High Performance in

Procurement Risk Management

Research and insights developed in collaboration
with Massachusetts Institute of Technology
2
Risk is part of businessa significant,
permanent reality faced by virtually
every organization. Without risk,
business as we know it might not exist
either. To compete, grow and capture
benefit, companies need to take
chances; its what businesses do.
Although business risk has existed
as long as there has been commerce,
the situation is clearly different in
the 21st Century. According to a
2009 Accenture Study, seven out
of ten companies acknowledge that
business risk has increased due to
recent financial stress. Nearly half of
survey respondents believe that new
regulations (often stemming from
economic concerns) have exacerbated
risk.
1
Commodity price fluctuations
and inadequate liquidity levels also
are current concerns whose roots
may be connected to modern
economic problems.
The net effect is that risk management
is a white-hot topic. Companies
in most industries are assigning
resources to risk management. And
many are working hard to identify
functional risk issues and solutions
hazards associated with specific
business components such as design
& development, supply & demand, and
finance & accounting.
2
The mission of this Accenture Point
of View is to discuss research and
insights associated with risk in one
such functional area: We believe that
procurement has become a major focal
point for companies risk management
concerns. Indeed, corporate buyers in
almost all industries have seen risk
incidents, factors and consequences
increase significantly in the past
ten years, often for the global,
technological and economic reasons
noted above.
It is Accentures position that the need for a structured
risk-management capability within (as well as beyond)
the procurement organization is significant.
However, Accenture has observed
that few companies translate this
concern into a formal procurement
risk management capability. Most
do have risk-management structures
within their finance organizations,
and perhaps it is their belief that
finances efforts are sufficient to
mitigate risk across other company
functions. We do not agree. It also is
clear that many companies continue
to manage risk opportunistically,
i.e., on a case-by-case basis without
a structured approach or specific
criteria. We feel that this, too, is
inadvisable. In fact, it is Accentures
position that the need for a structured
risk-management capability within
(as well as beyond) the procurement
organization is significant. Given
todays turbulent supply markets
and volatile, pan-global business
environment, corporate buyers need to
make consistently superior decisions.
And developing a formal, structured,
risk management capability for
procurement is an outstanding way to
do just that.
3
Is it possible that the recent economic downturn
actually spawned some good news? In procurement risk
management, that might be the case. According to survey
results, the global recession made companies significantly
more aware of the need for advanced risk management
practices. The bar chart below offers significant evidence.
Two additional findings also bear mention:
Fifty five percent of responding companies gave more
attention to procurement risk management in 2009 than
they did in previous years.
Eighty five percent believe that volatility will remain high
in the near future, thus implying that formal and sustained
risk management efforts should be enacted to countermand
that trend.
An Upside to the Downturn?
CPO's focus on procurement risk management
Relationships with key suppliers
Buyer's consideration of risk management
practices
Management monitoring and understanding
of procurement risks
Relationships with internal clients
81%
77%
76%
62%
56%
Percent of survey respondents that extended various procurement risk management practices due to the downturn.
A Formal Effort to Understand Risk
in Procurement
To validate Accentures view that
risk management in procurement
requires efforts beyond what most
companies are doingand to identify
leading practices, metrics and
solutionsAccenture partnered with
Professor David Simchi-Levi of the
Massachusetts Institute of Technology
(MIT) in Boston on a Procurement Risk
Management Research Study. Answers
to three fundamental questions were
sought:
1. To what procurement risks are
companies most frequently and
extensively exposed? For example,
are exceptionally high levels of risk
most-tightly associated with supplier
reliability, product quality, supply
chain disruptions or some other issue?
2. Is risk management a must have
capability? In other words, can a link
be established between the level of
procurement performance a company
has achieved and the depth and
sophistication of the risk management
solutions it has implemented?
3. What do high performers in risk
management do differently from other
companies? What risk management
capabilities really matter? What
capabilities make the greatest
difference in helping procurement
organizations perform most
effectively?
The research team from Accenture and
MIT received responses to an online
survey from chief procurement officers
(CPOs) at 127 global, industrial
companies around the world.
