Maintaining a Healthy Supply Chain

Regular supplier health checks can help you avoid any unnecessary risks and deal with any issues before they become a real problem.  Here, Jane McAuliffe, principal advisor at Optimum Procurement Group offers her top tips for maintaining a healthy supply chain.

Thanks to globalised, multi-tier supply chains operating in economically challenging times, the risk of supplier failure – in terms of turnover, supply disruption, customer relations and brand perception has become an area of real concern for supply chain managers.

The increasingly complex structure of today’s supply chains often extending to tier 3 or tier 4 suppliers provides access to a cheaper, or a particularly sought-after product or service to the end consumer;  however, it also serves to amplify the potential for disruption. These sub-tier suppliers need to be identified and the importance of their role in contract delivery understood. These suppliers are often omitted from an assessment until an issue arises.

Those suppliers representing higher levels of business criticality, reputational impact, complexity or limited supply is where the focus of the supplier vetting process should be, especially where this combines with high-value goods or services.

Supplier health checks can proactively help organisations identify, avoid or reduce the chances of supplier failure. These checks should include:

  1. Financial health - Assessing the viability of a supplier in terms of its financial stability is crucial. A strong balance sheet and good cash flow position means that the supplier is better able to withstand variability in revenue streams. It is also a good indication of a supplier’s ability in the longer term to execute against investments required to grow its business. Company credit reports can help provide an evaluation of a supplier’s accounts.
  2. Company structure - If a supplier forms part of a group of companies, it is important to establish the nature of any sister companies to ensure that they are not at odds with any aspect of the organisation’s reputation, or to identify where financial issues in one company could impact the contracting company. Furthermore, understanding the nature of any relationship with a parent company can help ascertain if the supplier has control over the direction of its own business plan, objectives and investment.
  3. Location - Find out where contracted goods and/or services will actually be supplied from and identify any risks or impacts (e.g. natural disasters or terrorist attacks) that may be associated with a specific location.
  4. Value - The value of a contract to a supplier could be an indication of its attitude and approach to the relationship. A customer preference exercise can be carried out to ascertain the relative value of the business against the attractiveness of the account. Its approach in terms of service and response levels, drive for best price and maximum profit and keenness to lock in can indicate how valuable an account is to a supplier.
  5. Capacity - Assessing a supplier’s ability to deliver can be carried out through direct contact or a site visit. This should provide you with the information you need to assess its resources in terms of staff, technology, equipment and storage to ensure it has enough capacity to handle your current and future requirements.
  6. Compliance - Supplier compliance is about assessing any pre-requisites for contracting with an organisation such as sustainability, environmental commitments, ethical values and ideally should be ascertained at the tender process.
  7. Communication - Many highly collaborative supplier relationships share health check and ongoing partner relationships must focus on fostering growth in trust and shared information through regular and structured communication.

The information obtained as part of a supplier health check process in terms of a complete view of the assessed organisation’s current and future validity as a supplier can then be input into the supplier’s risk profile. This can then be incorporated into an organisation’s overall risk management process and identification of any issues or opportunities which need to be addressed will provide the insights and information necessary to help maintain a strong and healthy supply chain.

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