In 2005 a report commissioned by consultants TiVA, entitled ‘What Lies Beneath’ uncovered that UK businesses are at risk; they do not know enough about many of their suppliers. Around 700 suppliers are managed by about eight purchasers, with each purchaser have responsibility for 37 suppliers each. So how do you manage the risks of procurement?

Most of those surveyed acknowledged there were risks – including financial, health and safety and threats to the firms reputation – in dealing with suppliers they knew little about. These are quite worrying but enlightening statistics and help underpin why increasingly, the business of strategic purchasing and supply management is about the management of risk.

Conducting business on a national, international or global scale is subject to varying degrees of risk, some of which can be foreseen and taken into consideration, for example the current unease concerning oil prices, interest rates and the US economy, but some are entirely unpredictable. The purchasing function has a valuable role to play in managing these risks as far as possible, resulting in a stable and secure supply chain. It goes without saying that IT and the implementation of new technologies in particular is crucial in the whole field of supply chain management.

2005 vividly highlighted the importance, and the vulnerability of the supply chain. During the summer of 2005, European clothes retailers saw their Chinese-made autumn collections stranded in warehouses because of new European Union textile quotas. British Airways has lost an estimated £40 million, not including the damage to its reputation, as the labour dispute at Gate Gourmet, its only catering supplier, spread to its own workforce. All proof that companies can outsource products and services to suppliers, but they cannot outsource the inherent risk involved.

The impact of outsourcing

A study by the Everest Research Institute, Procurement Outsourcing Annual Report 2005, showed the outsourcing sector as growing at a global rate of 30 per cent a year. It also estimated that the outsourcing market will be worth £220 million to outsourcers in 2006 and states that the highest savings are to be made from source-to-pay services.

Emerging markets in particular often lack political and economical stability and this can potentially disrupt the supply chain. Often corporate governance is not high on the agenda in these countries and this requires a stringent risk assessment process to be in place. The reputation risk of outsourcing to these areas of the world, as Nike discovered, is especially strong when brand and image are central to the business model.

Businesses are taking note. A recent study from FM Global, an insurer of commercial and industrial property, found risks to the supply chain were of most concern to financial executives in the UK – more than terrorism or sabotage, which were not viewed as a significant business threat. The survey of 500 financial executives, at companies in Europe and North America with at least GBP300m of annual turnover, found 31 per cent of UK respondents cited supply chain issues as the leading property-related threat.

It’s not just the back office functions such as IT development work and call centres that are being transferred overseas. Other, high value services such as legal services and investment banking may also be transferred to emerging economies. The key task for the professional purchasing team is to decide which areas can be safely transferred and which essential elements must stay ‘on-shore’.

Supplier relationship management

Profitability and efficiency in purchasing and supply management is increasingly being driven by good relationship management – working closely with suppliers and internal clients to achieve the best end result. Managing strategic relationships and ensuring suppliers are handled with respect and in an ethical manner is a specific skill set that increasingly the purchasing profession is demanding from individuals. Strong relationships can help drive innovation as it is often the supplier that can identify opportunities for improving processes or providing new materials.

Increasingly, relationship management is being seen as a softer skill, however, it must not be over-looked and that in a purchasing context it is much more than this; the softer ‘relationship’ aspect of this skill is key, but so is the management of it and that is where perhaps the more strategic approaches are needed.

As a buyer, the purpose of investing time in a relationship with a supplier is to ensure the performance of that supplier always operates to the best of its ability, or perhaps if it hasn’t been performing as desired, to try and improve the performance.

Just like any relationship, supplier relationships will vary in intimacy, all depending on what is deemed necessary for the relationship to work, the people involved and perhaps even the history of the relationship. A relationship for example could be deliberately kept at arms- length but still remain very cordial – this could be because it is deemed that there will be no immediate business benefit for it to be any different.

This may be the case when the items being supplied are relatively low value, infrequently required and pose very little risk to the organisation should the security of that supply ever break down. Moving to the other extreme is the long-term close relationships that may be operated as a partnership. This will often be the case when items are high risk, high value and integral to organisational operation.

A word of caution

However, there is word of caution here for some sectors. Scarcity of some raw materials such as steel, which is currently a situation faced by many manufacturers, can potentially change the dynamics of a relationship and put the suppliers in the driving seat - another element of relationship management that the professional purchaser must consider.

This is a situation Japanese car manufacturer Nissan found themselves in 2004 year, when it had to close three of its Japanese car plants for five days because it ran out of steel. This meant Nissan, Japan’s second largest car manufacturer, lost production of 25,000 cars.

Although this may be an extreme case, steel is a major commodity and it does highlight the need for purchasers to keep such issues at the forefront of their minds when working with suppliers – especially for high-risk items. It also highlights the need for flexibility within supplier relationships. The key issue for purchasers is to try and ensure that key suppliers don’t go elsewhere.

One factor for the purchaser to consider is how much knowledge they have of the market place within which the organisation operates. Purchasers must be aware of issues that may affect their global supply chain, both on a political and an economic front.

A 2004 survey by consultancy AT Kearney (Assessment of Excellence in Procurement) has uncovered that many large companies now see purchasing and supply management as a “strategic weapon” whose value stretches far beyond cost reduction. Two thirds of the organisations surveyed (238 were surveyed in total) said their purchasing and supply management function had a role to play in areas such as product innovation, speeding up time to market and gaining access to new sales opportunities. The survey also found that world-class functions are marked by high-quality personnel and processes and a growing interest in outsourcing “ non-core” buying activities.

Meeting the challenges

The challenges for organisations in the coming years present a great opportunity for the purchasing and supply profession to excel in helping organisations achieve their strategic goals. Well managed global sourcing, outsourcing, risk management and supplier relationship management are just some of the core components that will help organisations achieve success in years to come.

By Roy Ayliffe
The Chartered Institute of Purchasing and Supply
Email: Liz.Cullen@cips.org
Web: http://www.cips.org

First Published in Computacentre’s staff magazine