More than three quarters of those
organizations are in Europe or North
America, with most of the remainder
in Asia and Oceana. As shown in
Figure 1, five industry groups were
particularly well represented.
29%
17%
16%
13%
6%
19%
Automotive and industrial equipment
Communication and high technology
Consumer goods and services
Energy and resources
Pharmaceuticals
Other
Figure 1: Chief procurement officers from automotive, industrial equipment and consumer goods
companies were the most prevalent respondents.
4
Cisco: A Master of Risk Management
Cisco provides one example of a comprehensive risk management approach
that spans the entire company. With almost all its manufacturing activities
outsourced, the firm faces enormous risks: from supplier reliability,
through supply chain disruptions, all the way to man-made and natural
disasters. To address this challenge, Ciscos risk management framework
includes the three components identified in this Accenture Point of View:
risk anticipation, risk monitoring and risk mitigation. Ciscos resiliency
scorecard includes four categories: manufacturing resiliency, supplier
resiliency, component resiliency and equipment resiliency. Cisco updates
its resiliency scorecard on a quarterly basis and uses it to identify where
alternative sites, dual sourcing approaches or inventory adjustments are
required. Ciscos supplier risk assessment web-portal combines information
from supplier meetings and public information about at-risk suppliers.
Excerpted with permission from the book Operations Rules: Delivering
Customer Value through Flexible Operations by David Simchi-Levi, MIT
Press, September 2010.
5
6
1. Understanding Risk in Procurement
6
As shown in Figure 2, responding CPOs
are most concerned with the level of
dependency their companies have on
critical suppliers.
3
This may not be
surprising, given that critical suppliers
represent nearly half of respondents
total spend in direct materials and up
to 16 percent of respondents total
number of suppliers.
The implication is that, for a particular
category or niche, many buying
organizations have been unable or
unwilling to find more than one
supplier that offers an optimal mix of
price, quality and reliability. Buyers
thus are fearful because, for one
reason or another, they depend heavily
on one or very few suppliers for a
particular component, ingredient,
product, SKU or service. Risk
management efforts in this area focus
on reducing dependency by tapping
a wider swathe of suppliers or by
helping ensure the ongoing solvency
and reliability of those suppliers for
which alternatives cannot be found.
Concerns about price volatility were
shown to be nearly as prevalent as
worries about supplier dependence.
Survey results indicate that 46 percent
of survey respondents spend is
exposed to volatility in raw materials
prices and that 27 percent is exposed
to currency volatility.
Unlike the supplier dependency issue,
price volatility is often outside the
suppliers control. Suppliers certainly
have the ability to raise and lower
prices in response to volatility;
however, as elaborated in Figure
3, the research team found that
about 64 percent of market price
increases cannot be passed on to
final customers; corporate buyers
or suppliers simply must absorb
most of the new costs. This is why
sophisticated risk management
policies and programs are so
important: Besides raising prices,
what else can companies do when
the cost of a commodity is highly
unstable? Can they do a better job
of anticipating (and thus preparing
for) price increases? Should price-
escalation clauses in supplier contracts
be revisited? Might some products
be redesigned to limit dependence
on a potentially volatile commodity
or component? Can existing finished
goods near the end of their life
cycle be cannibalized or repurposed
to limit the number of new-part
purchases? These are some of the risk-
management issues associated with
volatility.
Supplier quality also represents a
significant (third most common)
concernone that speaks directly to
risk-management solutions focused
on the buyer-supplier relationship.
Fifty percent of survey respondents
experienced supplier-quality problems
in 2009.
Fifty percent of survey
respondents experienced
supplier-quality problems
in 2009.
Our company's dependency on supplier
Unanticipated price volatility
(raw material)
Supplier quality problems
Supply chain disruptions
Unanticipated price volatility
(currency exchange rates)
Supplier bankruptcy
Legal/Regulatory
Supplier dependency on our company
65%
63%
55%
53%
48%
44%
30%
29%
Figure 2: Survey recipients were asked, For each procurement risk, indicate the extent to which your company faces that risk.
