Why Supply Chain Risk Management is Key to Supplier Management

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In an earlier series of articles (Part 1 and Part 2), Pierre Mitchell and I emphasized how supply chain risk management (SCRM) is becoming a top priority in procurement as organizations are losing millions from cost volatility, supply disruption, non-compliance fines and incidents that cause damage to the organizational brand and reputation.

While brand damage can be quite costly to the businesses whose sales rely strongly on the customer loyalty they generate from their brand strength, cost volatility and supply disruption is very costly to all manufacturers. In fact, in the latest 2015 study by the Business Continuity Institute, supply chain disruption is double in priority relative to other enterprise disruptions and over three-fourths of respondents cited that they had at least one recent (significant) disruption. The same percentage didn't have full visibility of their supply chains.

While category management can address and even reduce supply chain risk by ensuring a chosen strategy has the right level of resiliency, prevention and agility, it cannot prevent risk or do much to eliminate the source of risk once something has happened. That can only be done by each party in the supply chain doing everything they can to eliminate the risk. In particular, a supplier needs to do all they can to minimize the risk on their end.

However, not all suppliers are as advanced in supply chain management, and in particular, risk management as the buying organization. That's why good supplier management combined with SCRM is key. Good risk management is a combination of risk prevention and risk mitigation when a risk is detected. Risk prevention involves selecting suppliers, products and services that are low risk and risk mitigation involves taking action as soon as an indicator is detected.

A supplier is not always good at mitigating or even detecting risk in its supply chain, or may overlook an obvious sign that an observant buyer would not, which is why proper supplier management is key. This begins even when qualifying suppliers. Including risk criteria related to the supplier and supplier location gives a good indication of a supplier’s the risk level. Besides the supplier qualification criteria, supply location-related risks provide an overview on potential threats like natural disasters, political situation, sanctions or economic risk. This gives buyers the chance to take preventive actions.

The process continues with performance monitoring. Watch for an increase in defect or section rate, late delivery or early payment request, as each can indicate a potential problem that could lead to a future disruption. An increase in defects could mean a lack of quality control, which could be the result of poor quality inputs from unmanaged suppliers further down in the chain or a staff reduction due to financial stresses. Late deliveries could mean plant slowdowns due to equipment malfunction or carrier problems. And while increased (early) payment requests can indicate the presence of a new, more aggressive, accounts payable director, it can also mean the supplier is undergoing severe, operations-threatening financial issues.

The next step is supplier development. It's not enough to simply point out an issue (such as poor delivery or poor quality) and ask a supplier to come up with a corrective action plan. The buyer has to initiate the creation of the plan, work with the supplier to detail the plan and to provide the training necessary for the supplier to implement it. Then the buyer has to follow progress and make sure that the plan gets implemented and performance improves. As long as the issue is not financial, this can prevent disruptions due to quality issues or late deliveries.

But just making sure that the supplier is performing to expectations is not enough to prevent disruptions (or cost volatility). It involves making sure the supplier has the knowledge and capability to monitor for, mitigate and manage risks as they arise. That requires continual supplier education, and innovation, to help the supplier identify processes and sources of supply that are high quality and low risk.

But if all this is done, quality, reliability and predictability in the supply base will increase. The only unknowns will be force majeure events, such as natural disasters, strikes and political unrest, that cannot be predicted. But with a risk monitoring and early warning system in place, you can react faster than your competition and initiate initiate action plans and strategies that are already in place. Those plans can be  complemented by dual sourcing and other appropriate strategies with the help of suppliers that are able to quickly ramp up production, capacity and distribution to help out their customers of choice.

Comprehensive supplier management combined with supply chain risk management helps secure supplier relationships, prevent supply disruption and ensure your company is operating both legally and ethically.

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