Sourcing and Procurement
How can you minimize risks on the Supply side with Supplier Risk Management?
Risk is inevitable in our day-to-day lives, and we all tend to develop our own responses to deal with risks based on various situations. Nevertheless, risk cannot be eliminated completely; however, the severity of risk can be curtailed.
In Supplier Risk Management, there are numerous risks that tend to come up - delays from suppliers, production disturbances, natural disasters, theft, shortages and cybersecurity, organizational and operational issues.
Types of Supplier Risks
There are five types of supplier risks that occur on the supply side and each risk type that might relate to an immediate supplier relationship.
The Five Key Supplier Risk Areas Are:
- Supply failure or delay risk - This is the risk of complete and possibly permanent supply or service failure, or risk of delays in supplying goods or providing a specific service.
- Brand damage - These are risks that can be disastrous for our brand either due to failure or practices in conflict with our principles, expectations of customers and stakeholders.
- Loss of competitive advantage - The risks of competitive advantage are generally undermined, which include theft of intellectual property, counterfeiting and goods sold on the grey market.
- Price and cost risk - The risk of out-turn costs being higher than anticipated or planned for (with or without contractual protection).
- Quality risk - The risks associated with quality failures, poor product or service quality, and latent defects.
Supplier Risk Segmentation
Supply base segmentation is the process of determining which supplier is important through the application of a set of pre-defined criteria. It is critical to understand why they are important and therefore what sort of intervention and relationship would be necessary or beneficial.
There are three components in this:
- Goal driven: Segmentation responds to organizational strategy, goals and end customer needs and wants.
- Resource driven: Determine and prioritize interventions based on available resources.
- Market driven: Informed by suppler and market understanding to be confident that we are selecting the right suppliers.
Improve Interactions with Suppliers
Knowing your suppliers is absolutely critical. Understanding their future plans and assessing whether these suppliers fit within your requirements becomes important. This is how you would also know their weaknesses that might impact your process flow.
Nevertheless, in practice, it is difficult to truly know a supplier, but you should work to find out as much as you can. This becomes an important part of SRM (Supplier Relationship Management) and an ongoing aspect of the Supplier Relationship Manager's role.
Supplier Risk Assessment Process
The risk assessment process is usually applied for suppliers in the High and Medium importance category.
For every process there is an assessment procedure, in the same way Risk has one as well. First we identify the risk, then we assess the severity, prioritize, plan the next steps, then manage the planning process and review its progress.
Once we understand the priorities for action there are two types of action we can take. We can mitigate the risks or develop contingency plans.
Supplier Risk Mitigation: Ways to Eliminate or Reduce Risk
- Contract planning and provision
- Supplier audit and assessment
- Maintaining a close relationship with a supplier
- Invoking certain policies, procedures, processes or systems
- Training and ensuring capability of those involved
Contingency Planning: Accept that certain risks cannot be mitigated. You cannot even plan for them, or even prepare what can be done if this risk arises. This might include:
- Disaster recovery planning
- Maintaining readiness of alternatives
- Switching suppliers
- Switching to a substitute product
- Working with the supplier to recover the situation
- Ceasing or pausing operations or supply
It is important that we adopt the right relationship with the right supplier and for the right reasons. In order to do this effectively, it is indispensable to establish a strong supplier relationship. It will help you to choose the right one and stay in control of the process to a great extent.