Depicted is the percentage of respondents who indicated a moderate-to-high extent of risk.
Figure 3: Exposure to raw materials price volatility by industry. The X axis measures the percentage of cost of goods sold
that is typically exposed to price volatility. The Y axis charts the average percentage of price changes that cannot be passed
on to final customers.
More than
70%
50% to 70%
Less than
50%
Oil, Gas and other Natural
Resources
Communication
Pharmaceuticals and
Medical Products
Media and Entertainment
Less than 3% 3% to 8% More than 8%
Utilities (distribution of
electricity, gas, water)
Automotive
Industrial Equipment
Chemicals
Retail
Construction
Transportation
Manufacturing
Food
Consumer Goods
Mining and Metals
Electronics and High Tech
7
Supply chain disruptions (the fourth
most highly rated concern) may or
may not be a supplier management
issue. But it still may be the most
difficult to deal with since the
capabilities of suppliers, third parties,
business partners and even internal
organizations must all come
under scrutiny. Macroeconomic,
political, social and ecological
factorseverything from OPEC
petulance to west coast port capacity
problems to Hurricane Katrinaalso
contribute to the potential for
supply disruptions. Bottom line: Risk
management solutions focused on
minimizing supply disruption must be
particularly varied.
Survey respondents generally know
that risks affecting procurement have
impacts that extend far beyond the
procurement organization. However,
that knowledge is not well reflected
in the dispersal of procurement risk
management responses and solutions
across functions. As shown in Figure
4, risk management expertise tends
to be centered either in finance (risk
managements traditional home) or in
procurement. Unfortunately, neither
comprises a complete answer. One
key to successful risk management in
procurement is to ensure its presence
across all the organizations with
which procurement interacts on a
regular basisfrom product design
to manufacturing to supply chain
management to service and spare
parts management.
This is not to say that each
department should develop its
own capability, but rather that
procurement risk management needs
to be constructed and executed
more cross functionally across the
enterprise. And it often is advisable
for procurement to take the lead in
driving this change across functions.
Thinking and Acting Cross
Functionally
Unanticipated price volatility
(currency exchange rates)
Unanticipated price volatility
(raw materials)
Supplier quality problems
Supply chain disruptions
Supplier bankruptcy
Procurement
Product Design
Figure 4: Survey recipients were asked, For each procurement risk, indicate the departments or
functional areas involved in identifying and monitoring that risk.
0% 20% 40% 60% 80% 100%
Manufacturing
Supply Chain
Finance
Other
8
9
10
11
Risk Management Issues and Responses
are Often Industry Specific
While many of the conclusions drawn in this Point of View
apply to companies across sectors, it certainly is true that
risk varies by industry. Consider the various industries
summarized in the table below and how much difference
there often is in the nature and degree of risk.
Exposure to price volatility and supplier risks by industry.
Pharmaceutical and
Medical Products
Chemicals
Food
Mining and Metals
High
Medium
Low
Low Medium High
Manufacturing Industrial Equipment
Consumer Goods
Retail
Automotive
Utilities (distribution of
electricity, gas, water)
Media and
Entertainment
Communication
Construction
Aerospace and Defense
Electronics and High
Tech
Transportation
Oil, Gas and other
Natural Resources
Perceived
exposure
to price
fluctuations
Perceived exposure to supplier risks
Impact of wheat or milk prices
Impact of oil prices
In 2009, some OEMs
have had >30% of their
suppliers in bankruptcy
situation
Mono-source situations
2. Risk Management as a Key Driver of
Procurement Performance
Just how important is sophisticated
risk management to companies
achievement of high performance
in procurement? It is clear from
information presented in the
previous section that procurement
risk has a great many faces (supplier
dependency, price volatility, supply
chain disruption, etc.) and that most
companies are exposed to these
realities on a regular basis. In fact,
Accenture has determined that risk
issues have a greater cost impactand
take up far more timethan most
buyers efforts to capture savings
through negotiation. Given this reality,
to what extent is procurement risk
management considered a must have
capabilityan investment in improved
performance?
