All dangers in view? Examples of risk management indicators
In the past, we have already reported on the basic conditions of modern risk management in procurement and its importance for minimizing risks within the company. It has long since ceased to be enough to monitor the creditworthiness index of its business partners. Instead, effective risk management is to be understood as a holistic view of threats to a company along global supply chains as part of a continuous process. Several indicators are suitable for risk assessment, whereby the relevance and selection of individual factors must be made on a company-specific basis. All potential risks should be continuously monitored in order to plan counterstrategies in advance and, if necessary, to be able to quickly initiate risk prevention measures.
In the following we would like to present some practical examples. For some of these, the possibility of using them as indicators of risk management may not be immediately apparent.
Frequently, the aim is to bundle purchasing demands in order to achieve higher volumes and, as a result, better conditions. However, the simultaneously increasing dependence of the purchasing company on one supplier leads to an increased risk for a company, should this supplier fail. At the same time, the concentration of a supplier on one or only a few customers bear the risk that, in the event of rejections or cancellations, this could lead to a decline in profits, liquidity problems and, as a result, losses for the business partner. It is therefore always important to ensure a reasonable relationship between the advantages of bundling and the risks of supplier dependency.
Quantity and quality reliability
If quantity or quality cannot be maintained by a supplier, other materials must be used, which may be of lower quality, have longer delivery times or are more expensive than those originally planned. The consequences are delays or quality losses in the own production or an increase in costs. Key figures for monitoring your own suppliers, such as „in full“, „on time“ or the complaint rate, can be drawn from past data in cooperation with the suppliers.
Baltic Exchange Dry Index
The Baltic Exchange Dry Index (BDI) is published daily by the Baltic Exchange in London and represents an important price index for the worldwide shipping of main dry bulk cargoes on main freight routes. The index is influenced by the available ship loading space, port capacities and seasonal fluctuations.
The BDI is regarded as the seismograph of the global economy. This is because it determines the shipping costs and volumes of raw materials such as coal, iron ore, gravel and cereals precisely. It not only shows the development of transport costs but also provides indirect information about raw materials and the global economy. An upward trend in the BDI indicates an expanding number of goods, i.e. increasing demand and, as a result, rising shipping and raw material costs. The volumes of the raw materials that are traded allow in turn conclusions to be drawn about the overall economic development. BDI usually takes eight to twelve months to complete the process.
Corruption Perception Index & Ecological Footprint
In times in which the topics of sustainability and compliance have an increasing influence on consumer decisions and thus on the success of the company, potential risks also arise in this field, which must be monitored as part of risk management.
Products or suppliers from countries with a high perception of corruption therefore also carry an increased risk of image damage. The Corruption Perceptions Index (CPI) from the International Secretariat of Transparency International is the world’s best-known corruption index, assessing 180 countries according to the degree of corruption perceived in politics and administration. At the same time, the negative development of the CO2 footprint of a supplier company can also have an impact on its own corporate image.
In global supply chains, costs are often heavily dependent on exchange rates. Exchange rate fluctuations are difficult to predict but can cause significant financial damage.
This was only a small extract of possible indicators for the evaluation of risk objects such as suppliers, countries or material groups within the framework of a risk management concept in purchasing. In order to define and implement a successful risk management concept, the requirements of each purchasing organization must always be considered individually. Have we aroused your interest? We would be pleased to deepen the exchange on this topic with you.
Gregor van Ackeren
Managing Director, ADCONIA GmbH
Managing Director, ADCONIA GmbH