Suicide by supplier

Posted on 3 Sep 2010 by The Manufacturer

No industry puts more faith in its suppliers than manufacturing. How do you protect yourself? Maureen Penfold of Kingston Smith explores.

It is too soon to say how the story of BP’s Deepwater Horizon disaster will end. It is possible however that it could be the latest, and largest, case of suicide by supplier given that sub-contractors supplied and operated both the oil rig and its key equipment. Other notable cases from this year include Globespan, the airline forced into administration when its payment card processing agent first delayed settlement of monies owed and then themselves went bust.

The risk of suicide by supplier looms large in all businesses including manufacturers as few industries make such sweeping use of company supply chains. It is not unusual for this to be a large number of critical parts and technology being outsourced, run machines etc. where often support is outsourced, but even where this is not the case there are still critical components, where a supplier represents a potential point of failure which could prove devastating.

Various brokers have repeatedly emphasised supplier risk, yet still risk assessments are often perfunctory and largely accepting of the self-disclosure that the supplier provides.

There are six questions a business should be able to answer when it commits its fortunes to the hands of a supplier.

1. Does the supplier have the capital strength to survive a severe downturn or shock? This is a dynamic challenge as conditions change. Nevertheless, all organisations that form key parts of the supply chain need to be assessed and evaluated as financially viable far more frequently than has been the case historically.

2. Do you know the key vulnerabilities in your supply chain? Many businesses have spent time thinking about the possibility of a supplier suffering a major operational incident. Often what is not understood is the risk should a supplier to your supplier fail. That scenario is at least as likely and potentially as damaging.

3. What is the back-up plan if a key supplier goes down, and is that plan viable? Prudent organisations have crisis management protocols and plans, which are tested to ensure they work. Consider a major incident where a supplier’s service or parts are not available. It is critical that you know not only what you would do in such circumstances, but who would do it and how this would impact on your business and customers.

4. What risks are posed by the change initiatives your supplier adopts? Changes are usually presented as supporting service improvement; many are really about cost reduction. Suppliers will sell their clients on the positives, but you need to focus on the negatives and how they are managed to protect the service you receive.

5. Can you rely on the information and service reporting you receive? The reliability of reporting by external suppliers is dependent on data quality, calculation methodologies, assumptions and even the graphical choices used to present the information. Disraeli coined the phrase “lies, damn lies and statistics”. Businesses need to know the key information they receive from suppliers is presenting the truth.

6. How safe is the data of your business and what is your exposure to financial crime? In the current environment, all organisations are more susceptible to fraud and technology intrusion because more people will be trying to commit fraud. Considered alongside supplier cost savings, which often fall heavily on ‘peripheral’ control activities, this concern increases.
Answering these questions and understanding your true exposure to supplier risk is a huge challenge. The traditional model that many businesses employ is to delegate much of their assurance over risk to the same suppliers who provide them with their core services. So SAS 70s or other control reports, when available, have content and coverage specified by your supplier rather than you. It is hard to see how this approach can answer the demands of reasonable due diligence, not while such a clear conflict of interest exists between the needs of the buyer and the self-interest of its suppliers.

David Morrey and Mark Child of Kingston Smith Consulting LLP will also be giving a number of seminars on this issue focused on manufactures at the following locations:

·     Wednesday 29 September – Venue: CEME, Marsh Way, Rainham, Essex

·     Wednesday 13 October – Venue: University of Surrey, Continuing Education Centre, Guildford, Surrey

·     Thursday 25 November  – Venue: Brunel University, Kingston Lane, Uxbridge, Middlesex

·     Thursday 2 December – Venue: Fielder Conference Centre, Hatfield Business Park, Hatfield Avenue, Hatfield, Hertfordshire

Timings: 4.30pm registration for 5.00pm start. Ends 6.15pm, followed by canapés and refreshments. 
Cost: Free for readers of The Manufacturer (usually £25).

How to book: If you would like to attend please contact Becky Honeysett on [email protected] or 0207 566 3850 quoting ‘The Manufacturer’.