Managing Supplier Risks

With increased globalization, corporations across the world are sourcing, manufacturing and distributing on a global scale. With the world flattening, supply chain has become more distributed – a failure in any process across the world could halt production abruptly and finally impact the bottom line. The result - supply chains have become more vulnerable to disruption and failures. Supply chain risk management is a growing concern for businesses across the world.

A recent report from Marsh Risk consulting has stated that “Nearly three-quarters of risk managers report that their company’s risk level has increased since 2005, while just 2% say it declined. Moreover, 71% report that the financial impact of supply chain disruptions has also grown. In addition, the C-level at companies—the CEO, CFO, and COO—are increasingly recognizing the dangers of supply chain risks”. In addition, risks and delays with the suppliers” has been identified as one of the topmost concern of supply chain & risk managers.

Unfortunately, most of the companies do not have a robust supplier management process program in place. The first step to manage risks is to have a standardized risk management process with a strong owner that drives this into the DNA of the company at all layers. Risks should be identified, assessed and managed at strategical, tactical and operational layer. A strong process within the company will ensure that people at each layer will identify risks in their respective business areas.

A small problem at just one end of your supply chain can morph into a disaster as like for Ericson’s. Philips, the supplier for both Ericson and Nokia, had a fire at one of its plant which wiped out its entire stock of microchips.  Ericson waited for the problem to be resolved – the impact was lost sales of $400-$500 million Stock prices dropped by 14-15%.At the end of 2000 this figure rose to $2 billion – the result of a tiny fire event. On the other end, Nokia was proactive; pressuring Philips to immediately come up with alternative chip supplies as soon as they realized that there was going to be a significant disruption in production. They escalated the problem up the chain and got senior executives involved. Nokia could fulfill their production schedules in time and did not have a major impact. The mistake made by Erricson is done by several companies – warning signs are ignored – leading to a major crisis finally affecting the reputation and bottom line of the company.

So how should we assess and manage supplier risks?  This would typically include  :

Supplier Selection
• Does the Supplier Fit Long-term Product Needs?
• Does the Supplier Show Low-risk characteristics?
• Is the supplier portfolio diverse enough?
• A strategy team that facilitates selection of suppliers.

Supplier Management
• Identify your Strategic Suppliers
• Develop Risk Profile of Strategic Suppliers in terms of threats to your suppliers, the probability of occurrence and the extent of damage it could cause to your business
This could be broadly divided as
    – Geographical : Political issues, Regulations and policies, Cultural barriers
    – Financial health: Assets & Liabilities to assess financial solvency, Payment trends to assess their cash flows, public filings etc.
    – Operational risks : Quality of goods, suppliers critical suppliers,
    – Performance : Define SLAs, Monitor against SLAs and performance targets,
    – Environmental risks : Natural disasters, fire , catastrophes
• Identify potential strategic suppliers and motivate them to move up the ladder
• Collaborate with your supplier to create a win-win situation for both through joint investments and Systems & Process integration.

The bottom line is risk is a part of any business, regardless of whether we manage or ignore it. It is therefore very important for supply chain managers not to only understand risk management but to embed it into the processes of the company and continuously monitor it. The recent financial crisis in the US has a lesson for all of us to learn on the importance of risk management!

Comments

[Vishal Wandalkar]

In context with our business scenario, it becomes critical for us, as a supplier, to have a good working BCP-DRP process to address operational and environmental risks.

-Vishal.

[iso9001 standard]

The history of standards for contemporary quality systems traces back to 1959. Then, the U.S. Department of Defense released a quality management program under the designation MIL-Q-9858. For nearly three decades, this standard was primarily used in the U.S. defense and aerospace industries. In the mid 1960s, the former Soviet Union introduced a national standard (KC YKP) in an attempt to manage quality across the country.

[Nadine]

Hello,
not bad...

Thank you
Nadine