With new compliance requirements, increased scrutiny from regulators and the pressure to maintain ones market position, reputation and brand, developing a comprehensive supplier management function has become critical in recent times. Banks can gain tremendous cost advantages and efficiency gains through increased governance and streamlined operations of supplier management.
Through this paper, we have laid out the components that we believe can enable effective supplier risk management practices.
In our experience, some of the common flaws that we have observed in the current supplier risk management framework across banks are as listed below:
- Inadequate Governance Frameworks: We have observed that the risk management frameworks to manage suppliers is far from being mature. In one case, one of the bank was spending almost $25 Bn on suppliers (annually) and had no well thought out framework to handle the risks associated with it.
- Lines of Business Don’t Talk: Tasks are carried out at process level, in silos, and not at an enterprise level. As a result, we have observed the same supplier ends up charging different pricing terms for the same service across two business lines and is not flagged out. This situation worsens as the geographic diversity of the bank increases across multiple countries.
- Inadequate Monitoring: The reporting infrastructure to monitor supplier performance is starkly missing in banks. Actually, it’s even worse – Not enough energies have been spent in detailing appropriate KRIs (Key Risk Indicators) to manage the supplier management program. As a result, the reporting based controls are quite weak.
- Inadequate Benchmarking: Given the stage of maturity of these programs, it is important to benchmark the existing programs vis-à-vis the industry. In our experience, inadequate energies have been spent in benchmarking these programs. As a result, there is huge variance in the maturity levels of these programs across banks.
We recommend the supplier risk management program to be based on the following framework.
This framework is based on our experience of working with multiple clients in this space. We lay particular emphasis on effective evaluation of supplier performance and the role PMO plays in binding this framework together. As a starting point, we strongly recommend benchmarking the existing program through an audit exercise on various components of this framework.