Risk & Supplier Performance — When Conventional Wisdom Isn't

This morning, I'd like to welcome a distinguished supply risk expert to Spend Matters. Dr. Kevin McCormack, the CEO of Supply Chain Redesign, LLC, is a true authority on a subject that all Spend Matters readers should know more about.

After applying a holistic risk model to several companies, we have seen something that contradicts the conventional wisdom that there is a trade-off between risk and supplier performance (total cost of ownership). The "wisdom" is that risk increases when supplier performance (price, quality and delivery) increases or with a better price comes higher risk. Remember when it was conventional wisdom that there was a trade off between price (or cost) and quality? What resulted from this thinking was that the companies that proved this false gained a competitive advantage on the believers. Many companies that accepted this "wisdom" are now out of business.

When we say a "holistic model" we mean that we attempt to measure all the factors that define a supplier's "risk" or the potential of not performing as promised (quality, delivery timeliness, quantity or cost). In our model, developed over the last four years of research, we measure the following attributes and situational factors of a supplier:

Relationship -- the specific relationship with the supplier’s customer, as seen from the supplier's perspective. This is a customer's reputation with a supplier.

Performance -- the specific performance of the supplier as measured by the customer.

Human Resource Factors -- attributes of the supplier such as pay position, workforce issues, turnover, etc.

Supply Chain Disruption -- the level of disruption experienced by the supplier in their supply chain.

Financial Health -- indicators that show the financial stress of the supplier (payables v. receivables cycle time, growth, profitability, customer satisfaction, etc.)

Environment -- situational factors that impact the supplier such as their specific market dynamics, physical location, specific transportation routes to the customer, etc.

After examining the data collected with hundreds of suppliers in numerous categories in widely varied industries, we have seen a statistically valid positive relationship between supplier risk and performance (including cost). The better performing suppliers also had the lowest risk level as measured by our model. When looking at the supplier's history with the customer, these suppliers also had the least number of supply chain issues or incidents.

Our conclusion is that holistic supplier risk management can produce a tangible return. Improve the risk level and this will help supplier performance which then will lead to a lower total cost while giving you opportunities for top-line growth. While this might sounds like a "duh" statement after reading this post, conventional wisdom, when disproved, always does!

Spend Matters would like to thank Dr. Kevin McCormack, the CEO of Supply Chain Redesign, LLC, for contributing his thoughts on supply risk.

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