Rewards of managing supplier risk: part two

Posted on 8 Apr 2014 by The Manufacturer

In part two of three blogs looking at the importance of managing supplier risk, Daniel Ball, co-founder and director of Wax Digital, looks at the change in procurement methods.

Daniel Ball
Daniel Ball, co-founder and director of Wax Digital

The last couple of years has seen supply chains hit by some shocking and high profile disasters. Inevitably supplier risk management is on the rise, but for manufacturers this involves much more than avoiding the possibility of a major incident like another horsemeat scandal or clothing factory collapse.

Generally speaking, most suppliers will deliver to your needs compliantly, but over time their levels of day-to-day performance can see significant ebb and flow, which, if unmanaged, can slowly erode risk protection leaving you exposed.

Think about a supplier who’s On Time in Full delivery record slips below par and how that might impact business sales or costs. Or, how a supplier who isn’t quite complying with the terms of their contract may make your organisation subject to fines or litigation. The subsequent reputational damage could lead to customer losses. Major disasters aside, supplier risk management needs to address the ‘little and often’ supply chain performance issues and ensure that they are monitored and managed.

Managing supplier risk is now one of the key aspects of professional procurement. As John Martin, independent procurement consultant, points out, “20 years ago procurement were buyers – pure and simple. Now we’ve become the organisation’s commercial authority, knowledgeable in all matters related to supply and how they may affect the business.”

Thus procurement has raised its profile with suppliers in line with perceived increases in risk, but it’s important that a balanced approach is taken around two key focus areas – process and relationships. Procurement needs to ensure that it has formalised processes for analysing and managing risk while at the same time maintaining relationships and open dialogue with its suppliers and business leaders.

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Relationships and collaboration must incorporate everyone from suppliers to internal customers. Understanding the business and influencing its decisions is a critical role which differentiates ‘procurement’ from ‘buying’. Improved process never removes the need for relationship management, in reality it reinforces it and the two are co-existent factors in ensuring standards are in place and maintained.

In terms of process, data analysis from multiple sources is vital underpinning for the identification of supplier risk. That data may need to be highly varied in terms of type and source to build a multi-dimensional risk model.

Data sources could vary from those directly related to you and your suppliers, such as goods receipting, order traceability or On Time in Full (OTIF) ratings, through to more generic sources such as global economic trends, climate data, political tensions or industry regulation.

In truth the sources of data which may be analysed as part of a supplier risk profile are hugely varied and dynamic and also likely to differ in importance from one supplier to another.

Taking a granular and analytical view of supplier risks using data is vital if we are to accurately evaluate potential and take steps to remove it. In my final blog I will look at the importance of both technology and relationships in the supplier risk management process.