3 Overlooked (Yet Obvious) Metrics Pointing to Supply Chain Risk

Spend Matters welcomes this post by Paul Noël, SVP of procurement solutions at Ivalua.

Almost every edition of the iPhone is accompanied with news stories about weaknesses in Apple's product supply chain (see: the recently reported iPhone 6 screen and staff shortages at Foxconn). Before executives in your firm take notice and come down the hall asking how “supply chain risk” is being addressed in your company, you may want to prepare a few things.

Procurement is commonly seen as the “people who spend the very little money that finance allows.” But this stereotype overlooks two important aspects embedded into each step of the procurement process: supplier risk metrics are already available and best-practice procurement is best-practice risk management.

You're Sittin’ on a Gold Mine

Most of the metrics your business needs to assess supplier risk are already on hand, either as a result of repeated supplier interactions or top-notch record keeping.

One telling indicator of supplier risk is employee turnover. While this might seem irrelevant on the surface, who knows more about your suppliers than the employees who work there? High turnover in an industry desperate to find and retain skilled employees is a red flag. Turnover numbers above industry benchmarks can signal employee dissatisfaction stemming from labor conditions, wage levels or other concerns. Challenges ranging from supplier employee strikes to child labor scandals not only disrupt your supply chain, but also damage your brand. Barring catastrophic developments, high turnover rates may be the early warning your firm needs to identify internal inefficiencies and suboptimal performance.

Your supplier’s record with on-time deliveries and responsiveness to your firm’s concerns are clearly core to managing risk, and your procurement team is probably tracking these metrics already. Whether or not this insight is being used to guide supplier strategy and mitigate risk is less certain.

Asking how you can reduce supply chain risk misses the point; it’s about fine-tuning the process. Is your procurement team addressing and acting on the full range of potential warning signs? Management turnover, inability to promptly respond to your concerns or willingness to offer discounts for early payments are all causes for concern. Your firm needs to seek out dependable suppliers, not just the ones who offer the lowest quote on an RFP.

When Efficiency Doesn’t Make Sense

Bolstering risk management practices within procurement is important, but so is identifying and correcting those that promote brittle supply chains. For example, many firms strive to mirror Apple’s notoriously lean supply chain with limited success. Eliminating supply chain waste is a laudable goal, but some firms take this too far and starve themselves of critical resources, disrupting production as they wait for the next shipment. Just-in-time delivery is another excellent strategy to reduce warehouse turnover times, but can leave firms vulnerable to shipping delays stemming from natural or manmade disasters.

Supplier consolidation is the “Siren’s Song” of lowering costs but can also lead to a poorly diversified risk portfolio. Any interruption in one of a few centralized suppliers can have an outsized impact on your supply chain, turning minor shortages into show-stopping obstacles. Savings in the short run won’t begin to cover the loss of productivity and other costs stemming from the scramble to find new suppliers on a short term basis after a centralized supplier runs into rough waters.

A majority of the magic in reducing supply chain risk is common sense. Don’t put all your eggs in one basket, don’t cut the bone when trimming the fat and walk a mile in your supplier’s shoes to experience if they can sustainably meet your needs. Your firm is already collecting most or all of the data it needs to make informed choices about its supply chain, focus on making sure procurement is using this information correctly. At the same time, plan your supply chain with hiccups in mind; a “plan for the worst and hope for the best” strategy is far more sustainable than one which falls apart when spreadsheets are confronted with the uncertainties of running a real business.

Ideally, the tools and processes are in place to tap into the metrics around supplier risk mentioned above. And you have the organization in place to practice good procurement in the face of short-term pressures for immediate cost savings. If not, you may have a longer conversation with the exec coming down the hallway so he understands where you may need help.

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