Sunday, June 8, 2014

Supplier Risk Management: Here Today… Gone Tomorrow?

It is an all-too-familiar reality: a key parts supplier has vanished overnight, and now you’re left with a curt email thanking you for your business—and chaos in your office. You’ve got to find an alternative solution to fulfill your dealers’ part orders. Sometimes a supplier’s demise is slow and obvious, but other times a lack of vigilance will cause you to miss the signals until it is too late.


This unfortunate situation hit me once while traveling in Africa. In a major metropolitan area, we were told to avoid exchanging money at banks because of usurious exchange rates. Instead, we were introduced to a man in a back alley… We’ll call him “Frederick”. We were told that Frederick was “always” there, and offered a favorable rate. For a few weeks, we went to Frederick for our all cash needs with no problems. I ran out of money one afternoon, as one does, and grabbed a wad of American bills to exchange with Frederick. I walked the few blocks from our living quarters and turned into the alley behind a convenience store.


No one was there.


I asked the store owner about Frederick, but he had no information. No one in my group knew what had happened to Frederick. Our link to cash had disappeared without a trace. For the remainder of the trip, we were overcharged and had to pinch every penny to get by.


Frederick’s disappearance meant a hefty added cost on our trip, not unlike the effect of a key supplier’s abrupt closure on you and your network. One way to reduce this risk is to monitor the business health of your suppliers.


Continuously checking on your key suppliers is like going to your dentist: if you do it every six months you’ll avoid a nasty surprise. In supplier risk management, proactive monitoring will help avoid major speed bumps in your supply chain. Some information worth gathering about your suppliers:
  • Regulatory and legal risks
    • Have lawsuits been recently filed against the supplier?
    • Are your suppliers following all pertinent government regulations?
    • Does recent legislative action in their state or country affect their ability to deliver product?
  • Secondary or tertiary supplier risk
    • Do multiple key suppliers in your business share common suppliers?
  • Share of business
    • How much of your supplier’s business do you provide?
    • Do they have another key customer whose business’ health could affect yours?
    • What share of your supplier’s business does automotive/heavy equipment parts supply make up?
  • Trends and Environment
    • What trends do you see in your supplier’s financial statements?
    • Is their state or county experiencing any hardships?
    • What is the market like for commodities used by your suppliers?
    • What other relevant market conditions specific to your supplier should you be aware of?
By periodically assessing these risks you can open up lines of communication with suppliers. You can identify opportunities to partner with a supplier to improve its health, or you can change your entire sourcing strategy. The goal is to avoid a sudden shortage of a critical part or material. Research your suppliers. You’ll give yourself the time you need to implement a safeguard. Assessing supplier risk factors will also save money and help keep your customers loyal.


Bottom Line: Avoid supply chain disruptions and the headaches that follow by tracking your suppliers’ health. Both you and your suppliers can benefit from using information to make your relationship transparent.

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