Furthermore, recent natural disasters in Japan, New Zealand and the US have raised serious questions about the security of supply and the implication for the wider business.
Organisations must establish a robust supplier risk management framework that can respond to the increased volatility and pressures in the current climate.
In the past, the signs that a supplier is encountering financial difficulty might offer advance warnings (e.g. requesting improvement in payment terms, increasing payment discounts, changes in ownership etc.) during 6-, 9- or 12-month intervals.
Today, financial duress can build up rapidly and overwhelm suppliers in a matter of weeks or even days. A supplier who was financially strong when you first qualified them may now be on the brink of bankruptcy.
The only way to minimise supplier risk is to maintain a high level of the information that acts as key indicators of each supplier’s ability to perform. Information such as:
- Demonstrated qualifications and capabilities
- Quality and safety assurance processes
- Certifications and regulatory compliances
- Insurance and disaster recovery plans
- Key executives and changes to the management team
- Mergers, acquisitions, and other important organisational changes
- Actual performance history and internal satisfaction levels
- The list goes on…
The truth is maintaining an up-to-date view of the operational and financial position of critical suppliers by proactively identifying risks and threats is proving difficult for most organisations.
For many organisations, the challenge to maintaining the necessary level of visibility comes from the way in which supplier information is collected, stored, and managed:
- A reliance on paper information and documents that cannot be easily analysed
- Multiple, dispersed systems containing different types of supplier information; sometimes conflicting where they overlap
- Manual and disconnected processes that don’t use or contribute to a single view of suppliers
- Information that may have been accurate at one time, but is now out of date
In response, some organisations pay attention to only the top 10-20% of their suppliers, focus only on initial supplier qualification, or depend on once-a-year risk assessments that don’t do the job, take too much time, and cost too much.
True visibility of supplier risk can only be maintained through consistent, consolidated, and ongoing management of supplier information throughout the supplier relationship lifecycle:
- General supplier qualification
- Supplier selection for a specific purchase, project, or contract
- Monitoring of ongoing supplier performance
- Access to alternative suppliers if/when a replacement is needed etc.
The situation surrounding and within a given supplier is constantly changing in both expected and unexpected ways.
The fact is it requires a variety of integrated tools and processes in order to maintain the necessary level of supplier visibility needed to effectively identify and manage risk. The only practical way is to employ the aid of information technology – it’s just not possible in most organisations to do a proper job of supplier risk management manually.
Risk never sleeps. Ask yourself:
- Who in your organisation is responsible for assessing and monitoring supplier risk?
- Is supplier risk management a natural part of your ongoing engagement with suppliers?
- What would be the impact on your business if a critical supplier failed?
- How confident are you that your critical suppliers aren’t in financial or operational difficulty?
- What actions would you need to take if a supplier were to face difficulties?
To gain perspective on supplier risk management, download the PROACTIS paper titled: “Supplier Risk Management: Do you Really Have the Right Level of Visibility to Minimise Risk?”