Supply Chain Finance Risk
Paul Trudgian Ltd | Supply Chain & Logistics Consultancy No Comments

Supply Chains are a complex and fluid network of companies, relationships and transactions. Even minor disruptions upstream in a supply chain can have a bullwhip effect and become major issues.  Take cars for example; they’re typically comprised of 30,000 parts and it only takes one of those parts to fail to cause a recall, creating additional costs and the risk of reputational damage to the car brand. Supply chain professionals are only too aware of these risks, but now finance professionals are also taking note.

A recent report from Dun and Bradstreet called The 2018 Global Risk Study doesn’t make easy reading for supply chain professionals, at first glance. Its fundamental headline demonstrates that finance professionals name supply chain disruption as one of just two identified top sources of risk within their industries.

The 2018 Global Risk Study: The Risk (R)evolution

The survey looked at responses from 1100 financial risk managers to ascertain where perceived high risks lie. This is an interesting study from several viewpoints, not least because the finance leaders of today are operating in a changing role. They are no longer straight-forward reporters of business viability and growth, but are now “driving strategic outcomes within the business”. Their opinions are therefore incredible insightful.

Risk management is crucial, for obvious reasons, from a financial perspective. Financial leaders within the study are at the frontline of identifying and implementing technology as it emerges in order to manage risk. This is one of the primary objectives of the study: to identify the core risks and understand what financial leaders are doing to mitigate them. The study went further to investigate “how they’re using data to manage that risk, and how they see their organisations adopting emerging technologies and tools”.

The Report Findings

Despite the technology of machine learning, AI and emerging tools, finance leaders have been candid in the study about how they are struggling to manage risk. Perhaps most notably they are pointing to data as the problem, when combined with their own capability to both monitor and manage risk. This is a monumental challenge for them, from their perspective. Specifically, they highlight the problems in three areas:

  1. Finance teams are struggling to manage risk: The results of the survey demonstrate that “overall, most finance leaders believe their own efforts to manage, monitor, and predict risk pose a moderate to high risk to their businesses.”
  2. Risk management is hindered by how we use data in the here and now: Finance managers are failing to use the methods which have developed to manage risk effectively which are both possible and suitable. We particularly see this in terms of how many businesses are still in the process of collecting data within the confines of a silo-approach. With these methods, data isn’t transparent or shared, for the purpose of mitigating risk, across the whole business. This is archaic and not necessary with the technological tools and digitisation available to them.
  3. The skills needed to tackle risk are missing in finance leaders: Finance leaders are honest themselves about their own shortcomings. Notably, they can see the benefits of digitisation, automation, analytics and big data, particularly in terms of managing risk. However, the majority of respondents in the survey believe that they rank “low” in terms of having these skillsets.

Rather than viewing the report as doom and gloom, it is important to remember that finance teams are relatively new to the arena. They should be viewed as newcomers to the roles of implementing risk management tools and strategies, as they shift from a strictly reporting function. As long as they are open-minded to adopting technology and knowledge to manage risk then they are primed to make an impact.

Mitigating Risk – Why it is Important

Explaining the mitigation of risk to supply chain managers is somewhat akin to preaching to the converted, however, it is important to understand on a wider level. It doesn’t just benefit supply chain managers who are operating in volatile marketplaces where reactivity can be a difficult beast to tame. If we can understand mitigating risk on a wider level, then we can help the entire business withstand the impact of the knocks and bangs that are part and parcel of life in a supply chain.

For example, geopolitical landscapes which are outside of our control; changing trade deals such as with Brexit; or even the weather; are all known by supply chain leaders for their propensity for risk. However, we now need to put them in to the hands of the finance leaders too. It’s understandable that finance leaders, not previously experienced with these problematic areas, feel uncomfortable now they are visible on their own horizon from anything more than a reporting basis. As the report states:

“Because risk management is becoming less about assessing and addressing the past and more about dynamically interpreting the future, modern finance leaders must embrace the knowledge they don’t have, the data they haven’t analysed yet, and the possibilities that may impact their businesses.”

In effect, finance leaders are being required to analyse something as intangible as fog without the knowledge or experience to do so. It’s therefore not surprising that they identify themselves as the weak link in the chain.

This is exacerbated by the silo style arrangement of many businesses. 60% of the risk management data reflected in the study was totally stuck within a silo approach. This means that finance leaders can’t learn from, and benefit from, insights elsewhere within the organisation. Such things as in-house analytics and credit reports are available, but they are hampered by the silo structure. Data isn’t in all the right places.

This is demonstrated further by the study which reports that only a mere 20% of respondents state that their company is advanced when it comes to their use of cutting edge risk management tools which include AI, machine learning and blockchain. Knowing that these technologies are available and capable of helping to mitigate risk is a frustration born by many of the respondents.

The big data in the hands of finance leaders which could be used to mitigate risk is useless without the technology to also analyse it and make sense of it. It’s needed to make predictions which can in turn improve both revenue and profit, as well as risk management.

Being Comfortable with Risk

It’s understandable that finance leaders aren’t comfortable according to the report. However, the response is to spur finance leaders on to incorporate new technology which breaks down silos and helps them mitigate risk using the data available to them. It should be promising and encouraging, not terrifying.

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