In the complex world of strategic sourcing, identifying risk and maintaining leverage over your suppliers is essential in order to meet the goals of the company. Corporations utilize many methods for mitigating supplier risk. Whatever the approach, supplier risk mitigation must be top of mind throughout the organization to ensure that an unforeseen issue with a key supplier or partner does not erupt into something disastrous. For instance, a government-mandated recall mandated of one of your suppliers that could have been otherwise avoided with proper diligence will almost always tarnish the reputation of the corporation that sponsors the supplier.
Perhaps the first thing to consider when thinking about supplier risk is that the nature of sourcing is wholly different than in the past. In a rapidly evolving global economy, no longer do you have the luxury of sourcing goods and services only in the “backyards” of your domestic service areas. The nature of a global supply chain exposes companies to additional risk.
Today, you must reach out to remote places for sourcing in order to reduce costs, create efficiencies, and enhance bottom-line performance. Contributing to the dynamics of global sourcing are local politics, laws and customs, language barriers, and geography—all factors that contribute to potential supply-chain risk.
Inherent to the demands of competing on a global stage is setting up systems to manage your suppliers daily throughout the relationship. Taking a hands-on approach to managing your suppliers reduces risk and, thus, increases the leverage you have over expected outcomes.
Here are some ideas to consider:
- Establish formal procedures that align with the predefined metrics and acceptable risk thresholds for evaluating and scoring suppliers during the selection process. You do this by understanding and assessing where risks are likely to occur and who the stakeholders are in your organization that require compliance. Some high-risk areas to focus on are: financial health, safety and OSHA violations, environmental infractions, human rights, legal judgments, and other standards that are determined by your industry. Be sure to publish the expectations so that both internal and external stakeholders understand what is required of them. Ultimately, the company must establish the level of risk it is willing to tolerate in the supply chain and select suppliers accordingly. Current suppliers should also periodically assessed for risk so that the company can anticipate and react to any changes in a supplier’s standing.
- In today’s burgeoning technological age, many experts suggest using technology tools and methods to gain visibility into supplier risk. We are in an era when “big data” is continuously being generated—keeping tabs on processes, outcomes, and efficiencies. Use the comprehensive data generated through your supply chain to predict where risks are likely to occur so that you can take action to identify and mitigate them.
- In maintaining leverage over your supply base as a means for reducing risk, use a carrot along with a stick. Surely, you may have to sanction underperforming suppliers, but just as important as holding people accountable, you want to incentivize those who deliver superior results. Rewarding your supply base for a job well done is perhaps the greatest leverage you can have over risk.
In conclusion, your plan to manage risk must be comprehensive, tightly managed, and all-encompassing. You must understand where the risks are, what conditions can bring them to the surface, and what actions you must deploy to keep them at bay.