from required and promised delivery dates
  • Regularly (at least annually) ask your key suppliers to update the standard lead times for the products/services you buy from them
  • Create the opportunity for your key suppliers to update you at any time should there be a significant change to their lead times
  • Put in place/contribute to a review of late customer deliveries to identify where material shortages may have contributed to this situation
  • Work with your key stakeholders to help them understand the value of an early involvement of the purchasing team where their deliberations will result in an external sourcing activity.
  • Document case studies / success stories where your team have worked with internal specifiers with a collective positive outcome
  • Train your team in influencing/interpersonal skills to help them interact with internal specifiers
  • Consider positioning your specialist buying resources alongside the appropriate specifier(s)
  • Provide your buying team appropriate support/resources to spend time with key suppliers to better understand their products/services
  • When recruiting, consider product/service specialists who can then be appropriately trained in purchasing and supply tools and techniques
  • Encourage your buying team to learn from both internal and external resources in relation to the products/services they are responsible for
  • Work with your key suppliers on a continuous basis to see how the overall cost of their suppliers can be reduced, rather than rely on sporadic demands for price reductions
  • Include your key stakeholders in any attempts to reduce cost over time (changing specifications, etc.)
  • Understand the key price sensitivity elements such as raw material/currency/climate/demand etc.
  • Take a controlled approach to any new sources starting with small orders
  • Regularly use the CIPS Risk Index powered by Dun and Bradstreet to keep abreast of areas in the world that have a higher potential for supply chain risk
  • Ensure that all your category team have an awareness of the challenges associated with sourcing in these geographic areas
  • Develop expertise in appropriate geographic regions with your buying team
  • Ensure you have access to and regularly consult related external sources of information for the countries/regions you source in
  • Carry out on site audits where possible to verify a suppliers capability to deliver as required
  • Encourage your key/at risk suppliers to participate in the CIPS Sustainability Index which will help you identify any potential risks associated with a new supplier
  • Carry out a review of all goods and services that you procure to establish which are a) business critical and then b) potentially single sourced
  • Check all goods/services that are suspected as single sourced to confirm there are no other sources of supply worldwide
  • For all your key parts or services take steps to understand if your supplier(s) is exposed to a potential risk related to a single-sourced part or service, and work with your specifiers/internal stakeholders to see how it can be either phased-out, or re-specified so that an alternative part or service with more procurement options can be used
  • Encourage a review of inventory policy if a potential future risk is established within the supply chain
  • Build a review of single sourcing into any on site audit you may perform with key suppliers
  • Consider building in appropriate questions in your quotation/pre tender documentation
  • Try to quarantine cost increases that are associated with securing supplies and mitigating risk
  • Make cost savings part of an overall balanced scorecard that shows the overall contribution your purchasing team makes to your organisation
  • Seek to use part of your cost savings to support risk mitigation activities relating to purchased goods and services
  • Ensure your buying team:
    • Understands the main models and processes of negotiation
    • Plans and manages a negotiation with a supplier
    • Applies the appropriate persuasion skills to achieve the optimum output
    • Identifies and negotiates key contract variables
    • Recognise the importance of personal attributes and behaviour during a negotiation
    • Understand how to balance gain against potential risk in any negotiation
  • Enrol your team on a CIPS negotiation course
  • Encourage other appropriate stakeholders/specifiers to undertake negotiation training
  • Consider organising a bespoke negotiation training course for your organisation

 


 

FURTHER RESOURCES

 

CIPS Supply Chain Risk and Resillience Report

Supply Chain Risk and Resilience

Whilst there are numerous BSI and ISO standards developed for business continuity, risk management and organisational resilience there is no global benchmark that can be used to test and develop an organisation’s end-to-end supply chain resilience. The objective of this CIPS introduction along with the forthcoming good practice guidance and online tool is set to fill this gap. This will help procurement and supply management professionals support the survival of their organisations by identifying supply chain risks whilst protecting shareholders and the general public against the effects of disruption and malpractice.

Read the full report

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