Rewards of managing supplier risk

In this first of three blogs looking at the importance of managing supplier risk, Daniel Ball, co-founder and director of Wax Digital, outlines why supply chain has become an increasingly dominant focus for risk scrutiny.

The rewards of managing supplier risk
Daniel Ball, co-founder and director of Wax Digital

There has always been a need to evaluate and control risks in the supply chain, but recent events have made manufacturers operating amongst increasingly complex and global supplier partner networks patently aware of the threats of getting it wrong.

Evidence suggests that businesses of all types are making investments in risk control, with supply chain a key area. The Lloyds Risk Index shows that business leaders have developed a more sophisticated and proportionate approach to risk management over the past five years. In 2013 corporations were more prepared – with risks central to supply chains such as loss of customers, cancelled orders and the price of material inputs, all in their top 5 bracket. Total supply chain failure also came relatively high on the list.

As manufacturers look to shore up their risk profiles there’s a need for collaboration internally. Procurement, often seen traditionally as merely the buyer of goods, must play a leadership role, engaging finance, supply chain management, legal and other specific departments, to manage down risk through effective sourcing and supplier vetting, the monitoring of purchasing processes and scrutiny of suppliers’ performance.

Risks can be complex and manifest themselves in many ways, requiring procurement people to use a high level of scrutiny and investigation to pinpoint potential issues. With fallouts from suppliers including brand reputation, customer loyalty, credit terms, fines, insolvency, environmental liability, corporate crime and even deliberate cyber-attack, both the causes and effects of risk must be closely modelled and monitored.

But supplier relationships have always been susceptible to risk; why are we all talking about this now? According to John Martin, an independent procurement consultant, “changing market dynamics have altered the supplier risk landscape and forced the issue of investing in more resources to manage suppliers.

“Globalisation of markets and supply chains creates more room for issues like litigation and patent infringement. It also leaves a business exposed to the issues of working amongst vastly differing ethical codes and cultural standards. As every manufacturer knows, what’s considered risky in one part of the world may be considered an inevitable condition of the job elsewhere,” Martin continued.

Risks could even boil down to accidental errors or wrong assumptions based on these differences. Was your Russian negotiator an effective communicator for example, or do you really understand those Chinese business rules sufficiently to build a trusted relationship? How do you compare cheaper prices in some territories in the context of standards and exposure to risk?

If supply chain scandals over the past year have taught supply chains anything it’s that they must care deeply about who their suppliers are and how they choose to operate. For UK manufacturers taking steps to devolve more control to supply chain partners, risk is only going to become a more frequent part of life.

In the next blog I will look at the increasing role of procurement and the importance of taking a granular and analytical view when assessing supplier risk.