Contributed by Nicole Shedden, Marketing & Communications Coordinator
CU Quarterly, March 2012
Supplier risk is certainly on the list of things that keeps procurement professionals up at night. The best way to get back to sleep is to develop a plan for managing that risk. While every industry inherently carries different risks with its suppliers, below are several different examples of supplier risk and what you can do to mitigate these threats.Supply Risk: The risk of not having the things you need.
Supply risk is typically more serious for direct materials than for indirect. However, there are some indirect categories that may be treated like a direct category based on its importance to a company, such energy, benefits, contract labor and transportation logistics. One way you can mitigate supply risk is by having more than one supplier for any given category. Where this is not possible, understanding the supply space and continuing to build relationships with other suppliers in the market place could make any type of transition less difficulr.
Cost Risk: The risk of having to pay too much for the things you need.
Related to supply risk, cost risk can also be mitigated by having multiple suppliers. Cost risk occurs when the cost of a company’s product cannot accommodate the cost of what is required to create that product. For a manufacturing company, the price of energy can be an enormous cost risk; if a manufacturing facility’s energy costs spike, it changes the entire cost structure of the product. Another mitigation option, depending on the spend category, would be to use a hedge strategy to lock in price rates for a set amount of time.
Performance/Quality Risk: The risk of a supplier failing to meet requirements.
If concerns arise that a supplier is not performing at the necessary level or the quality of the product is unacceptable, ask yourself questions such as:
- What is our supplier relationship management program like?
- What are our SLAs with this supplier?
- What are our out-clauses?
The more specialized something is, the fewer suppliers there will be, so if something happens to your supplier – or worse yet, all the suppliers – how will you get your share? Similarly, if one supplier goes out of business, it will likely cause a strain on the other suppliers’ inventory levels. Ask yourself:
- Are there contractual terms that obligate the supplier to get us our full share?
- Will we get only a percentage of what we’re supposed to?
- Will the supplier only take care of its biggest customer?
- How can we make ourselves a “customer of choice” to the supplier?
Have you considered what would happen if you took a category out to bid and had no replies to your RFP? If it turns out that no one wants to do business with you, by conducting an RFP, you just gave your current supplier the opportunity to raise prices or to end their relationship with you. If you are known for browbeating your suppliers or being extremely challenging to service, consider what you might do to make yourself a more attractive customer before going out to bid.
Risk of Limitless Suppliers: The risk of having too many suppliers from which to choose.
This might not initially seem like a risk, but consider an industry such as temporary staffing. There are big suppliers, little suppliers, diversity suppliers, national suppliers, local suppliers, and, and, and. If you conduct an RFP in this space, you run the risk of not inviting the right suppliers, which would leave you with an unsatisfactory relationship, or inviting too many suppliers, which would make the RFP process too big to properly manage. Having an excessive number of suppliers to choose from requires a great deal of due diligence.
Risk of Uneven Expectations: The risk of having higher expectations for the supplier than the supplier has for itself.
Some suppliers are content with merely meeting the expectations listed in the agreement; as long as they hit the SLAs, they feel they have done their job. However, most companies have unstated expectations of their suppliers, and this leaves the supplier at a disadvantage. By developing a collaboration card with your supplier and regularly reviewing it with them, you can create a forum in which those expectations are discussed.
Relationship Risk: The risk of having a shallow relationship with the supplier.
Even if you have worked to communicate all your expectations to your supplier, that understanding is likely only as deep as your main contact(s). Establishing deeper relationships and knowing multiple people across the supplier organization is a good way to solidify the buyer/supplier relationship. Keep in mind that when people change – be it your main contact, the supplier’s leadership team or the person filling your order – everything has the chance to change. Or perhaps your supplier decides it wants to alter how it goes to market. Continually managing and growing your relationships will help lessen the risk associated with these changes.
So Now What?
Mitigating all these risks for every one of your company’s suppliers would be a full-time job. To make it a manageable task, take the time to conduct a formal evaluation of your suppliers. With the results of this evaluation, you can objectively determine which suppliers are most strategic and/or pose the most risk. Develop a regular risk assessment schedule for the most high-risk and strategic suppliers; this will enable you to spot issues more quickly, which leads to resolving them more quickly.