Are you hungry for more supply chain risk?

Risk in the supply chain is real and a constant in the life of procurement leaders. In a recent Gartner survey, 89% of participants stated that they have experienced a supplier risk event in the past five years.

When I ask chief procurement officers (CPOs) if they are open to more risk in their supply chain, their answer is usually “No way.” But think about this: All innovation comes with risks attached. No risk-taking equals no innovation equals loss of market share as competitors continue to improve through innovation and taking risks.

The answer to the risk question should rarely be a strict “No” nor an enthusiastic “Yes.” A more effective response is “Let's take a look at our risk appetite statement and evaluate.”

What Is Risk Appetite?
Risk appetite is not a new concept, but it's still widely underutilized. It details to what extent risks should be taken to achieve strategic and operational goals, sustain competitiveness and increase agility. In times of uncertainty where tariffs and other geopolitical developments can have huge negative impacts on supply chains, a risk appetite statement that is accepted and valued by all stakeholders is more important than ever.

CPOs are the very first line of defense when a disruption occurs. It is their responsibility to minimize the time to recover and the business value at risk and maximize the time the company can survive with the disruption in place. Therefore, CPOs should be responsible for creating a risk appetite statement for the entire supply chain.

Engage and assess
The first step is to identify and engage with relevant stakeholders in the business units. It's crucial to know their goals and core capabilities as well as their dependencies, interdependencies and possible complexities in market regulations.

With this information in mind, the CPO can align procurement and business initiatives and emphasize those that drive the most positive impact to business goals. This is the time to watch for and eliminate discrepancies in risk preferences.

For example: There might be an advanced sourcing initiative to drive new product development in high-velocity markets, but it's slowed down by overly rigid processes in new vendor integration.

Build
Once everyone is on board, build the risk appetite statement while constantly communicating with the stakeholders. Communication with the business units and other senior leaders and functions, such as finance, legal and strategy, needs to be open and it needs to be frequent. Consider it a checkpoint for buy-in and alignment on any economic or political changes as well as compliance to existing governance or regulatory requirements. This process will also ensure the necessary endorsement and ratification.

CPOs might also be able to take advantage of a risk monitoring committee, which exists in most organizations. Traditionally, the committee has a reactive role — it monitors and guides responses to risk events after they occur. However, CPOs can use the risk appetite statement to help the committee evolve into an effective and efficient oversight tool that assesses current and emerging risks based on the risk appetite defined in the statement and become a true catalyst for a risk-reward decision-based culture.

Complement
No matter if your risk appetite is high or low, technology will usually help to improve risk management. We see that new risks emerge with increased complexity, impact and velocity. Most leading organizations tackle this challenge with automated risk assessment and monitoring. Speed, accuracy and awareness are crucial for success.

Decision makers increasingly rely on the support of such tools to spot relevant correlations for scenario planning, predictions and provide transparency. However, there is no one-size-fits-all solution. CPOs should work closely with their finance and IT departments to facilitate the budget and ensure proper implementation.

And one last piece of advice: Be aware that some vendors claim to develop machine learning and artificial intelligence capabilities, but to date, very few can offer a working solution that truly uses those technologies.

Koray Köse is a senior director analyst with Gartner’s Supply Chain Practice.

SC
MR