The research team sought to address
this question by mapping CPOs
investments in risk management
capabilities against the specific
levels of performance achieved by
their procurement organizations.
Our hypothesis was that companies
with stronger (though not necessarily
more) investments in procurement
risk management would be more
likely to show up on our litmus test
as procurement masters. Companies
with less-focused or less-effective risk
management investments would more
likely be labeled low performers. This
did prove to be the case.
According to a previous Accenture
study,
4
high performers in the
procurement realm (procurement
masters) save about ten times as
much as it costs them to operate
their procurement organizations. In
other words, if it costs a company
$100 to staff and support an in-
house procurement department,
an organization that has achieved
master status will identify and capture
annual procurement-related savings
of $1,000. The bell curve for the
aforementioned survey identified 16
percent masters, 67 percent mid-
range performers and 17 percent low
performers.
Low Performer
18%
ROI< 3 ROI> 8
Master
22%
Figure 5: A procurement performance bell curve (annual savings relative to annual operating costs) reflects
companies investments in risk management.
Mid-range Performer
60%
The hypothesis was
that companies with
stronger (though
not necessarily
more) investments
in procurement risk
management would be
more likely to show up
on our litmus test as
procurement masters.
Companies with less-
focused or less-effective
risk management
investments would
more likely be labeled
low performers. This
did prove to be the
case.
12
As shown in Figure 5, a similar bell
curve emerged for our present study
on procurement risk management.
First, a composite score (from 0
to 100) was calculated to reflect
survey respondents investment
in procurement risk management
capabilities. These capabilities were
associated with one or all of three
categories:
Risk anticipation (e.g., predictive
analytics or dual sourcing)
Risk identification and monitoring
(e.g., supplier scorecards)
Risk mitigation (e.g., mitigation and
escalation plans)
These scores then were correlated
to the procurement-related returns
on investment achieved by each
respondent.
Following are some of the specific
observations that helped survey
analysts make a connection between
risk-management investments
and distinctive levels of overall
procurement performance.
4 5 6
0
5
10
15
20
25
30
0 1 2 3
Procurement ROI
Average yearly number of incidents by critical supplier
Figure 6: Procurement performance and level of realized risks.
Procurement performance tracks to
respondents level of realized risk
Figure 6 demonstrates that high
levels of procurement ROI are closely
associated with fewer risk incidents.
This applies to masters, mid-range
performers and low performers,
but is particularly evident among
the masters. It is also notable that
companies with a high number
of incidents are rarely masters.
Companies with low procurement
performance seldom have a high
number of incidents, not because
they are better at managing risk but
because they are unaggressive when
it comes to pursuing procurement
savings.
Companies investing in supplier
risk management capabilities often
experience fewer incidents
The key to interpreting this finding
is combining it with the insights
depicted in Figure 6: In Figure 6, we
show that fewer risk incidents are
associated with the achievement
of higher procurement ROI. In
Figure 7, we demonstrate that, as
companies invest more intently
in risk management capabilities,
the fewer incidents they are likely
to experience. The same basic arc
was found when the research team
graphed respondents implemented
risk anticipation capabilities, risk
monitoring capabilities and risk
mitigation capabilities.
Companies that have not invested
in price risk monitoring capabilities
for raw materials are limited in
their ability to improve procurement
performance
Depicted in Figure 8, this is a raw-
material-price-risk-management
example of the information described
more generally in Figure 7. It further
supports the broad conclusion that
procurement risk investments result
in higher procurement ROI. The
distinction is that price risk has two
distinct geneses: macro-economic
forces and fluctuations that are
influenced directly by the supplier.
Sophisticated procurement risk
management capabilities potentially
address both.
13
Masters
Mid-range Performers
Low Performers
Average yearly
number of incidents
by critical supplier
0
15 20 25 30 35 40 45 50 55 60 65
1
2
3
4
5
6
Overall supplier risk management capabilities
Figure 7: Level of realized risks compared to investment levels in supplier risk management capabilities.
14
Masters
Mid-range Performers
Low Performers
Figure 8: Procurement performance and level of investment in price risk monitoring capabilities.
