Supplier Risk Mangement

The major role of the buyer is to manage his business with all his suppliers. One bad supplier can ruin the complete supply chain thus managing supplier proactively is critical. Also if you add the current situation of global uncertainty managing supplier is very high on priority list.

In a more general term if you ask any buyer whether he will be able to manage his business if one of his top three suppliers fails. The answer comes out as NO. Also companies go to great lengths to assess the quality of the suppliers output or there delivery model but do very less on assessing how much strong supplier financial and production aspects are.

So it is very important for companies to implement a supplier focused risk identification and management model. The basic framework of supplier risk management should include:

1. Communication is key: To manage supplier the communication is the key. The best a buyer can do is having an information strategy that calls for more emphasis on risk management. If you talk to suppliers on daily or weekly basis regarding what’s happening in their organization, it would provide an input to vast information as to what might go wrong and you can sense whether an issue with supplier is coming or not. This acts as a predictive model for supplier risk management.

2. Making an Effective Process: Make a strong process to monitor and mitigate risk. The process should measure, monitor and mitigate risk using a repeatable and scale able process. The process should be rating supplier in green yellow and red zones. The green one the best and red being worst. Whenever a supplier enters red zone, there should be a defined process to analyze whether it is worth to continue business with him and if yes then how and when supplier will come out from the red zone.
The common criteria for supplier ratings include:
a) Quality- ppm
b) Delivery – Schedule Adherence.
c) Cost / Price - Savings targets
d) Capability
e) Service.
Suppliers and Buyers should also utilize supplier ratings system to drive performance and improve the business relationship.

3. Incorporate it in sourcing Decision: Now most companies think risk management comes from continuous evaluation of their supplier base. There is a critical error in that Risk management of supplier should start at the sourcing cycle itself. Incorporate risk mitigation evaluation in your sourcing decision making and supplier evaluation cycle itself. Once Suppliers are identified due diligence should be done on their economic and functional risks. Only then a supplier can be selected.

4. Develop Exit Strategies: Buyers should always augument their knowledge and resources relating to potential exit strategies. The main goal should always be no supply chain disruptions.

Supplier Risk management should not be a single activity done once or twice in an year but should be a continuous process. The goal should be to find the best tactic to deal with any general issue or a specific one. A good business sense is to look every movement and every factor more closely as you can so as to predict a failure before it effects your supply chain.