June 7, 2013

Supplier Risk: Finding a Path through the Forest

Forest

In order to maintain competitiveness, organizations have employed four strategies:

  • Outsource more to suppliers (less control);
  • Consolidate the supply base (more concentration in tier-1, with more tiers of suppliers);
  • Just-in-Time manufacturing and/or delivery (less room for margin); and,
  • Capitalize on the global supplier market (less visibility).

Certainly, this is an over-simplification; however, the point is simple: today’s environment, now more than ever, has magnified the risk exposure due to suppliers, as well as elevated in importance of tackling this head-on.

Aside from compliance (e.g., Information Security, FCPA, CMR, CSR, COI, NDA, OFAC, etc.), where a known-outcome is easily defined, one will find that every organization has a different methodology to mitigate supplier risk. Is it simply insight into:

  • Financial stability, from credit scores to payment history to supplier dependency?
  • Supplier performance, whether quantitative (short-ships, OTD, etc.) qualitative (support, flexibility, etc.)?
  • Bankruptcies, judgments, and liens?
  • Change in ownership?
  • Negative news?
  • Adverse weather?
  • Port closures?
  • Regional civil unrest?

Visibility into data elements, such as these, is critical, but it begs the question, “what now?” These may be leading indicators of failure, before the impact hits your organization – but, if failure is assured, it will most likely affect most buying organizations before there is time to react.

Have many gotten to the point where they cannot see the forest through the trees? Are we in the details, and ignoring the big picture?

And, on planning for a disruption… how many organizations had a contingency plan in place to deal with a volcano eruption in Iceland? None, as it wasn’t a typical risk.

Many organizations request the information listed above, but few acknowledge the inevitability of supplier failure, regardless of what insight the buying organization has (though maybe a couple could be avoided) – and contingency plans, albeit necessary, remind me of the Mike Tyson quote, “Everyone’s got a plan ‘till they get punched in the face”.

As such, “the big picture” is: how prepared are we to react in order to minimize, or eliminate, unnecessary cost and/or loss of revenue?

Consider this…

  • Supplier-related:
    • Do you actively maintain backup suppliers for critical products – including contacts, capacity, lead-time, etc.
    • Do you track supplier sub-tiers – including location, financial risk, etc.?
    • Are your suppliers geocoded (not just headquarters, but by plant location for products provided)?
    • Do you track the shipping method and route (e.g., shipping routes and ports).
    • Is there quick visibility into what commodities are purchased from the supplier, and by end product, by customer, by customer location (part-site mapping), etc.?
  • Reaction time:
    • How fast would you be notified of a potential disruption (e.g., hurricane and suppliers potentially affected)?
    • Do you know who the stakeholders are for each supplier, as they would most likely be needed for any reaction? Simply put: who needs to be in the war room?
    • Is there a method to communicate with suppliers in case of a disaster?

Sidebar: After Hurricane Irene, many could not communicate via email or phone, as the bandwidth was hindered, and the most effective, and consistent, method was through “texting”. As such, we sought out texting technology, with survey capabilities, so that suppliers, as well as stakeholders, could be automatically queried as to their status.

  • Insulation:
    • Have you secured insurance, such as through Zurich Insurance, to cover any lost revenue due to disruption?

The blueprint hasn’t been finalized on how to either prevent disruption, or ensure disruptions cannot affect your organization. Instead of holding one’s breath for the blueprint, gain visibility across the forest and ensure that, when disruption does happen: you have the necessary information on hand to make decisions; the right people are brought into the decision-making process; and, you can react quickly (before your competitors secure what bandwidth is available, whether manufacturing or shipping or other).

 

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by Grant Watling

Chief Customer Officer

Grant has 11 years management consulting experience specialising in supplier data and analytics advisory services. Grant holds a Master’s Degree (MSc) in International Business, is a Prince2 practitioner and holds certificates from the Institute of Financial Services and the Chartered Insurance Institute.
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