Masters
Mid-range Performers
Low Performers
Procurement ROI
Overall price risk monitoring capabilities
0
5
10
-10 10 30 50 70 90
20
30
15
25
15
3. Risk Management Mastery:
What Do High Performers in Risk
Management Do Differently from
other Companies?
Thus far, we have demonstrated that
companies in a variety of industries
confront myriad procurement-related
risks, and that a clear connection
can be made between companies
investment in risk management
capabilities and the level of
procurement mastery and ROI they
are able to attain. Two things remain
to be determined:
What do procurement masters do
differently that allows them to achieve
higher ROI?
What specific investments do
procurement masters make to support
those capabilities?
Accentures experience is that one of
procurement masters most important
attributes may be their use of a
risk management frameworka
comprehensive, end-to-end approach
to anticipating, monitoring and
mitigating risk. As shown in Figure
9, this is basically an over-layering
process, whereby three risk-
management stages (anticipation,
Procurement masters
are significantly more
likely to address
supplier and price
volatility risks when
developing their
procurement strategies
(as opposed to later on).
monitoring and mitigation) are
applied to the key components of a
procurement organization.
1. Procurement Strategy
The research team observed that
procurement masters are significantly
more likely to address supplier and
price volatility risks when developing
their procurement strategies (as
opposed to later on). Masters also were
found to be two-to-three times more
likely than low performers to integrate
risk management into their category
strategies, develop innovative ways to
monitor risk, and implement practices
and tools to mitigate risk.
A good example is that masters are
significantly more likely than low
performers to apply dual-sourcing and
risk-sharing initiatives to anticipate
supplier quality risks (Figure 10). To
anticipate supplier bankruptcy risks,
procurement masters were found to be
leaders in dual sourcing and supplier
negotiations. In addition, the most
significant disparity between masters
and low performers was in the area
of risk sharing clauses and back-to-
back contracts (formal agreements
stipulating that buyers can share, or
even transfer, the cost of unforeseen
problems across suppliers or sub-
suppliers). According to our study,
masters are 2.5 times more likely
than low performers to deploy these
clauses/contracts.
16
Figure 10: Percentage of companies using various practices or tools to anticipate supplier quality issues.
Risk Anticipation
High Performance
in Procurement
Develop strategies to avoid or minimize
risk exposure
Continuously track potential risks and
raise alerts
Act quickly and appropriately to minimize
realized risks
Risk Monitoring
Risk Management Framework
Risk Mitigation
Procurement Strategy
Sourcing & Category Management
Supplier Relationship Mangagement Requisition to Pay
Process & Technology
Workforce & Organization
Figure 9: A risk management framework applied to procurement.
Dual sourcing
59%
44%
44%
41%
19%
7%
4%
0%
5%
9%
9%
18%
32%
18%
45%
50%
Regular negotiations with suppliers
Risk sharing clauses/back-to-back contracts
Value engineering/reduction of commodity
content
Insurance
Supply chain financing
Index-based contracts
Hedging/financial tools
17
Masters
Low Performers
Latest news on the supplier
Risk-management KPIs
Historical pricing
Historical quality of delivery performance
Supplier's corporate information
Figure 12: Data collected through supplier scorecards.
Figure 11: Frequency and context with which companies use supplier market analysis to address risk
issues.
11%
15%
41%
78%
56%
0%
37%
67%
14%
18%
41%
15%
10% 20% 30% 40% 50% 60% 70% 80%
To monitor risk of supply chain
disruption
To monitor supplier bankruptcy risk
To monitor supplier quality risk
Masters
Low Performers
18
2. Sourcing & Category
Management
Integrating risk management initiatives
into the strategic sourcing process
(e.g., during supplier evaluation) can
help companies achieve procurement
mastery and there are many tools
and approaches for addressing/
remediating procurement risk in this
area. These include supplier market
analysis, current supplier portfolio
analyses, supplier audits, supplier
scorecards, supplier process failure
mode & effects analysis (FMEA),
historic & forecast pricing analysis,
and logistical & transportation risk
analysis. Among these, one of the most
interesting may be supplier market
analysis, an activity that is practiced
far more by procurement masters than
by low performers (Figure 11). Supply
market analysis involves a thorough
assessment of supply market industry
dynamics, (supply, demand, industry
structure, industry profitability,
supplier capacity utilization, etc. )
in order to anticipate commodity
price evolution and potential supply
shortages.
