Supplier risk management – is it a waste of time? Two Chief Procurement Officers (CPOs) debated this topic and were not in agreement. * One said that his Company had compiled a detailed risk assessment on every single one of its suppliers, including potential risk and alternative suppliers*.
The other CPO said that he saw detailed risk assessment as a waste of scarce resources. He would much rather spend the time and effort on putting in place strategies and back up plans because some supplier, somewhere, will fail.
So what are the risks?
- Disruptions to the continuity of supply. This can be due to industrial action, natural disaster or terrorism as well as raw material shortage or operational problems
- Price escalations and/or currency volatility. If there are no price adjustment mechanisms in the contract, there is exposure to escalating costs.
- Quality and delivery of goods or services. Poor quality and logistics challenges can mean delays in servicing your customers leading to lack of sales.
- Sole supplier or one large supplier (25%+). Best practice says that multiple suppliers are preferable and that reliance on large suppliers can lead to changeover problems and switchover delays, especially in I.T.
- Financial failure. Bankruptcy and defaulting are common occurrences. Companies can fail for many reasons, cash flows, fraud, over extending their business.
- Reputational damage due to supplier behavior. This can be due lack of regulatory or legal compliance, safety issues, price fixing, collusion or fraud.
What can you do to manage risk?
Know your supplier. Sounds obvious but you need to establish ownership, business registration details and licenses especially in foreign countries.
Do site inspections and factory audits. Make sure your supplier is who he says he is and is not an agent only. Look into their company records, interview the managers and use people who know the culture and the environment.
Develop a supplier scorecard. There are several resources (i.e., financial, operations, commercial, business reports, and intelligence,) which can be used to assess your supplier’s health. Measure your supplier on rejects, stockholdings, delivery times etc against benchmarks.
Document supplier information. Data should be accurate, validated and easily accessible. Use real-time data from the suppliers, internal users and external input from third-parties on supply performance and value received.
Have a risk management plan. Collaborate with the suppliers on how to manage identified risks in their industry or line of business. You could have a contingency plan, at least for at-risk suppliers. Develop an early warning system of supplier health and alert the right business owners early.
Click here to read Supplier selection criteria