This post is based on the following FreeMarkets white paper (published in 2003) that I co-authored with Mark Clouse, Global Supply Management: Strategies for Identifying and Managing Supply Risk. I recently dusted off the paper for my own research into supplier relationship management and found an analysis that was nearly every bit as relevant then as now.
As context for this post, “market risk” is one of five drivers of supply risk we identified in this paper originally. The others are strategy risk (reference here and here), demand risk, implementation risk, and performance risk. Enjoy!
Once you’ve transitioned parts or services to a new supplier, performance risk becomes a central concern. What if a supplier does not perform as you expect, delivering goods and services of lesser quality than you specified or providing poor on-time performance? One of the insidious aspects of performance risk is that many organizations are not set up to monitor performance over time. For example, while on-time delivery information certainly should exist within an ERP or MRP system, very often the sourcing organization lacks the appropriate interface to integrate with these systems. And, in some cases the organization lacks the capability to monitor and authority to act on performance issues that span divisions and systems.
There are many factors that impact performance risk. They include:
- Lack of performance-tracking capability: Very few organizations have invested in tools that enable them to monitor and measure supplier performance. And if you can’t monitor it, you can’t measure or manage it. Here, supplier scorecarding and measurement tools are just the ante. Progressive organizations invest in tools that proactively monitor supplier financial performance, which can be a predicator of overall health and viability.
- System integration challenges: While a handful of organizations have taken the first steps to understand their spend on an enterprise-wide basis, few have begun to integrate their disparate systems to measure supplier performance and compliance against contracts, which requires integrating contract, ERP, and accounts payable data, as a start.
- Lack of “deep” supplier information: The social and financial risks that a supplier can bring— which sometimes have nothing to do with the supplier’s operations at all—are challenging to quantify. For example, what if you discover a supplier—or a subcontractor to the supplier—is using socially unacceptable means to manufacture or deliver your parts or service? Or what if the supplier intro- duces environmental risk through the use of dangerous chemicals or materials which do not end up in the end product, but damage the environment and workers’ health in the host country? And what if a supplier becomes insolvent or declares bankruptcy?
Curious? Drop Sydney a line (firstname.lastname@example.org) and we’ll send you out a copy of this dusty old analysis! Some topics are timeless. And supply risk is one of them.
See additional Spend Matters research coverage below: