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Failure to mitigate supply chain risk to cost companies billions in 2012

Chief procurement officers at the world's largest companies predict their businesses, unable to manage the range of risks affecting their global supply chains, will lose €140m on average over the next 12 months as a result of supply chain disruptions, according to a recent report.

Commodity volatility, adverse weather conditions and a range of other threats featured heavily in 2011 and, despite the measures taken to combat these events, the sentiment among procurement executives is that 2012 could prove to be another costly year. When projected against the Global 2000 the total predicted loss amounts to an eye-watering €280 billion, according to research by the Procurement Intelligence Unit.

The research, which took in the views of 181 senior procurement executives in mid-2011, also showed that the procedures aimed at reducing the impact of unexpected events are limited. The majority of businesses assume that suppliers will take responsibility for managing supply continuity. A tiny minority of firms actively deploy strategies that extend to suppliers' suppliers.

The report states that CPOs believe there is a 50% probability that their company will suffer from commodity volatility, leaving them with an increased bill of €67m in this area alone. In the current uncertain economic climate, supplier insolvency was also cited as an increasing concern. Indeed, 85% of all participants reported increasing levels of overall risk within the supply chain.

Despite this, significant effort was placed on managing low-probability risks (such as political risks), which rarely affect operations, but receive high levels of press attention. Moreover, the systems used to identify risk are often basic. The majority simply use historical data and third-party credit ratings to track financial risk, with limited strategies to mitigate against non-financial risks.

Jonathan Webb, the lead research analyst for the project, stated: "It is important to remember that risk management is not an event - it's an approach. Proper risk assessment needs to be incorporated into each stage of sourcing operations. Both those within procurement and in other functions must carefully consider the potential impact of risk in the supply chain".

Mark Perera, CEO of the Procurement Intelligence Unit, said: "The research is an important step in realising procurement's central place in risk management. So many companies are vulnerable to risks in the supply chain and the onus is on the purchasing function to mitigate these risks."