A New Approach to Managing Risk – IHS Markit
- Risk Management
- 19.04.2021 01:45 pm
“As risk factors proliferate and regulatory oversight increases, procurement must rethink the approach. In a complex and volatile world, procurement is no longer just about commercial value. It's about protecting the organization's reputation, resilience, competitive position and market share.” – Richard Blore, chief executive officer, KY3P, IHS Markit
Outsourcing has been a trend for years due to the efficiency gains, cost advantages and access to specialized skills that it enables. Not even the COVID-19 pandemic could reverse this trend: even as the outsourcing model faced unprecedented stressors, reliance on outsourcing increased during 2020 for many industries. However, a tumultuous year underscored the need for greater vigilance around the vetting and monitoring of outsourcing partners across multiple tiers. Procurement must now include the evaluation of a wider range of risk vectors, including political, environmental, governmental and regulatory, when selecting these partners.
Regulations around corruption, fraud, export controls and sanctions, labor laws, customer privacy, data security and health and safety have multiplied in recent years. This has forced organizations to take responsibility for compliance and oversight across multiple supplier tiers, and with many regulators now stipulating the need for ongoing and continual oversight, it's no longer a "one-and-done" activity. The US Department of Justice, for example, expects the supplier management process to cover the entire supplier lifespan and create a permanent record of rejected or terminated third parties to ensure they are not inadvertently re-engaged at a later date. Similarly, Germany's Supply Chain Act requires companies to draft and adopt a policy statement on human rights, conduct risk analysis, engage in risk management and implement transparent public reporting regarding both direct and indirect suppliers.
In this highly regulated environment, procurement leaders who continue to focus on immediate cost savings over careful due diligence could find themselves saving the organization $5 million only to incur hundreds of millions in penalties.
Customer and investor priorities
The ethical integrity of the supply chain is becoming as important as its operational integrity. People want to do business with companies that embody ESG principles, and those principles need to extend to the furthest tiers of its supply chain. When a company's suppliers engage in unethical or damaging business practices, it is the company itself that takes the blame and sustains the reputational damage. Discovery of corruption, bribery, exploitation, cruelty or environmental abuse have an immediate and devastating effect on a company's market viability and capitalization. In this hyper-vigilant environment, procurement must support vetting and monitoring processes that enhance supply chain transparency and ensure ethical practices across supplier networks.