Supplier risk can keep procurement professionals up at night. The best way to get some sleep is to develop a plan to manage it.
While every industry inherently carries different supplier risks, there are challenges common to most procurement departments. I spoke with a few of Corporate United’s category managers to see which risks they consider most pressing – and how to manage them.
Here are eight different examples of supplier risk and what you can do to mitigate threats.
Supply risk: The risk of not having what you need
Supply risk is typically more serious for direct materials than for indirect. However, some indirect categories might be treated like a direct category based on its importance to a company, such as:
- Contract labor
- Transportation logistics
One way you can mitigate supply risk is by strategically 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 marketplace could make any type of transition less daunting.
Cost risk: The risk of having to pay too much for what 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, is 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?
Capacity risk: The risk of a supplier running out of its supply
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 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 had a head-on collision with any of these risks? How did you resolve the situation?Read part 2 for the next four examples of supplier risk.