SUPPLIER RISK IS CHANGING THE ROLE OF THE CHIEF PROCUREMENT OFFICER

Posted by Edith Simchi-Levi on Tue, Jul 29, 2014 @ 07:20 AM

 

The article, "Companies are looking more towards their Chief Procurement Officers for a supply chain revolution" caught my attention as it summarizes succinctly what is now becoming a more important role and significant transformation in the way companies are managing their suppliers and their supply chain.

Traditionally, the role of the Chief Procurement Officer (CPO) has been a secondary one compared to others in top management. It was mostly limited to negotiating good deals and tracking supplier performance. Increasingly, however, the role is being seen as more valuable and central within many companies. In particular, the CPO is now accountable for supplier risk not only on the first tier but often on the second and third tiers. In particular, large multinationals are rethinking the way they manage and rationalize their supply chains and the way they can manage risk more centrally and strategically.

Some of the many reasons for this trend:

• Global expansion and far flung supply chains have added complexity to the supply chain and to supplier management. 
• Customer demand for faster service across many channels means turnaround time for every part of the supply chain including suppliers is higher.
• An extended supply chain has drawn the attention to ongoing operations risk such as transportation delays, port closures and quality problems.
• Growing awaremness of reputation and brand issues related to supplier sustainability and labor practices.
• The impact of supply chain disruptions due to natural disasters, war zones and other unexpected events have brought attention to underlying risks with suppliers and the need for more preparation and planning.

These challenges on the CPO require a whole new set of skills. Foremost is the ability to collaborate both externally with a diverse supplier base that is required to perform at a higher level and internally with other supply chain stakeholders who may hold the keys to resolving some of the risk issues and improving overall performance.
While risk is often manifested in supplier problems and can sometimes be resolved by lining up alternative suppliers this is not always a feasible or best solution. In order to address supplier risks you need to understand the role of inventory in the supply chain. This in turn requires an understanding of what drives inventory and what is the best way to manage it which entails an end to end view of the supply chain.
The first step that we recommned to address these issues is to use data and analytics to increase understanding of the drivers of the supply chain. There can be several approaches to this and the direction chosen depends on the company’s specific challenges, structure and its industry characteristics.

1. Start from the demand profile and gain understanding of customer segmentation - this was the approach taken by Dell in their transformation project several years ago. The project was driven by problems creating a retail channel. One aspect of the project was reducing the number of configurations by 99% which of course simplifies the entire supply chain back to manufacturing and sourcing. And indeed, manufacturing costs went down by 30%. The technology used here ismachine learning and optimization. 
2. Start from looking at end to end inventory optimization. This will reveal what are the true drivers of inventory in the supply chain and where there are opportunities. Locating inventory efficiently across the supply chain, taking advantage of risk pooling  through postponement and similar strategies can help simplify processes and reduce risks. It will also help determine the impact of long lead times and variability in lead time as we found in our work with PepsiCo.
3. Start from supplier network analysis to reveal the Risk Exposure Index™ (REI) and look at performance impact versus spend. Then focus on the truly problematic suppliers that need immediate attention. Many companies take an exhaustive approach by treating all suppliers alike for risk management. The REI analysis can save time and cost by honing in on the risky suppliers that truly need to be hedged in case of a disaster. Ford successfully used this approach to reduce the number of tier 1 suppliers that needed to be addressed from four thousand to about one hundred or so where the impact would be greatest. 
4. In some cases, in particular when merger and acquisition activity is involved, it may make sense to start from network design. The supply chain network analysis can help determine sourcing that is most efficient from a transportation and lead time perspective. 

Of course, the CPO has many other options to improve performance and minimize risk such as collaboration with suppliers and others in their industry, improved supplier management, supplier assurance, supplier monitoring control tower and many others. But we believe that a true revolution will come when leading with an end to end supply chain approach and analytics that are harnessed to help make more informed decisions.