CombineNet: Incorporating Supply Risk Constraints Into Sourcing Award Decisions and Scenarios
Earlier today, I shared some of the suggestions from Brett Cornell’s session (Integrating Supplier and Supply Chain Risk into Decision Making) at CombineNet’s customer event (CombineNet is now branded as CombineNet, a SciQuest Company). Brett’s session focused on how to apply “gating” to the sourcing process to incorporate supply risk elements into the RFI and supplier qualification and engagement process. We’ll pick up on this same topic by taking supply risk and sourcing one step further now, exploring how to apply a similar risk mindset when it comes to sourcing award decisions.
As with all advanced or “expressive” sourcing exercises where organizations are looking to incorporate more than price-based factors into award decisions based on real-world needs, the key to incorporate supply chain and supplier risk into the sourcing equation first requires knowing what questions to ask suppliers to make it easier to then run scenarios against these criteria. For example, a rule that’s a component of a broader set of constraints going into an award decision might include any of the following:
- Do not award business to suppliers where risk scores (e.g., Altman-Z, D&B SER, etc.) exceed XYZ
- Favor bids by ABC amount if the supply risk score is less than (or equal to) XYZ
- Penalize bids by ABC amount if the supply risk score exceeds XYZ
- Favor bids from incumbent suppliers by ABC amount if quality and performance scorecard metrics exceed XYZ
There are numerous other criteria one could add to an award analysis, including looking at geographic plant locations of suppliers, product lead time requirements, ability to produce a specific level of safety stock/inventory within a set period of time after first article testing and approval, etc.
With these types of inputs, it is then possible to run award scenarios, factoring into account multiple constraints or variables. Re-running scenarios can also yield interesting award possibilities. Brett suggested a couple of approaches in this regard during his talk:
- Within your winning scenario, drop out one of your major suppliers and re-run the scenario
- Increase/decrease volumes of your highest producing production plants to learn the effect on supplier volumes
Of course this is just a start. Risk award factors and scenarios can be as complicated or simple as you want to make them! But the key is using them – and pulling them up into the sourcing process instead of making them an afterthought.