Over the past three years, the world has not only become more complex but also more dangerous. That’s why experts now talk about a polycrisis created by war and geopolitical tensions, inflation, climate change, and the consequences of the pandemic. To keep doing business amid these circumstances, companies need to have digitally supported risk management in place, as our recent risk management research shows.

Security of supply remains the dominant topic for procurement teams at the companies surveyed (77%), significantly above price risks (66%) – despite the fact that high inflation and hugely increased purchase prices have made headlines over the past year. However, despite the relative easing in supply chains, almost three quarters of the respondents were still experiencing disruptions and bottlenecks.

Increased stock beats nearshoring

The qualification of additional suppliers (71%) and the construction of extra warehouse capacity (62%) are the methods of choice for keeping supply issues at bay. More than half opted for closer collaboration within the supply chain (56%), while only a few companies substituted materials or looked for new suppliers in their home region in a targeted way. Substitution and nearshoring are no doubt more complex solutions that require more time than restocking a warehouse. In view of the increasing geopolitical and regulatory risks, coupled with uncertainties over the availability and pricing of raw materials, companies should consider these options.

Companies can no longer rely on trust in free trade and the global division of labor remaining the most important political strategy. Politics is increasingly interfering with the markets – whether through measures such as punitive tariffs or import bans, or through laws and regulations designed to protect the environment and human rights. Western countries in particular are luring businesses with attractive subsidy packages in order to steer investment decisions in the desired political direction. A growing number of trade agreements around the world are reorganizing world trade into more or less desirable political associations. Moreover, as the Ukraine war shows, there is a risk that the increasingly aggressive rhetoric of autocratic regimes will lead to open disputes.

Digital risk management is evolving

No longer can the growing risk management requirements in terms of procurement and supply chains be manually fulfilled. Companies are therefore investing more heavily in digital solutions. Our annual risk management research shows a growing proportion of businesses are using digital solutions intensively for their monitoring, with the proportion of businesses not using these remaining relatively constant at around 25%. Evidently, businesses starting their digitization journey are swiftly convinced of the benefits provided by the tools, causing them to invest further.

Irrespective of whether companies build on existing solutions or start afresh with digital risk management, it’s important that all tools and activities are brought together within a network. Companies therefore need to set up an IT-supported risk control tower that will bring together all the relevant figures and information, with the help of artificial intelligence and advanced analytics evaluated in real time and visualized with the aid of graphics.

/ Do you systematically record and assess risks?

/ Do you use digital tools to systematically capture and assess risks?

Source: INVERTO Risk Management Study 2022

Cross-functionality and integrating suppliers

Risk management is a cross-functional challenge. Procurement needs to implement risk analyses and evaluations together with colleagues in Finance, Production, Sales, and Legal. These departments and the executive management team should also have access to the risk control tower and receive real-time risk alerts to enable potential hazards to be pinpointed and identified from various perspectives. This creates true end-to-end monitoring that tracks not just supply chain and compliance risks but also pricing ones. Given the volatile prices and high inflation we are now seeing, the Sales team can then set appropriate prices for customers.

Everyone involved should understand that risk management is not a one-off task, but an ongoing process. Constant observation and further development are just as much a part of this as joint consideration and decision-making when the control tower identifies disruption.

Equally, suppliers are important partners in managing risk. Collaborative monitoring strengthens the partnership, since both parties come to better understand each other’s needs. The optimal approach is to establish software solutions with key Tier 1 suppliers to enable automatic data transfer.

To react quickly, both short-term and long-term measures for dealing with procurement risks should be defined as part of the risk management process. In addition, companies need to have an early warning system and emergency procedures plan in place to cover the most serious risks – and, to do this, the control tower needs to be programmed accordingly. However, the current polycrisis also means that judgments about what the greatest risks might be can quickly change. Cross-functional teams therefore need to plan regular reviews and meet ad hoc as needed, in addition to the scheduled cycle of meetings.

/ The risk management process

Authors

Sebastian Wellmann

is Associate Director in INVERTO’s Cologne office and heads the Industrial Goods & Automotive Competence Center. He mainly advises customers from the automotive industry, as well as mechanical and plant engineering.

sebastian.wellmann@inverto.com

Nele Heubeck

works as a Consultant at INVERTO Cologne. She advises companies from mechanical and plant engineering as well as the automotive industry and deals with the digitization of risk management.

nele.heubeck@inverto.com