Supply Chain Brain

OPINION

agement function depends on understanding what drives the total cost of organizational risk. For example, an organization may rely on insurance premiums and other fees as a dependable measure of risk management costs because they can be easily commoditized and translated into the procurement function. However, determining the true cost of organizational risk requires a more sophisticated approach that commands the best available data, metrics, benchmarking, predictive analytics, catastrophe assessment, claims mitigation and management, as well as the efficient application of a variety of risk engineering and related disciplines.

By determining the total cost of risk, an organization can optimize its risk-related decision-making in terms of value added or potential lost opportunity for the enterprise, thereby reducing uncertainty to a meaningful degree.

Imagine two vendors competing to provide an organization with a component necessary for the production of goods. Both offer similar products and quality, but Vendor A is more expensive than Vendor B. Following the procurement department’s typical protocol, Vendor B would be the natural choice as a business partner. However, the organization might consider employing analytic-based decision-support tools to create a risk metric that measures the dependability of each vendor in terms of continuity risk. That metric may show that Vendor A is a much more reliable and dependable supplier. So while the short-term costs may be lower for Vendor B, the long-term cost savings and production efficiency offered through Vendor A would be the best solution for the organization.

Though the implementation of efficient procurement strategies undoubtedly offers considerable value to several different enterprise functions, modern risk management departments require a different and broader level of competency that cannot be addressed by the commoditizing of risk-related goods and services alone. Subsequently, risk management is best served by an independent department that can utilize both reliable analytic capabilities and effective risk partners who can tailor sophisticated risk services to fit specific client needs.