Opinion

Risky business

Procurement strategies such as demand consolidation and global sourcing have lowered costs, but at what price?

by Christina De Luca

Your job is to save money for your business. So you consolidate your demand, explore sourcing from China, reduce your supplier base and invest in procurement capability. Plus, you have achieved every CEO’s dream of lower costs and higher profitability, all delivered by you and your value-enhancing team.

In reality, we all know that delivering on that offer isn’t easy, but this can be solved. Attend a seminar. Learn from your peers. Hire a consultant. Buy a book (if you’re really good, even write a book!). You, too, can jump on the global supply chain procurement train and transform your company in the process.

But hang on just a minute, aren’t we forgetting something? What about that all-important factor called “risk”?

Somewhere back in our youth we learned about the “risk-reward” trade-off. This was uppermost in my mind as I waited last year for a flight to leave Houston as Hurricane Rita was approaching. The devastation caused by Katrina had already put pressure on some commodities we required, but Rita posed a significantly greater threat. The Houston area is home to one of the largest concentrations of chemical plants anywhere in the world. As my plane took off, I realised that I didn’t have the slightest idea how many of my suppliers, and how many of their key suppliers, were shutting down to prepare for the approaching hurricane.

I really had no idea of the extent to which my supply chains and businesses would be stretched in the coming days and weeks. I could tell our executive committee about the value my team was delivering, but I didn’t know how to communicate the real risks apparent in our supply chains. In feeling this way, I don’t think that I’m alone. Judging by recent trade press, we don’t spend enough time thinking about risk.

OK, I’m being unfair. We actually do spend a lot of time as a community talking about risk – implementation risk. Every week I see articles, seminars or lectures about what is inherently implementation or execution risk. Don’t get me wrong, such discussions are important, but it seems we are missing a conversation. Before you start worrying about how to overcome the risks of implementing strategies, you need to consider the risk of pursuing these strategies in the first place.

Many of you have created real value for your companies by successfully implementing strategies such as consolidating demand and low-cost country sourcing. This does not mean that such strategies are appropriate for every business. Far from it. While many of these might be appropriate, that doesn’t mean you should pursue them all. And what impact will pursuing all these strategies have on your risk profile?

For businesses operating in the US and Europe, sourcing from countries with developing capabilities means that we increase the length, complexity and inherent risks in our supply chains. Longer chains are slower chains, with more opportunity for things to go wrong.

Consolidating our demand into fewer suppliers also increases our risk. One small problem can take out your entire supply chain for that commodity. You know this. I know this. And I know that my team, when developing a sourcing strategy, does a great job of articulating and quantifying those risks through proper risk-reward analysis. The problem is that I don’t know the cumulative impact of those individual decisions. And I don’t know how to articulate that impact to our executives. Do you? We’ve saved money largely because we’ve taken on more risk. But how much?

It’s time to stop having one-sided conversations. The procurement practices of the past decade have done much to drive efficiency in our supply value chains and create real value for our businesses. However, this value has often come with increased risks. CPOs need to understand and carefully evaluate the inherent risks in their business before pursuing the “hot” procurement strategy of the day and deciding what approach is right for them.

We need to brief our colleagues appropriately on the cumulative risks of these strategies to their businesses, carefully considering approaches to mitigation and continuously monitoring our supply chains to ensure that the risk profile remains within the guidelines established by the executive team.

Do you know the risk your procurement strategies have brought to your business?

Christina De Luca (deluce@bp.com) is chief procurement officer, refining and marketing, at BP