Respondents use of supplier
scorecards also is noteworthy. While
distinctions among high, mid-range
and low performers were not dramatic
in this area, it is remarkable that 67
percent of respondents identified
scorecards as a key capability. It also
should be mentioned that masters
seem less likely to maintain scorecards
on all suppliers; masters are likely
to focus on critical suppliers only. In
addition, masters were found to be
50 percent more likely to update their
scorecard information on at least a
monthly basis. Figure 12 identifies the
kind of data that respondents collect
most often via their scorecards.
3. Supplier Relationship
Management
When it comes to procurement, risk
management masters also tend to be
supplier relationship masters. Not only
do they form deeper, more symbiotic
connections, they also collaborate with
suppliers to rapidly detect risk (e.g.,
through early warning systems) and
neutralize risk-related issues before
those issues become incidents. As risk
management masters, they also adapt
their supply relationships to various
geographies and cultures.
To mitigate price volatility risks,
survey respondents appear most
prone to use negotiations and index-
based contracts when forging and
maintaining supplier relationships.
Despite their prevalence, these tools
are used less by masters than by the
remainder of the survey population.
The reason could be that these two
strategies either are not considered
permanent solutions or not valuable as
risk-abatement approaches. As noted
earlier in Figure 10, other practices
identified by respondents as key to
their price-volatility-management
efforts include:
Value engineering and reduction of
commodity content (practiced by 33
percent of masters and 23 percent of
low performers).
Hedging and other financial tools
(practiced by 26 percent of masters
and 41 percent of low performers).
0%
Defining the critical level
that makes the risk an
incident/alert
Developing mitigation
plans in case of incident/
alert
Listing decision makers in
case of incident/alert
Measuring impact of
incident/alert
10%
20%
30%
40%
50%
60%
70%
Figure 13: Percentage of surveyed companies that document risk management to a high
extent in their category strategy documents.
19
Masters
Low Performers
Risk sharing clauses (practiced by 22
percent of masters and 14 percent of
low performers)
Dual sourcing (practiced by 22
percent of masters and 36 percent of
low performers)
Survey results also show that
procurement masters invest more in
developing and following up on their
mitigation plans. In each of the four
areas noted in Figure 13, masters hold
a roughly 20 percent edge over low
performers.
4. Workforce &
Organization
Research findings show that most
companies do not assign procurement
professionals to full-time risk-
management work. However, there are
distinct differences among masters,
mid-range performers and low
performers when it comes to centrally
led coordination across regions:
Procurement masters are far more
likely than low performers
(75 percent versus 32 percent) to
have developed a regionally dispersed
but centrally led procurement risk
management network. Procurement
masters also are more likely than
low performers to have defined
beforehand, and by function, who
shall take part in mitigation plans
when an incident occurs (48 percent
vs. 27 percent).
5. Technology
The range of risk management tools
available to procurement organizations
is vasttoo broad for any organization
to not be discriminating about what
applications provide the greatest
value. In fact, the ability to make
smart decisions about what tools and
technologies best support their risk-
management efforts could be what
best distinguishes high performers
from the rest of the survey pack.
Perhaps compensating for their more
prudent technology-investment
approaches, masters were shown to
Masters were shown to
focus more intently on
the use of externally
acquired and managed
data.
focus more intently on the use of
externally acquired and managed data
(Figure 14). Particularly noteworthy
are the extent to which this group
emphasizes externally acquired
information to help assess suppliers
financial situations, perform market
analyses, gauge supplier performance,
and make tax and legal decisions.
Figure 14: Percentage of responding companies that leverage external data, applications and sources.
Supplier financial situation
Market analysis
Price indices for commodities
Supplier performance
Tax and legal recommendations
Recommendations for how to use risk-
management tools
Service companies (credit rating service, etc.)
