If you are a manufacturer or distributor,
your procurement people dealing with direct materials are focused on managing all aspects of supply risk throughout your supply chain – they can’t afford to stop producing product because of the failure of one internal or external source of supply. For them, the primary issue is the need for a steady flow of raw materials, components and sub-assemblies because the lack of even one item can shut down a production line. That can require extremely close scrutiny of and collaboration with direct material suppliers, as well as efforts to maintain contingency plans such as alternate sources of supply. But at least the total number of suppliers they must manage is relatively low.
If you are a service business, a not-for-profit organisation, or a public sector entity;
or if you are focused on procurement of indirect goods and services in any type of organisation; your risk management issues are a little different. Your challenge is that you have a huge range of goods and service providers with which you do business. Every category of supplier carries a different set of risks. Some are selected using a rigorous process; others are engaged quickly to meet an urgent need. Some deliverables are high value; some are low. You may do business with some of your suppliers every week; others only occasionally; others only once for a special project. Others may be maintained primarily as contingencies in case of a problem with a preferred supplier.
But the level of risk each supplier brings may have no relationship to the amount you spend or the frequency with which you do business with them. For example, a contractor you use only once or twice a year to maintain your gas furnace could cause significant financial damage if they send a worker who is improperly trained and causes a fire that burns your building down and you find their insurance has lapsed. Or worse yet, they send a worker who assaults a resident, student, or employee and it turns out their hiring practices had deteriorated and that person had a criminal history they were unaware of.
Unfortunately, risk never sleeps.
- The supplier who was financially strong when you first qualified them may now be on the brink of bankruptcy
- The contractor that complied with all your qualification criteria last year has new management that has let critical safety or quality processes slip
- The small lawn maintenance business you contracted with last year has been acquired by a national company and no longer qualifies as local or diverse
- The company you hire to replace all the windows in a building (or even one of their subcontractors) never agreed to your standard terms and conditions and now they are suing you because they say your building was unsafe
- The company you rely on to perform key outsourced services has their facilities destroyed by a fire and will be unable to process your work for months
Some scenarios are more likely than others, of course; but it’s clear that there are many risks out there at all times. And the impact of an adverse event or failure to perform, while hard to quantify beforehand, is often significant when it occurs.
To learn more download the PROACTIS white paper: “Supplier Risk Management: Do you Really Have the Right Level of Visibility to Minimise Risk?”