Target Supply Risk in the Upturn by Focusing on Supplier Performance

I know I sound like a broken record on the subject, but when it comes to supply risk, supplier performance is often the best leading indicator of a potential supplier financial issue that an organization will have when it comes to the majority of its supply base. Over on his blog, Charles Dominick recently tackled the subject, quoting an older blog by friend Tim Minahan. In it, he notes that it's important to "look for early warning signs [with suppliers]. Drops in quality or shipment delays can be indications that the supplier has cut too deep into its operations. More frequent requests for early payment or changes in sales and support personnel should also raise a red flag. While these symptoms may not necessarily belay supplier troubles, they should warrant further investigation."

Now more than ever, supplier performance should be top of mind for all procurement, operations, and finance professionals worried about supplier financial challenges impacting their bottom and top and line. This is of particular concern in manufacturing supply chains with direct or indirect ties to the automotive market, given the rising challenge of finding financing to fund new orders (not to mention the cash safety net that even more secure suppliers have often managed to break through in the past 18 months). But even in the services market, degradations in service levels and supplier non-compliance (e.g., insurance certifications/renewals) can be the best early-warning signals a company will get that a particular supplier is on the rocks or incapable of meeting contracted expectations because of its financial position.

Need further reason to consider supplier performance as an ideal indicator of emergent risk? Since organizations that tackle supply risk head on -- which I believe is still a minority in the Fortune 1000 -- by assigning resources and budget to the issue still overwhelmingly choose to focus their financial-monitoring efforts on only a subset of their supply base, performance indicators are often the only indicators of potential risk an organization will be able to observe across its broader supply base. As I've said time and time again, the 80/20 rule does not apply to supply risk. Even a small supplier is capable of shutting down a production line or harming your customer relationships. In fact, you might find out the hard way that a supplier whose total annual account value is 1/20th (or less) that of an indirect supplier like a Dell or Staples can cause more havoc in your business than the hundreds of larger suppliers you may be monitoring just because of their size.

Jason Busch

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