Research companies
Industry associations
Masters
Low Performers
Consulting companies
20
59%
41%
59%
9%
14%
9%
55%
32%
23%
9%
74%
63%
48%
41%
33%
7%
67%
52%
30%
30%
Key Conclusions
So what conclusions can we draw
from the facts gleaned by the survey
effort? With regard to the current
procurement-risk environment, the
research team determined that:
Procurement organizations have
traditionally under-estimated the
effect of risk on their performance.
However, the economic downturn has
helped them realize how dramatically
procurement risk can affect them.
Many companies remain ill-equipped
to cope fully with procurement-related
risk. The most common and potentially
dangerous procurement-risk areas
relate to supplier reliability and
price volatility. This exposure varies
significantly across industries.
It is increasingly critical that
companies fully assess supplier risks
(including financial and logistical
concerns) and construct formal
mitigation plans.
Buyers must recognize that
anticipating and rapidly reacting to
market forces are more useful than
concentrating on (non) relationships
founded solely on lowest price.
However, both aspects remain key.
Team members further concur
that excelling at risk management
contributes significantly to
a companys achievement of
procurement masterythe ability
to maximize the savings that a
procurement organization generates
relative to its costs. For example, a key
characteristic of procurement masters
is their adoption of a cross-functional
approach: acknowledging and acting
on the fact that procurement touches
almost every corporate function and
thus must be equally inclusive in its
approaches to risk management.
Procurement risk masters also tend
to be particularly proficient at using
specially developed risk-focused
tools and services. Perhaps the best
example is predictive analytics:
Masters continuously monitor raw
material price developments, forecast
them and use technology to enable
fast scenario planning. Basically, these
organizations are better equipped than
most to foresee a particular hurdles
effect on their cost structure and the
relative profitability associated with
a specific component, system or end
product.
Figure 15: High performers in procurement risk management often organize their capabilities in terms of
risk anticipation, risk monitoring and risk mitigation.
Identify and assess the level of risk at
key stages of the strategic sourcing
process
Identify, assess and continuously
monitor key risks with critical
suppliers at each step of the supply
chain
Adapt monitoring approaches to
categories of suppliers and to different
geographies and cultures
Use external data sources for
continuous monitoring of the supply
markets, supplier's financial health,
etc.
Apply SRM practices-close integration
and collaboration with selected
critical suppliers and agree on "early
warning systems"
Monitoring Capabilities Mitigation Capabilities
Develop a process to measure impacts
of incidents/alerts and continuously
improve risk management practices
Integrate the organization in case
of incident in mitigation plans (who
makes, who decides)
Emphasize development of mitigation
plans for critical suppliers
Carefully integrate procurement risk
management into each category
strategy (differentiation by category)
Use dual sourcing and regular
negotiations with suppliers to
anticipate supply risks related to
quality and supply chain disruptions
Use risk sharing clauses/back-to-back
contracts
Apply value engineering concepts to
look at alternative materials
Use predictive analytics to analyze raw
material regarding pricing and forecast
& build scenarios on the effect on
company's own cost structure
Anticipation Capabilities
21
As shown in Figure 15, masters in
procurement risk management often
organize their capabilities in terms of
risk anticipation, risk monitoring and
risk mitigation. This clear segmentation
of risk-related processes allows them
to develop the formal plans and
responses that help whittle down
procurement risks otherwise-daunting
impacts. At the Anticipation stage, for
example, masters align risk programs
with category strategies, make use
of risk-sharing clauses and excel at
predictive analytics. At the Monitoring
stage, they work more closely with
select suppliers, design formal supplier
relationship management programs
and (compared to low performers)
make exceptional use of external data
sources. And for Mitigation, masters
stand out in the formation of decision
processes and the use of formal
metrics and measurements.
Lastly (and unsurprisingly) masters
are collaborators: They work with
critical suppliers to predict, detect and
neutralize risk-related issues before
those issues become incidents. And
when incidents do occur, masters have
predefined action plans.
