Are We Solving the Right Problem with Supplier Risk Management?

Supply risk is almost always at the top of the CPO agenda (and if it’s not, it should be). Most organizations focus on supplier risk elements that are relatively easy to implement, such as supplier financial risk management, which is a good start. It essentially helps monitor supplier viability through the lens of the financial statements (assuming you can get them from your private suppliers too).

But, supplier financial risk management only goes so far. It does provide an "assurance of supplier,” but it doesn’t necessarily protect your assurance of supply from that supplier. The diagram below illustrates this concept.


Source: Spend Matters 2016

Hopefully, you have conducted a rigorous sourcing and ongoing supplier management process to ensure that the supplier is not only delivering high quality products (which includes new innovations that deliver continuously evolving value propositions) and services at lowest total cost, but also has good strategic alignment with you, and is likely to stick with you for the long haul.

Even if you have all these success factors in place, it doesn't mean you’ll actually receive those products and services in a world that is increasingly “VUCA” (variable, uncertain, complex, ambiguous). Being able to fulfill customer requirements in a risky world is the definition of an “agile” supply chain (or ‘value chain’ if you prefer – for example, in a services-oriented value chain).

An agile supply chain means that you can be reliable even though an increasing number of things are going wrong. You can only do this if you can avoid those things in the first place or recover from them when they happen. Either way, this requires supply chain risk management, not just supplier risk management, and certainly not just supplier viability management via financial statement monitoring.

Supply chain risk management must not only accommodate supplier risks within the suppliers’ factories or board rooms, but also more broadly across the physical, digital, and financial supply chains. There are a lot of moving parts (pardon the pun) across a multi-tier supply network, so you’d better have some processes, systems, and services that can:

  • Translate enterprise risk and compliance requirements from multiple stakeholders out to suppliers (via a coherent supplier management process that includes risk management, performance management, and collaboration/relationship management) and their suppliers (including logistics partners and other value chain participants). Check out my recent posts on using ISO9001:2015 to accomplish some of this in the related links below
  • Monitor supply intelligence (i.e., market and physical supply chain intelligence) and hang it off of an analytic backbone that is designed to model the physical network (think of this as a mashup of supply network design, supply chain risk modeling, and performance monitoring — see the first installment of my series on this here)

If you can align your supply intelligence capabilities with the intersection of supplier management (with sourcing tied in), supply chain management (whether at a network level or at a lower-level category/segment level), and risk management, then you’ll be a supply chain superhero able to manage to risk-adjusted value and be able to increase your capability/agility (which is basically the “option value” of your supply chain – but that’s a topic for another post!)

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