Risk: Sorting out the Real Issues
When your organization is managing several hundred thousand suppliers, risk can become a significantly complex factor in your business, which poses the question, do we have our sights set on the real issue? Supplier solvency appears to be a common topic of concern today, so let’s examine some statistics:
For example, from 1990 to 1993 the bankruptcy rate for U.S. firms was about 1.32% of the total number of firms; it is estimated that from 2005-2008 the rate was significantly lower at 0.54% (based on data from the American Bankruptcy Institute and the U.S. Census Bureau). It’s been estimated that the rate for 2009 will rise to 1.01%, a very large increase but still well below the average for 1990-1993. Additionally, in 2008 there were 43,546 firms filing for bankruptcy; that figure is expected to rise in 2009 to just over 60,000. However, over the past 20 years, the peak in the number of bankruptcies occurred in 1991 with 71,549 firms filing and the lowest point came in 2006 with only 19,695. Yet we are in the most severe downturn since the Great Depression. While supplier insolvency needs to be a concern for us at all times, it appears the effort to focus on it in managing risk today may be somewhat misplaced.
It seems to us that the most significant risk in the procurement process is not supplier insolvency but poor scheduling and late deliveries; not always an entirely supplier generated problem. Late deliveries generally impact a schedule, manufacturing or project, causing delays and most likely additional cost. Other factors, such as poor quality, can be another component in this dilemma. However, we seem to have that under control with TQM, SPC and Six Sigma. There are always inaccurate price estimates for new products as well, and maybe difficult to control without dedicated resources to conduct thorough cost and price analysis. There are also a variety of financial, legal and human behavior risks that are impossible to predict. So the question is can we do more than just watch?
Let’s stop to think for a moment. Did anyone in procurement address the issue of risk twenty years ago? Were there any consultants or third party service providers out there offering to identify risk in a company’s supply base? In today’s society, especially with the down turn in the economy, organizations are becoming more aware of this issue at hand and are implementing a learning management system or e-learning courses into their repertoire to educate their employees on Risk management and how to identify and address the problem using methods best fit for their infrastructure in resolution.
Tell us the areas of risk you believe are the most important. Again, we have our preferences but let’s hear back from you. What is your experience and what do you typically monitor?
Fred Sollish for Supply Knowledge Monday, October 26, 2009
When looking for ways to trim costs and maximize every dollar, procurement is an area that requires careful attention. This is, after all, where you are investing hard earned dollars for products and services that you must have to keep your organization running. That's buying everything from paper clips to professional services.
