In a call with Purchasing magazine Editor-in-Chief Paul Teague earlier this week, the discussion inevitably turned to the big issues facing purchasing and supply management executives today. Top of mind for the CPOs Teague’s been talking to: supply risk.

“The role of purchasing has transitioned to become one of risk portfolio manager,” said Teague. “Low-cost country sourcing and lean strategies are exposing supply chains to more risk. And purchasing and supply managers must do a better job of predicting and managing risk.”

Teague points to Dow’s Procurement Risk Assessment and Mitigation (PRAM) approach as one to emulate. Developed after a series of supply disruptions due to Hurricane Katrina, PRAM combines financial and operational risk models with contingency planning methods.

Dow works with key suppliers to determine the impact of certain risks and assigns a probability factor to each risk scenario. Next Dow and its suppliers develop risk mitigation and contingency plans for the most probable risks. Dow then validates each plan in a homegrown risk scenario assessment system and retools its mitigation and response approaches accordingly.

A little Web sluething pointed me to Purchasing’s excellent cover story on Supply Risk Management, which, not suprisingly provides a full expose on Dow’s PRAM program. According to the article, Dow is initially focusing PRAM on its $5 billion raw materials spend: “The goal is to put about $2 billion of raw-material spend through the PRAM by the end of 2007.” The remaining raw material spend will be risk-assessed by the end of 2008.

According to Purchasing, PRAM has already helped Dow avoid a number of supply risks that could have impacted more than $200 million in profit. In one instance Dow uncovered a dangerous single-source situation. In another it detected a raw material that was at risk of being banned by regulators. In each case, Dow quickly took action to seek secondary and alternative sources (and types) of supply.

Dow’s story should sound familiar to Supply Excellence readers. The PRAM program emulates Hewlett-Packard’s Procurement Risk Management (PRM) approach which has been profiled here. Both companies have developed a standard framework for assessing and mitigating risk. But HP utilizes its assessments to develop risk-reward-based agreements with its critical suppliers. According to the PRM program manager, this has helped not only mitigate risk but also improved supplier relationships: “The company that bears the risk, gets paid for it.”

For a more detailed look at risk management and to better determine where your company is at risk, download Aberdeen Group’s recent benchmark on the subject, Supply Risk Increasing While Market Stands Still.