Supply Risk — A Little Preventative Health

When it comes to managing supply risk this year, many of us have transitioned from a focus on preventative medicine to treating the sick patient -- with a combination of bloodletting, antibiotics, antidepressants, pain killers and just about anything else we have to throw at it. Unfortunately, it's far less effective and more risky to rehabilitate an already terminal (or near terminal) patient than it is to treat when they're just beginning to present symptoms of underlying maladies. Or best of all, to catch them before symptoms manifest outwardly. Like early detection for various and sundry cancers, heart and other potential deadly conditions, supply risk has the best prognosis when you can detect it early. And then when you can isolate, treat and monitor it on a permanent basis going forward.

What does preventative supply risk medicine look like? It starts with accurately identifying symptoms early on. Some symptoms are often hard to spot, but become more visible if you know what to look for. For example, by closely observing both performance related issues (e.g., PPM, escapes, service levels, on-time performance, etc.) and receivables behavior (e.g., early payment requests, discount taking, term renegotiation) it's possible to gain a pretty good understanding of the current and potential future health -- and near- to mid-term viability -- of your suppliers. Note that all of this symptom tracking data is available internally if you measure and report on it -- and does not require licensing third-party content. The key is to not only collect it, but analyze it as well. And herein lays the challenge. Most companies have woefully inadequate end-to-end controls and closed loop reporting and compliance capabilities when it comes to supplier performance, quality and P2P (including downstream invoicing and payment) tools.

For some fortunate companies, accurate, current and complete internal data can produce a state of predictive supply risk nirvana. But others realize that they may never get to this level of overall spend and supplier visibility and reporting. Like the patient whose dentist tells him to floss to prevent plaque buildup and potential heart conditions (yes, the two are tied) but who fails to take out the floss daily, these organizations are the ones in need of a good mouthwash that can rinse away their supply risk ills -- not to mention curing their spend and supplier bad breath in one fell swoop (or swish, as the case may be). Now, we all know that even Listerine is not as good as flossing. But it can serve as a substitute, or so my dentist friends tell me.

In a similar vein, third party supply risk content that focuses on predictive risk factors is a great way to get some portion of the value from tracking and rolling up other metrics internally. Actually, the best insurance of all is to subscribe to external content/risk services that monitor the health of suppliers and to also track and report on internal metrics, but that's the topic for another post entirely. Short of having both types of intelligence and supplier content insight, third-party data can go a long way in helping predict supplier bankruptcies -- and can even help you understand in more advanced cases just how bad a supplier's health actually is. Are they destined for outright liquidation ala Circuit City (Chapter 7) or will they be able to restructure and maintain their promised continuity of supply under Chapter 11? Good third party supply risk data can -- and should -- reveal at least basic level insight into the financial health of your suppliers, although alone will prove insufficient to manage broader buy-side risk areas (e.g., strategy risk, commodity/market risk, performance risk, quality risk, etc.)

With this information, it’s possible to take action. Just as bloodletting has been replaced by surgery and medication, so has supplier flogging been transcended through visibility. But should you pop a pill, head to the gym or change your diet or follow other outlandish Victorian style remedies? Warning: the previous link is not necessarily office appropriate, although it's a bit of fascinating history and also a rather curious metaphor as well. Or maybe a combination of both? Well, that's a subject for another post. In the meantime, if you can focus on preventative medicine by looking inward and outward at the same time, you'll clearly get your supply risk program on the right footing.

Jason Busch

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