Assessing supplier risk is more challenging and more important than ever in a global supply chain. Is your business prepared for critical supplier failure?
Increasing globalization over the last decade has resulted in increased supplier risk. Procurement managers today are tasked with coordinating global strategies for compliance, risk assessment, and risk mitigation, while maintaining optimal productivity.
In a complex global marketplace, elevated supplier risk management represents a greater challenge with higher stakes. Although the exact value varies by industry and company, more than 50% of the company’s product or services depends on the supply chain.
Today’s supply chain managers deal with increased financial risks in an ever-changing global arena and answer to a variety of stakeholder requirements, ranging from stockholder profits to compliance regulators to meeting customer expectations. Failure to manage supplier risk can result in significant monetary losses from damage to the company’s reputation, regulatory penalties, production delays, product recalls, or catastrophic health and safety fails.
Most businesses struggle to establish effective supplier risk management strategies in the face of these challenges. Further complicating the issue, necessary data about regulatory supplier compliance, reliability, integrity, and production capability is not always readily available, and a typical enterprise-level company may can deal with more than 20,000 suppliers. Here are six steps to a robust supplier risk management plan.
1. Develop an integrated supplier database.
The first step to build and maintain a comprehensive supplier assessment program is to integrate supplier information across operational systems. The latest procurement technology is design to effectively consolidate supplier data across a multinational organization, providing visibility and real-time information.
Supply chain transparency enables proactive compliance and ongoing performance review for informed risk management.
Easily understood, actionable management reports are essential for data collection and accountability from all departments. To properly manage risk, the technology must track, collate, and monitor all relevant internal and external data. In the process, they must facilitate a smooth workflow within and across departments and business units, offering managers a clear picture of risk factors in real time, along with actionable advice.
“Best-in-class supplier risk management requires end-to-end supply chain transparency, careful monitoring, continuous analysis, and predictive mitigation strategies for potential risks.”
2. Segment suppliers into risk categories.
Using due-diligence data from internal and external sources, procurement managers should identify pivotal suppliers that pose the highest level of risk; the vendors likely to disrupt operations in the event of an unforeseen event, those whose ability to consistently meet regulatory compliance is difficult to verify, and suppliers who are potentially unstable for financial, geopolitical, or other reasons.
Assign risk categories and develop backup suppliers for primary materials to ensure a quick pivot in the event of a major weather event, manufacturing slowdown, or other issue that significantly impacts the supply chain.
External supplier data should include:
- The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) economic and trade sanctions list
- Company financial information
- Business continuity plans and test results
- Data security and breach notification plans
- Vendor management plans (for companies that hire subcontractors or outsource raw materials)
Along with internal tracking data, external data offers a more nuanced and comprehensive view of supplier risk.
3. Translate risk data into predictive intelligence.
The key to effective risk management is predictive strategy – having plans in place to contend with a potential risk before the need arises. While no program can foresee every possible risk scenario, predictive analysis enables development of proactive governance and escalation procedures to cope with likely risks in context with potential impact on company operations.
To prepare for potentially damaging supplier disruptions, craft alternative sourcing strategies by continually researching new suppliers. Predictive analytics requires well designed procedures and a deep understanding of integrated supplier risk data.
4. Keep supplier assessments up to date.
Because supplier risk can change continuously, supplier risk assessment must be continuously updated. Some suppliers will prove stable and reliable over the long run, others can suffer from anything from a detrimental management change to a typhoon wiping out shipping lanes.
The most useful tool in any procurement manager’s toolbox is communication. By working together, a company can help its suppliers develop contingency plans, and mitigate its own risks in the process.
The supply chain can fail for many reasons:
- Natural disaster wipes out manufacturing facilities or shipping infrastructure. A contingency plan for natural disasters includes developing suppliers in diverse areas, so the company is never dependent on one geographical region for materials.
- Management changes. Unfortunately, the advent of new management is often driven by the need to cut costs – which can also mean cutting quality or skirting regulations. Continual assessment allows businesses to stay informed about supplier performance.
- Regulatory changes. Newly implemented sourcing or human rights laws can influence the availability and pricing of raw materials and finished goods.
- Shipping failure. Likewise, goods transportation can be derailed or delayed due to a natural disaster wiping out roads, rails, or ports, cargo theft, or regulation issues. Businesses should assess transportation companies as carefully as they scrutinize suppliers to ensure there are contingency plans for alternate shipping routes in the event one method is disrupted.
- Geopolitical instability. Manufacturing facilities may be located in areas where civil wars, government takeovers, protests, or other political tension may disrupt production. Cultural research should be included in supplier assessment.
It may be impossible to predict supplier failure, but companies can plan ahead for potential disruptions from critical suppliers by putting alternative sourcing strategies in place with suppliers already vetted and approved, and by mapping out alternative shipping routes to compensate when roads, rails, or ports are destroyed by natural disasters.
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