Dealing with Supplier Risk — Part One

“It’s a VUCA world,” one of my management professors was fond of saying, in the same dark tone that Ned Stark from Game of Thrones used whenever he said, “winter is coming.” In a world where volatility, uncertainty, complexity, and ambiguity are ubiquitous and can adversely affect our business processes, we can’t survive for long if we don’t identify the reasons for and take measures to eliminate them. One area that is particularly vulnerable to VUCA factors is supplier management. Prices might change any minute, supply lines could be disrupted, or your suppliers might not be able to meet the demand. This has been a major reason for loss of business continuity over time. So much so that many organizations have even taken steps to vertically integrate with their suppliers to mitigate risk.

So what causes supplier risk? How do we identify these factors? Given that we don’t have much control over our suppliers’ business processes, what steps do we take to mitigate risks?

There are a wide variety of factors that can cause supplier risk, with some being:

Supplier selection: Ever got a passionate sales pitch from the newest kid on the block and thought, “why don’t I give this supplier a chance?”

This could cause supplier risk too. Unfortunately, you don’t have much, if any, data to bank on. You don’t know whether they have a record of timely deliveries. You don’t know if their business is sustainable. You don’t know if they have the wherewithal to meet your terms.

Improper supplier selection is one of the major factors that cause supplier risk. Be sure to vet your suppliers thoroughly. Ask for all relevant details. Check their past transactions and deliveries. In short, ensure that your supplier can meet all obligations.

Over reliance: This is another common occurrence. Sometimes, long-term relationships with select suppliers lead to less volatility. However, this gives very little scope for flexibility as does relying on just one supplier. What if a natural disaster disrupts your supplier’s production process? What if they go bankrupt? How will you ensure business continuity?

Fraud: Fraud can happen on your side, your supplier’s side, or from both sides. Did the supplier take an advance payment after promising something he can’t deliver? Did your procurement manager have inside information about the supplier? Did the supplier bribe your procurement manager to favor his organization over others?

No prizes for guessing who the casualty in any of these scenarios is.

We’ll look at some ways to mitigate supplier risk in the next installment of this post.

In the meanwhile, to know more about supplier management and risk mitigation in procurement, click here.