Building the Business Case for SRM (Part 4): Reducing Supplier Risk

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Spend Matters welcomes this guest series from Sean Harley, co-founder and CEO of LUPR.

In this post in our series on developing the business case for investing in supplier relationship management (SRM) capabilities, we focus on reducing supplier risk. (Catch up on the first three entries here, here and here, as well as the introduction.)

Supplier qualification (SQ), a subcomponent of SRM, enables your organization to identify suppliers with weak quality management processes, thereby minimizing your exposure to supplier noncompliance with safety, insurance, environmental and security requirements. In addition, SQ facilitates root cause analysis with suppliers performing poorly.

Effective SQ starts with a supplier self-assessment and usually includes a site assessment by the customer or a designated assessor. You can use the segmentation strategy we discussed in our previous blog, or a reweighted version placing more emphasis on potential risks, focusing on what we refer to as “critical” suppliers. These may be suppliers engaged in hazardous work, such as handling materials with environmental implications, or those whose misuse of data could result in major reputational damage.

The SQ strategy should also incorporate critical subsuppliers. In one instance, a relief valve supplier to the oil and gas industry was deemed to have solid controls in place at its U.S. assembly plant. However, they were purchasing valve housing castings from a Chinese subsupplier with no quality control in place. Once discovered, this necessitated spending over 150 hours on valve re-inspections in the customer’s refineries to mitigate this risk.

Your chosen SRM solution should include a web-based assessment workflow you can use when conducting supplier site assessments that enables easy sharing among sites and business units. You’ll also need a supplier community portal for easy real-time collaboration. Your suppliers can then be alerted to any actions you may have given them, such as the need to complete self-assessments or provide evidence of compliance.

The assessment scope should include prequalification of applicable requirements such as quality, financial, technical, security (e.g., data) and HSE. Financial and HSE ratings are available from third parties and can be easily accessible within your SRM platform. You should be able to customize assessment forms for specific functions (e.g., safety) and spend categories depending on your requirements.

Prequalification and site assessments may highlight potential risks, which can be tracked and managed within your SRM tool. Having this data, and with it the ability to reduce risk with suppliers, is another key part of the business case to pursue SRM.

In our next blog, on assessing stakeholder satisfaction, we will discuss how faster contracting, response to performance issues and closer collaboration make for smoother interactions between suppliers, procurement personnel and other stakeholders.

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