4 Point Supplier Risk Management Formula
It is no secret that large enterprises increasingly engage with a large number of far-flung suppliers in today’s globally connected world. Companies depend on these suppliers to man manufacture or develop their products or services or rely on them run critical business processes. A supplier failure can therefore directly affect an organization’s business performance and reputation.
In a study conducted by FM Global among 600 large enterprises, respondents rated supply chain risk as the one with the greatest potential to disrupt their top revenue drivers. The study noted that it could take two or more years for organizations to recover from a supply chain failure.
According to a report by Dun & Bradstreet called Managing Risk Throughout the Supplier Life-cycle, major supply disruptions over the period of three years may result in 35% drop in shareholder returns, 11% rise in operating costs and a seven percent dip in sales growth.
How do companies stay focused on supplier management in the changed world? An organization which has multiple suppliers should regularly assess and understand the risk that they carry by association. The most common methods are risk avoidance and mitigation. Let’s take a look at the methods or remedies that can help you weather through the supplier risk storms. Unfortunately, these risk remedies are adopted by a few companies only.
1. Risk assessment — The first step is ‘risk assessment’. It is necessary to have a detailed approach evaluating the maximum number of risks that can potentially occur over a period. Companies should maintain risk registers to identify baseline risks and their corresponding impact. The risk register should be comprehensive enough to capture all the potential threats that the organization faces. Worst-case scenarios and a business-impact analysis of all the identified risks should be prepared based on a detailed evaluation. Dashboards can be used for predictive risk monitoring, providing alerts at the right time for executive action.
Monitoring, however, is only half the work done. Risk probability scores, risk registers, and risk scores help raise red-flags, which have to be followed up by corrective and timely executive action.
2. Risk transfer — Many large organizations prefer to reward their ‘high-performing’ suppliers as a part of their loyalty programs to motivate them. Some others prefer to safeguard themselves by distancing them from supplier’s risks, by transferring the liability and making the supplier responsible. This is key in cases where supplier-failure can lead to catastrophic business losses.
Manufacturing corporations that rely heavily on contract management should consider risk transfer measures besides making provisions for contingencies. Risk transfer involves the use of insurance that partially transfers the onus the risk back to the supplier. Transferring risk increases pressure on the supplier to maintain the quality of goods and services delivered.
3. Technology — Automation solutions have become increasingly crucial for assessing and mitigating risk at a large scale. These solutions identify partners, processes and practices that are risky and help ensure that an enterprise is carefully shielded from any unwanted supplier-related issues.
Technology can be used to assist in assessing the strategic importance of your suppliers. It can analyze product portfolios, annual supplier spends and financial health of each supplier. It can help you identify your most vulnerable suppliers through ongoing reviews, audits and performance management with impact analysis.
Technology can make potential risks visible by mining and analyzing internal and external data. It can also help you formulate your next plan of action — setting KRAs, project durations, tweaking deliverables and deadlines, and appointing responsible points of contact — internal as well as external — for every supplier.
4. Vendor performance management — Companies should conduct regular quality checks and continuously monitor supplier performance. This can be done in the form of streamlined supplier selection process covering strict selection criteria, multi-continent sourcing, and backup suppliers. Maintaining a large list of vendors along with a comprehensive view of vendors and a detailed analysis of active suppliers is desirable. However, maintaining merely a large list can be counter-productive. Instead, a qualified list that incorporates the CPO’s experience with individual suppliers and their performance track records is essential. Moreover, this will need to be an ongoing exercise with an emphasis on data governance.
A regularly updated qualified database can help spot vendors prone to greater risk and classify them based on the extent of risk they pose. Historical data of vendors like breach notification, business plans and financial details should also be collected. Supplier risk can be lowered by putting in controls, periodic reviews and conducting regular quality checks.