In net, an increasingly straight line
can be drawn from 1) excellence in
risk management to 2) procurement
mastery to 3) high performance (a
companys ability to consistently
outpace competitors with respect to
profitability and growth). Procurement
risks will only continue to grow.
However, companies that excel at
procurement risk management will, in
all likelihood, continue to grow also.
22
About the Authors
Per Segerberg is a Senior Executive in
Accenture's Supply Chain Management
Service Line. He has 23 years of experience
as a management consultant and currently
leads the Sourcing & Procurement practice
in the Nordics. He has extensive experience
in operational excellence programs and
specializes in procurement transformation
programs, including global procurement
organizational design, global sourcing,
supplier development and workforce
transformation. He has worked across a
variety of industries, including automotive,
commercial vehicle, industrial equipment,
high tech and electronics. He also has
responsibility for developing Accentures
High Performance in Procurement offering
and assets. Based in Gothenburg, Sweden,
he can be reached at
Per.Segerberg@accenture.com.
David Simchi-Levi is a Professor of
Engineering Systems at Massachusetts
Institute of Technology. His research
focuses on developing and implementing
robust and efficient techniques for logistics
and manufacturing systems. He has
published widely in professional journals
on both practical and theoretical aspects
of logistics and supply chain management,
as well as co-authored award-winning
books: Designing and Managing the Supply
Chain (McGraw-Hill, 2007), The Logic of
Logistics (Springer 2005), and Managing
the Supply Chain: The Definitive Guide for
the Supply Chain Professional (McGraw-
Hill, 2004). His newest book, Operations
Rules: Delivering Customer Value through
Flexible Operations, will be published by
MIT Press in September 2010
Aurlien Rothstein is a Senior Manager in
Accenture's Supply Chain Management
Service Line. He has extensive experience
in the areas of global sourcing and
procurement, including strategic
sourcing, supplier development, sourcing
transformation and performance
management. He has worked across a
variety of industries, including automotive,
industrial equipment, high tech and
consumer goods. He has also contributed
to the development of Accentures global
sourcing offering and assets. Based in
Paris, he can be reached at
aurelien.rothstein@accenture.com
23 23
Copyright

2010 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
About Accenture Supply
Chain Management
Footnotes
About Accenture
The Accenture Supply Chain
Management service line works
with clients across a broad range of
industries to develop and execute
operational strategies that enable
profitable growth in new and existing
markets. Committed to helping clients
achieve high performance through
supply chain mastery, we combine
global industry expertise and skills in
supply chain strategy, sourcing and
procurement, supply chain planning,
manufacturing and design, fulfillment,
and service management to help
organizations transform their supply
chain capabilities.
Accenture is a global management
consulting, technology services
and outsourcing company, with
more than 190,000 people serving
clients in more than 120 countries.
Combining unparalleled experience,
comprehensive capabilities
across all industries and business
functions, and extensive research
on the worlds most successful
companies, Accenture collaborates
with clients to help them become
high-performance businesses
and governments. The company
generated net revenues of
US$21.58 billion for the fiscal year
ended Aug. 31, 2009. Its home
page is www.accenture.com.
We collaborate with clients to
implement innovative consulting
and outsourcing solutions that align
operating models to support business
strategies, optimize global operations,
enable profitable product launches,
and enhance the skills and capabilities
of the supply chain workforce.
For more information, visit
www.accenture.com/supplychain.
1
Managing Risk for High Performance
in Extraordinary Times,

2009 by
Accenture.
2
Still, the aforementioned report
(Managing Risk for High Performance
in Extraordinary Times) noted that
risk management is often absent
from mainstream decision-making
processes. For no major process
(strategic planning, performance
management, M&A, budgeting and
forecasting, etc.) was risk management
positioned as a major consideration.
3
Accenture defines critical supplier
as a supplier that requires specific
monitoring to avoid any significant
impact on companys performance in
case of incident.
4
High performance through
procurement: Accenture research and
insights into procurement performance
mastery,

2007 by Accenture
The authors would like to extend a
special note of thanks to Maya Olsha
for all of her contributions to this
research initiative.