… Probably not at the moment, but there should be.
RAT (Risk-Assessed Total cost of ownership) should be modelled when sourcing ‘time critical’ goods and services, if long-term benefits are to
As buyers, how often are we pressed to make short-term savings and ignore the longer-term impact of those actions? Not that short-term savings aren’t important: in austere times they can make the difference between survival and insolvency. But to only consider short-term savings protects neither current sources of supply
nor longer-term supply market competitiveness. Further, a failure
to identify intrinsic risks in internal processes and the impact of supply market globalisation will lead to primary sources being unable to meet supply responsibilities.
Do you think I am exaggerating? When was the last time you reviewed inherent risks in your procurement processes; or appraised the risks in your supply chains and mitigated them in both purchase contract and through supplier relationship management? When did your personal objectives last incentivise you to maintain low risk in the supply chain? And when did you last measure those risks?
Buyers are currently promoting demand aggregation to achieve low prices. The prize of huge volumes of business, albeit with low margins, for the winning supplier encourages longer supply chains often starting in low cost-base economies and passing through politically turbulent areas. And to what effect on the supply market in the long-term, let alone the likelihood of short-term disruption?
So what is the solution? First, stop
the ill-considered “aggregation-is-the-answer” folly and, instead, all sectors should look within to see where their own processes can be strengthened to reduce costs/risks: PQQ or RFI, ITT or RFQ/RFP and SRM. Action at these stages reduces the likelihood of a supply-chain failure. Knowing that
your supply chains are robust offers both improved resilience and lower recovery costs, i.e. lower RAT.
Second, identifying through formal business impact analysis which are your ‘time critical’ goods and services; understanding risks associated with their supply chains over at least three tiers; looking at your single/multiple sourcing approach item-by-item and optimising the affordability of your approach.
Third, when comparing bids, include residual sourcing risks as a percentage
of the total cost of ownership of the relevant item.
In theory, all risks can be modelled using RAT. But in any supply chain there are risks which are not cost-effective to protect simply through good practice. Advise your continuity representatives
of unprotected risks and let them
develop a planned response to any
supply chain disruption.
☛ Brian Leigh is a director of QiPS
Consulting and a CIPS member