"In terms of procurement and how an organization looks at its suppliers and supply chain, value comes from two fundamental activities: realizing opportunities and managing risk."
Fundamentally, investment in risk management is designed to avoid something happening, rather than to make something happen. Investments in marketing, new factory equipment or even research and development generally have tangible outputs— a new chocolate bar, more output, a social media campaign. On the other hand, an investment in improved supply chain risk management means that something does not happen—the firm does not have a reputational risk crisis, factory shut-down or supply shortage.
While that is clearly important, it lacks the tangible nature of many other investment outcomes, which is one of the issues that must be overcome. Linking the improvements to risk management through to business outcomes or measurable benefits—such as better customer service or more efficient operations—can be challenging. That means the business case has to be very explicit about the potential impact on the business arising from supply chain risk; it is not necessarily just a simple numerical return on investment calculation.
Nevertheless, the evidence for professionalizing supply chain risk management is overwhelming, and the growth of powerful and effective tools—often cloud-based and using the latest technology (such as artificial intelligence)— makes it easier than ever to create a persuasive business case. But the case still needs to explain in appropriate business language the situation, the problem that needs addressing through the investment, and how the situation can and will be improved. It must be persuasive, robust and professional to motivate the organization to act and to invest.
Why Do You Need a Business Case?
Many organizations have invested in supply chain risk management, whether that is in the form of internal resources, training, tools or technology. However, we often see executives who understand the need, yet still struggle to create the business case and get approval for the appropriate levels of investment. Why is that?
In terms of procurement and how an organization looks at its suppliers and supply chain, value comes from two fundamental activities. Organizations look for opportunity: how their suppliers and supply chain can help generate value that ultimately leads to competitive advantage. That can come from a low-cost strategy or even savings through cost avoidance, contributing to greater efficiency in the business. It can also come from driving revenue growth through innovation that originates with the supply chain; for example, via strategic sourcing to make better total value decisions by awarding business to a new, innovative supplier.
The other side of the value equation is risk management. Opportunities are important, but so is managing the risk inherent in any supply chain. Smart organizations and smart executives understand that in terms of the supply chain, both risk and opportunity management are critical to a sustainable success. However, many companies and executives focus more on the obvious opportunities. A discussion about an acquisition, an exciting new product or a technical innovation is perhaps seen as more exciting for the board than an analysis of key strategic supplier risk.
A Hackett Group report identified some of the reasons why procurement has struggled to address supply risk, leading to an unsatisfactory picture in many organizations. A survey found that 94% of respondents agreed with the statement “procurement is held responsible for supply risk but lacks a mandate or resources to address the issues.” Another 78% said that procurement “mostly reacts to risk to ensure regulatory compliance rather than get ahead of the problem.”